Warren Buffett is often quoted comparing investing to baseball, with the one difference in that there are no called strikes in baseball. As a batter, you can let as many pitches go by without swinging. Even those right down the middle of the plate. The only thing you lose is opportunity cost.
That’s a great analogy, however there is one problem with that analogy, you need to have a bat to swing. If you don’t look at a company, your hands will be empty when Mr. Market, the pitcher, throws you a “fat pitch.” And that’s the case with me when it comes to Kirkland’s (KIRK). You see, it was about 14 months ago when I first saw the idea, and to this day I’ve only done cursory research on the company.
Kirkland’s was written up on Value Investors Club in September, 2008. Non members got access to the idea in early November, 2008. At that point, the write-up seemed interesting, but I couldn’t imagine buying a housing related retailer in the middle of a recession caused by housing. The stock had declined about 20% from the time of the write-up, which made me think that it wasn’t as good an idea as it seemed (boy, was I wrong). And it had doubled from the lows already, so greedy me wanted to buy it under $1. By not being prepared, and not buying, I missed an almost 10 bagger in a year.
Once in a while when I completely miss a golden opportunity, I like to go back and see what the situation looked like at the time, to make sure that when the situation presents itself again, I’ll be ready to swing.
Basically, KIRK was a retailer trading at about 1-2x EBITDA which had been forced down due to selling by large holders. While this is generally enough in itself to get me interested, the story was even better.
KIRK had spent 2007 restructuring and the benefits of the changes were already evident. As part of the restructuring, they’d replaced some management and stopped new store expansion. They made the decision to get out of mall based stores and focus on the strip mall locations (with lower rents and where customers were more likely to buy a mirror and take it to their vehicle as opposed to walk through a mall with it). Same store sales went positive in Q108 causing gross profit to increase. Operating Margin expanded as well as expense were down. The momentum continued throughout Q2 and Q3, however margins were still only a fraction of what they were before the company decided to expand the store base aggressively. There was still plenty of operational improvement to be had.
So while the business had already turned, the stock price didn’t reflect it, most likely due to a turnover in the shareholder base. Two funds, Vardon Capital and Endowment Capital, who had owned over 20% of the stock began selling in 2007, driving the price down. To make matters worse, Advent International, which had brought the company public and still owned 30+% of the company, also started selling. Most PE funds have limited time periods, investors want their money back after 10 years or so. So the Advent fund that held KIRK was winding down, they just wanted to exit their investment as they had started a new fund. And since KIRK has such a low float, all this selling held the price down despite the cheap metrics and turn in performance.
So who was buying all these shares that were flooding the market? Integrity Brands, which had a successful return with a similar situation in United Retail Group (URGI) a few years early owned 5% of the company by June 2008. But the pièce de résistance of the story is who was buying Advent’s remaining 19.6% stake. On 9/22/09, 5 members of management and the board of directors spent about $7.5m to acquire almost 20% of the company. This isn’t Salary.com (SLRY) insider buying of $5k per month by the CEO. This is real insider buying that removed an overhang that was keeping the stock down.
And I missed it. Never again, if I see massive insider buying like this, will I let a company go un-researched. So while this may not have been a called strike, it was definitely a fat pitch, slowly tossed down the center the plate, that I definitely should have swung at.
At the current ~$16.50, the stock is down 15% from the highs and still could have a ways to run. It’s traded up after every earnings announcement as results continue to get better and better. However, management has started selling some of the shares they bought from Advent, so the easy money has definitely already been made.
Disclosure: Long SLRY. No position in KIRK, unfortunately.Please see full disclaimer.
Tags: Kirkland's, Missed Opportunities
