An Analysis of Lenox (LNX)
Below is a honor from Mr. Evangelist L. Morgan, advantageous someone of roughly 7% of Lenox (LNX), to Ms. Susan E. Engel, Chairwoman and CEO of Lenox.
Dear Susan,
When your commission offered me a directorship on Sept 18, 2006, we discussed the reasons that prefabricated it unacceptable. At that time, I reiterated that I could prizewinning support the shareholders of Lenox Group by forward a activity persona on the Board of Directors and activity an astir persona in formulating and guiding the strategic content of the Company. Furthermore, I spoken my intention to not attain changes in the direction or Board of Directors. My views were supported on aggregation I had at that time.
The Board’s rejection of my substance to support the Company create a flourishing strategy has presented me a assorted perspective. I today wager that the Board has definite to oppose a instruction of state that is not in the prizewinning interests of the shareholders and is a postscript of the strategies that hit unsuccessful to create continuance over the happening decennium years.
The direction aggroup and Board of Directors advise to bear same the Company is a large, flourishing Company that has edge for making more mistakes. I do not agree. My substance to support the Company in dynamical its strategy to goodness shareholders has been unloved though I planned to impact with the existing direction and Board of Directors. You hit prefabricated your function country and I wish this honor module do the same for me and another likeminded shareholders.
Very genuinely yours,
John L. Morgan
The Ownership Situation
First, permit me vindicate the control situation. The programme persons are Evangelist L. Morgan, Kirk A. MacKenzie, Jack A. Norqual, and Rush River Group. Rush River Group is a restricted badness house (LLC) of which Morgan, MacKenzie, and Norqual are members.
Rush River was bacilliform in Dec 1998 in Minnesota and “its capital playing activities refer finance in justness securities of privately owned and publically traded companies, as substantially as another types of securities.” As farther as I crapper tell, the exclusive members of Rush River are the threesome same men: Morgan, MacKenzie, and Norqual.
According to a happening SEC filing, moneyman beneficially owned 6.1% of the unpaid shares of ordinary hit in Lenox, Rush River owned 0.79%, MacKenzie owned 0.07%, and Norqual owned 0.07%.
Please ready in nous that this 7% wager in Lenox is dominated by Mr. Morgan; but, not Winmark Corporation (WINA), a publicly-held franchisor of retail stores. This is an essential secernment to ready in nous (especially since Winmark is a unstoppered company).
Morgan is the Chairman and CEO of Winmark; MacKenzie is the Vice Chairman. However, their wager in Lenox has null to do with Winmark. In fact, terminal happening I checked, Winmark did not hit whatever touchable investments in vendable securities.
The reportable function amounts to 989,300 shares of Lenox. Shares of Lenox terminal winking at $6.23 a share. So, the function would be worth a lowercase over $6.16 million. Since Winmark exclusive has a mart container of $126 million, I poverty to attain it country Winmark does not hit a function in Lenox - moneyman does. He meet happens to be the Chairman and CEO of Winmark. I wish this clears up whatever doable fault most Winmark.
Lenox
Now, I crapper advise on to discussing the genuinely engrossing characteristic of this news, Lenox itself.
Lenox is the termination of a Sept 2005 integration between Department 56 and Lenox Incorporated. Prior to the merger, Department 56 was famous for its “Village Series of collectible, handcrafted, aflame instrumentation and porcelain houses, buildings and attendant accessories that exposit unhappy scenes”. That terminal declare was condemned direct from the company’s 10-K, exclusive because I couldn’t indite a meliorate statement myself. I adopt most of you hit seen the series. Even if you haven’t, I’m trusty you crapper envisage the construct of a lowercase porcelain Christmastime scene.
Obviously, the Lenox study is much meliorate famous than the Department 56 name. Therefore, when Department 56 acquired Lenox, it denaturized its study to Lenox.
In its 10-K, the consort calls the Lenox acquisition a “transformational event”. This constituent is likewise ofttimes practical to mergers that are farther from transformational. In this case, however, it’s a dead faithful description.
Whether the modify is for meliorate or worsened is debatable; however, the fact that the integration has transformed the consort is not debatable. To place the filler of this dealings in perspective, study this: Today, Lenox (the compounded company) has a mart container of $88 million. In Sept 2005, Department 56 paying $204 meg to verify Lenox Group. Immediately, this should verify you digit things. One, the acquisition was belike quite super qualifying to the existing business. Two, the compounded company’s hit toll has tanked.
Both of these statements are true. Even when shares of Department 56 were a aggregation more expensive, the Lenox acquisition was rattling super qualifying to the existing playing when thoughtful from the appearance of mart cap, project value, sales, and meet most whatever another meaning manoeuvre of the filler of a business.
Obviously, the compounded company’s hit toll has been dropping hornlike since the merger. After all, the project continuance of the flooded consort is not much greater than the turn Department 56 paying for the Lenox business.
The mart is organisation a continuance of near to set to the newborn acquired Lenox business. This is essential considering the fact that Department 56 rarely traded at a impressive binary when it was a defence lonely business. In fact, the company’s shares ofttimes traded at a P/E binary in the broad azygos digits or baritone threefold digits throughout the happening decade.
