DFZ recently announced their fiscal Q4 and Money McBags wanted to break it down in more detail as it’s an interesting, underfollowed little company that put up their first bad Q in a while (and Money McBags was an owner until he sold after the “flash crash” as he wanted out of illiquid names more than Lenny Bruce wanted out of the Navy).  Money McBags broke them down two quarters ago with the basic story being they are the market leader in the slipper market (and I know what you are all thinking, slipper?  I hardly even know her) with ~35% market share, they own WMT’s slipper business which makes up ~35% of DFZ’s business, they sell an inexpensive fucking product which should continue to do well with consumer spending becoming tighter than Joan Rivers’ sphincter, and they are fucking cheap.

It is a weird company in some ways though because 70% of their business occurs in the last half of the calendar year which generally makes them unprofitable in the first half (though they were surprisingly profitable last Q).  To remedy the seasonality, they intend to buy a company with strong summer sales such as a flip flop company (perhaps run by the flip flop king Mitt Romney who never saw an abortion he didn’t like, or did like, or didn’t like, or whatever the fuck his magic underwear told him to say) within the next 180 days using the $45MM in cash on their balance sheet.

That said, the company traded off by ~12% after earnings thanks to a more disappointing quarter than the remade Oregon state quarter because really, the Beaver state should have something much more appealing.  So Money McBags will break down the good and the bad below:

The Good:

1.  A very nice fiscal year.  For the year, revenue was up 9%, net income was up 34%, and gross margin was up to 41.5% from 38%.  In other words, they sold the fuck out of some shit and sold it with a lower COGS which is a huge win in this shitconomy™.  That said operating costs were up slightly as they try to build a brand, but it was marginal and guidance is for those costs to moderate going forward.

2.  They have a ton of cash, $45MM to be exact, which is enough cash to take all of the writers of the award winning When Genius Prevailed (which would be yours truly) to a night at Rick’s Cabaret with full champagne room privileges and and still have at least $42MM left over, or they could just buy a few copies of the Birds of America, whichever.  Aside from using it for acquisitions, DFZ is going to put their cash to use by increasing their quarterly dividend from $.05 to $.07 so the stock currently has a ~2.8% yield.

3.  On the call, they said that in this current Q they are seeing “substantial increases” over Q1 last year in terms of sales (and hopefully as substantial as the increase in an 18 year old virgin’s pants when he sees the lovely Brooklyn Decker or Teddy Roosevelt’s Q score after the Battle of San Juan Hill).  Now if Money McBags heard right, some of those sales could have been pulled forward from their expected Q2 sales, but whatever, sales going up are better than sales going down, unless sales are Marissa Miller and you are on what she is going down.

4.  They continue to try to build a brand for Dearfoams with shit such as this facebook page (and Money McBags would friend them but the name nazis at Facebook still won’t give him a page) and licensing the brand name to Olivet (which sounds like the veteran of a fictional pimento war) for them to put the brand on clothes, hats, and perhaps even willy warmers.  Money McBags places about zero value on this licensing deal because it is doubtful Dearfoams as a brand will ever resonate with anyone, but Money McBags gives them credit for trying and for selling that risk.

5.   Shipping costs remain in check.  With everyone shipping cheap shit over from China, sometimes it can be more expensive to get crate space on a freightliner than it is to get a face like Heidi Montag’s or Paul Rudd to DJ a Bat Mitzvah (well maybe not that last one).   According to management, shipping costs are generally remaining in check but it is still a long-term concern (and Money McBags just determined that long-term should be hyphenated, so while it looks weird to him, he will be doing it for the remainder of this write-up).

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6.  One of the Shannon sisters may finally be releasing a sex tape and while it has nothing to do with DFZ, it is still very good news.

7.  They are finally close-ish to buying a company (they said in the next 180 days) and won’t buy a company with worse returns (which makes fucking sense) because they would rather invest in their own business than just buy a shit company for revenue (though to be honest, it’s not clear why they would be interested in a shit company since shit and slippers don’t mix, except for that one time in college, but that is neither here nor there).  Putting their cash to use on an accretive acquisition to balance out their seasonality and diversify some of their risk is a big positive, unless of course they fuck up the acquisition, lose their focus, and wind up managing something with fewer synergies than nuts and gum.

