Between J. Alexander (JAX) and RadioShack (RSH), I’ve been mentioning consumer stocks quite a bit lately. I figured I’d keep that trend going with my stock of the day (is stock of the day the right term? That sounds so sleazy / penny stock pro!) today, Duckwall Alco (DUCK).
Aside from having an awesome ticker, DUCK is a regional retailer offering general merchandise to extremely small towns. I mean, really small- 70% of the towns they operate in don’t have another broad line retailer, and they try to open in towns w/ populations between 5k to 16k. In total, the company operates 258 stores in 23 states (focused in the central US).
Honestly, there’s nothing more interesting than that to talk about with this business. They’ve been generally profitable in the past (profitable in four of the past five fiscal years, with 2009 being the only exception.), and though they will likely report an operating loss this year, sales trends appear to be accelerating in recent months.
However, for our purposes, what makes them interesting is their balance sheet. The company has net current assets (current assets minus all liabilities) of $16.30 per share. In addition, they own ~475,000 square feet of real estate (through owning their distribution centers) and four of their stores. In total, tangible book value per share comes in at $26.32 per share versus a current stock price of just over $12.5. In other words, you’re being offered a relatively profitable retailer for less than half of book value and about 75% of current assets. While they do have substantial off balance sheet real estate obligations, given how quickly they turn inventory over (3 to 4x per year) and the general nature of their inventory (basic goods), I think it’s safe to say they are trading near liquidation value
My Take
I know what you’re thinking- another profitable net-net? Hooray, those things are awesome!!! Plus, this one has a niche!!! Buy buy buy!! Not so fast, hombre. The problem with DUCK is it likely deserves to trade as a net net permanently. They company may have a niche, but it’s a really unprofitable one with no moat (maybe even a negative moat). The company’s return on capital is horrendous, and until they show a willingness to improve returns and reduce invested assets by liquidating inventory, the company is destroying value simply by staying in business. The other problem is that the retailing business is, by its nature, inventory intensive, and if they cut down on inventory they may kill the business (actually, maybe that would be a good thing for shareholders!!!). Unless they can do SOMETHING to improve profitability, you’ll be investing in a company that can grow equity value somewhere between two to four percent per year. While that may sound nice, trading at about half of book value, that would translate into a return of 4 to 8% per year for an investor at today’s prices. Unless you can buy them whole and liquidate everything, I’d stay away from this one!
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