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  • stonea66 stonea66 Mar 26, 2013 3:40 PM Flag

    Is a restructuring coming?

    Can someone articulate the long thesis for OSH? Here is the short thesis:

    1. Senior secured term loan is trading at 40 cents on the dollar (Bloomberg)
    2. Company has hired restructuring advisors, and is paying for lenders’ restructuring advisors (8K filed 2/15/13)
    3. According to company, assuming if they are able to reach an agreement with lenders, it “is likely to be significantly dilutive to the Company’s stockholders” (8K filed 2/15/13)
    4. Even Eddie Lampert is selling the stock—he was ~50% of the volume on Friday and ~40% of the volume yesterday. He’s also selling the preferred stock (Form 4 filed 3/25/13)

    When debt is trading in the 40s, equity is usually not worth much. Sounds like a restructuring is coming, but maybe I’m missing something. Would certainly love to hear the rationale for being long at $4

    Sentiment: Strong Sell

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    • Long Thesis:

      1. History of strong positive operating cash flow (30+ million)
      2. Growth Strategy working - double digit sales growth at new/remodeled stores
      3. New/remodeled store already accounted for 10% of stores, will reach 20% by year end (Why would OSH continue to remodel and open new stores - 10 new ones in 2013 and even expanding out to Oregon - if they were in serious trouble?)
      4. Even including stores that were being remodeled, comp store sales still went up by 1.6% last quarter
      5. merchandise margin improved sequentially over the course of the last quarter
      5. Overall debt is reducing - down from $320 mil to $228 mil
      6. Lenders are highly accommodative - due to strong financial position of majority owners and the promising turnaround story unfolding
      7. Owns $195 mil in property/plant/equipment to facilitate more sales-leaseback if needed
      8. A combination of sales growth, cash flow growth and deleveraging will lead to significant increase in valuation in the long run
      9. Current depressed price is artificially created by shorts - short position tripled from 200K last year to 693K as of Feb 28 (probably even higher now)
      10. The shorts are shorting each other and waiting to see who would eventually hold the hot potato

      In regards to the Short Thesis above - here're my comments:
      1. Loan price is a speculative number itself - speculating on top of another speculation is... speculation squared
      2. Hiring of advisors (Moelis & co) is not news. They have hired them since the 3rd quarter last year and had only resulted in increased liquidity thus far and more accommodation from lenders
      3. Eddie's sold less than 6% of his holding - he's still the clear majority owner of the company. The rest of the majority owner (e.g. Berkowitz) is also holding firm. Nothing alarming here.

      • 1 Reply to watcher.bear
      • Thanks for the comments. A few responses:

        1. The performance of the remodeled stores is encouraging, but the performance of the business overall is dismal. The last time the company had $30 million in operating cash flow was early last year. On an LTM basis, it is currently negative. EBITDA has declined every single quarter since the beginning of 2011
        2. With regard to PP&E, they only have 9 more stores they can sell. The vast majority of the PP&E balance is other stuff like furniture and fixtures. Their average price/store from previous sales was $7 million, which will not take care of the debt problem
        3. The loan price is not speculative. Anyone who has a Bloomberg terminal can see it. An industry publication, Debtwire, has also reported that the loan is trading at those prices
        4. I agree that Moelis is not news. However, the 8K indicated that the lenders have hired Dechert, and were in the process of selecting a financial advisor. According to Debtwire, the lenders have hired Zolfo Cooper, and the company has hired a second restructuring advisor (FTI)
        5. You are correct that Eddie sold less than 6% of his holdings, but that was over a period of 3 days. In the 9 months prior to that, he sold 32% of his holdings. We’ll probably never know for sure why he is selling, but he knows more about what is going on than any of us, and he is selling. I would NEVER take the other side of that trade. If your analysis were right, Eddie would be buying, not selling. I suspect we will continue to see more Form 4s from him, but time will tell . . .

        Sentiment: Strong Sell