8.  Management doesn’t give a fuck about the stock price.  Music to Money McBags’ delicate yet discerning ears.  Sure, you want management to be market savvy, but more than anything you want them to manage the business for the long-term and not worry about daily stock price movement, especially when we know the market is more rigged than a South Carolina Democratic Primary thanks to the prevalence of HFTs and and the dark powers of the Fed, Money McBags means Goldman Sachs.  Go to about the 56 minute mark of the DFZ call when an investor asks about stock buybacks given the 12% drop on the day and you’ll hear quotes from the CEO such as (and Money McBags is paraphrasing): “The quarter means nothing in the big picture of the year,” “The Investor base doesn’t understand the story if they are selling today,” “We focus on the business and not the stock,” and “Anyone who is selling can eat a fat dick” (and again, Money McBags was just paraphrasing).  Shares are relatively illiquid so when a crappy Q happens, the stock gets yammied even though the long-term business trends remain as reasonable as Aristotle’s Prior Posterior Analysis (and nice to see that even good old Ari was in to analyzing posteriors back in the day).

9.  The product does well in a recession. Sales have actually been up moderately in past couple of years even as the shitconomy™ has nosedived as slippers remain a cheap present to buy someone when you can no longer buy them that faberge egg or vibrating cock ring (and yes, Money McBags just spent 10 minutes on sextoys.com looking for that punchline so perhaps you shouldn’t complain about what you had to do for your job today).  As management said, they think the business is recession proof (though not as recession proof as penicillin or money) and they have seen accelerating sales over the past 24 months as cheap practical products excel during recessionary periods.  The question remains though as to what consumer spend will look like this holiday season (and Money McBags hopes it looks like this).

The Bad:

1.  Money McBags hates to sugar coat it, but the quarter fucking sucked.  Management can blame lumpy Qs, the replenishment season, or Canada all they fucking want but sales were down 9% and their loss per share grew from $.03 in fiscal Q4 last year to $.15 this year thanks to a spiking SG&A.  Money McBags thought they would earn somewhere between $.99 and $1.10 for the year and they were at $1.00 going in to the Q so while Money McBags may have been a bit optimistic on the top end, it’s not like he was forecasting Dearfoams were going to be the next iPhone or Snuggie.  So while management maintains they always focus on annual numbers, shitting the bed is shitting the bed and gentlemen (and ladies), we have a shit bed here so coprohiliacs unite.

2.  Revenue was down due to a big customer loss/slow down and seeing how that big customer was likely WMT and ~35% of DFZ’s business comes from WMT, this has the potential to be a huge business changing event.  On the call, management didn’t do a great job of explaining this at first other than saying retail slowed a bit causing the replenishment business to suffer but going forward they have several key programs with big retailers.  Later on they clarified by saying, that they will probably “have one of our biggest fall seasons we have ever had with them.”  So that made Money McBags feel a bit better (though not as good as he would have felt after a taint tickle from Carmen Luvana) but frankly Money McBags still doesn’t feel like he understands the revenue miss because why would just one customer cut back due to lower traffic?  Shouldn’t DFZ have seen weakness across all customers?  Seems odd that only in their largest one was there an issue.  So management, Money McBags knows you’re reading this (and not just because the award winning When Genius Prevailed has taken the finance world by storm, but because your offices are located in Pickerington fucking Ohio where the only things to do are attend “Bean Dinner and Bingo Night” and dream about all of the places that are not Pickerington, Ohio (like Fort Gay, WV or Hooker, OK ) so when anything about DFZ appears on the internets, you’re likely to read it), therefore could you drop Money McBags a line (moneymcbags@gmail.com) and help him understand this revenue decline from a big customer a little better so he’s not guessing at straws (as opposed to guessing muffs) and can feel a bit more reassured.

3.  SG&A was up 16% which they said was due to an incentive bonus hitting so if that bonus was paid out for “being able to fuck up a quarter” then it was well earned, but otherwise, they should have figured out a way to notify the street of the big cost hit ahead of time.  Money McBags supposes it is good someone got a bonus because it means shit is going well, as long as the bonus was tied to slipper sales and not winning the DFZ company foosball tournament.

4.  Drew Brees sucked in the NFL season opener.  Yeah, Money McBags knows, this has nothing to do with DFZ but outside of making money in the market and writing dick jokes, Money McBags does have a life and in that life Drew Brees is his fantasy football quarterback, so by only finding the end zone once, Brees pretty much sunk Money McBags’ week like KIRK’s Q sunk their stock.  So yeah, it is irrelevant to the DFZ analysis, but we can all agree that it is very bad.

5.  The consumer remains weak and unpredictable like Vern Troyer after downing a 40 of Saint Ides Special Brew.  Intellectually, Money McBags understands that $15 slippers in theory should be recession proof but we might be heading to one of those times where all previous data about everything is more worthless than Art Laffer’s opinion on the economy or a Vanilla Ice autograph.  We’re in the fat tail of this gaussian curve, or to be more exact, we’re not even in a fucking gaussian curve as economic data is so skewed by the few and so intermingled that it is starting to resemble an Amish family tree, which we can probably all agree is far from normal.  So while Money McBags thinks slippers will hold up better than most consumer items because they are practical and an easier trade down product, he is worried that the absolute hit to any consumer business could be worse than the relative.

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Valuation:

If you’ve made it this far, you either work at DFZ, hate life, or are waiting for Alice Eve to make her usual appearance, or all three, so congratulations.  That said, how do we value this company?  As Money McBags sees it, there are really three scenarios:

1.  Business as usual:  The company doesn’t make an acquisition, the market remains flat to downish, the weak Q4 was just lumpiness, and the slipper business maintains with maybe even some international growth.  They said Q1 will be good but it’s too early to know about Q2.  The business grew ~9% last year, so lets say it grows 4% in this case as they win some new deals, get some more international business, and WMT doesn’t fuck around with them anymore.  On the call they guided to 40% gross margins (down a bit from this year so there is some potential upside) and SG&A to be lower than last year both in dollar and % of revenue terms (so we’ll call it flat).  Using those estimate, Money McBags gets to ~$.87 eps so the stock is trading at ~12x that but if they don’t make a deal, they would still have ~$4 per share in cash and a 2.8% dividend yield, so that is still not expensive.  For small growth, a solid balance sheet, some potential upside, and yield, the company should probably trade at ~10x-12x plus the cash so DFZ should be ~$12-$14 per share.

2.  They make an acquisition: With $45MM in cash, it’s not clear how much revenue or EBITDA they can really buy.  They trade at <1x revenues and ~4.5x EBITDA but presumably they would be buying a small company that likely needs a cash infusion.   Money McBags guesses they will buy maybe $30MM in annual run rate revenues and maybe get $.15 to $.20 per share in earnings out of the acquisition assuming no fuck ups in integration and they don’t buy AOL.  So maybe with an acquisition they earn ~$1.05 next year but that is more if a guess than what Caster Semenya‘s gender really is, so take it for what it is worth.  Anyway, let’s pretend that is what happens (and as long as we are pretending, lets pretend that Elisabetta Canalis is here and today is Buy One Get One Free Blumpkin Day) which would be ~25% revenue growth and put revenues ~$160MM so even if they trade at .8x revenues, the stock should be worth at least $14.

3.  Holy shit we’re fucked. While Money McBags doesn’t think this scenario is likely, any or all of these things could go wrong:  The down Q4 revenue was not just a blip and WMT kicks them to the curb.  They somehow screw up an acquisition.  The consumer completely dies and moves to wearing cardboard on their feet in lieu of shoes/sneaker/slippers.  Chuck Klosterman’s books become required reading in high schools.  In any of these scenarios (except maybe the last one), the stock will be worth less than what it trades for today, and less is bad.

Summary:

Money McBags is going to believe management here that there are lumpy Qs because they seem to have done a nice job running this business over the past few years and say all the right things about the long-term value.  Given that, the likely outcome is somewhere between scenarios 1 and 2 and thus the stock is probably worth at least $12.  That said, it is very very illiquid so in any volatility event in the market, you are kind of fucked.  For now, you have a cash cushion, an ok yield, and some upside, so while this isn’t a home run, Money McBags looks at it as a nice single, potentially a double, but a decent long-term value.

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