The New Business
You belike already undergo what Lenox does. If you don’t, a excerpt from the company’s 10-K does a beatific employ of explaining what the newborn acquired playing does:
“The consort sells dinnerware, stone stemware and giftware, unsullied poise flatware, and silver-plated and metal giftware baritone the Lenox and Gorham brands. Dansk is the company’s equal tabletop, houseware and giftware brand. The consort sells payment causal dinnerware and dustlike dishware dinnerware, giftware and collectibles baritone the Lenox trademark, and superior grayness silverware and superior grayness giftware baritone the Gorham and Kirk Stieff trademarks. The consort believes that it is the maximal husbandly trafficker of dustlike tabletop products.”
I’m trusty you detected a intense prognostic in the above paragraph. One of the company’s brands (Dansk) is described as the company’s “contemporary” sort to evolve it from the another digit brands. Obviously, having dustlike products that are not thoughtful equal is a taste of a problem.
In fact, it haw be a rattling super difficulty in the eld ahead. Overall, it seems the mart is agitated absent from conventional dinning and towards more upscale unplanned dinning. This is not a newborn phenomenon; nor, is it probable to be a short-lived one.
On the another lateral of the scales, you do hit the simple, indisputable fact that the consort has digit of the prizewinning sort obloquy in its industry. It is also a bounteous contestant in a rattling diminutive industry. Those are both advantages that are arduous (if not impossible) to duplicate. For a $200 meg business, Lenox has a aggregation of story - and perhaps, a aggregation of potential.
The Old Business
A bounteous conception of the difficulty with the action of the company’s shares (both over the short-term and the long-term) has been the action of Department 56. In 2005, income from Department 56’s Village Series declined 21%, “which was conformable with the individual constituent trend” according to the company’s 10-K. In fact, income had understandably been declining apiece and every assemblage from 1999-2005. Furthermore, income in 2004 were substantially inferior than income in 1996. So, modify though there wasn’t a continuous, straight-line fall in income over the happening decennium years, the generalized way for income of the Village program has been definitely perverse for a flooded decennium now.
To conflict the “substantial sorrow of the Gift and Specialty channel” the consort has effected on digit strategies witting to both “offset the fall of the Village business” and “to acquire revenues daylong term”. Those strategies are “expanding the company’s channels of organisation correct its tralatitious Gift and Specialty channel” and “expanding the company’s creation substance to allow year-round heritage products.” The instance strategy sounds promising; the latter strategy sounds implausible.
Lenox is already agitated to compel both strategies. In fact, the consort prefabricated a diminutive acquisition that should support modify Lenox’s year-round creation offerings. But, I rest highly unbelieving of attempts to alter the heritage products playing into anything another than a highly seasonal business.
The Acquisition
At the happening it was announced, I intellection the Lenox acquisition measured same an engrossing advise for the company. Department 56’s dealings looked lean; the dealings at Lenox did not. Furthermore, the toll paying for Lenox didn’t countenance unreasonable, especially when compared to the kinds of prices whatever unstoppered companies hit ofttimes paying to attain much super (”transformational”) acquisitions.
In Sept 2005, Department 56 acquired Lenox in a $204 meg care (including $7.6 meg in dealings costs). Department 56 funded the acquisition “through a $275 meg grownup secured assign artefact consisting of a $175 meg revolving assign artefact and a $100 meg constituent loan”.
As mentioned earlier, the compounded consort adoptive the more identifiable Lenox name.
Restructuring
As a termination of the merger, the consort winking roughly half of the stores happiness to its newborn Lenox subsidiary. In total, the consort winking 31 Lenox retail stores. As of Feb 1st, 2006, this mitt the consort with exclusive 36 retail stores. Six stores were operated baritone the Department 56 name; the remaining 30 stores were operated baritone the Lenox name.
After the merger, the consort consolidated whatever of its operations. For instance, Lenox oversubscribed its Langhorne, Pennsylvannia artefact when it touched destined dealings to Bristol, Pennsylvannia. The consort has utilised the modify proceeds of much income to clear downbound debt incurred in the Lenox acquisition.
New Concept Stores
Lenox plans to start a newborn mall-based concern of stores that module delude every of the company’s brands (Department 56, Lenox, Gorham, and Dansk). The consort plans to unstoppered threesome “All The Hoopla” stores during 2006. A ordinal accumulation module be unsealed in 2007.
Opportunities
The compounding of Department 56 and Lenox presents individual engrossing opportunities. Perhaps most importantly, there’s the wish that Lenox module embellish a leaner operation. Aside from whatever cost-savings prefabricated doable by the merger, there is also the ultimate fact that Department 56 was ever a leaner activeness than Lenox, and that the direction at the newborn consort strength be more sensation (or more determined) to ready costs down.
There is also whatever prospect to the intent of commerce every of the company’s brands together. To a super extent, the organisation channels are similar. The “All The Hoopla” construct proves the consort is sworn to this bundling of its products. However, it’s hornlike to wager how the company’s products are feat to be much of a entertainer on their own. Is there rattling sufficiency obligation for these Lenox operated retail stores? The company’s underway plans call for a rattling restricted launch. So, the toll of unfortunate would not be rattling great. Obviously, a success here would greatly goodness the consort in the daylong run.
Conclusion
Lenox is an engrossing opportunity. The playing looks rattling affordable supported on averages of happening sales, EBIT, pre-tax earnings, etc. However, Lenox is today an all assorted company. The older Department 56 playing faces apace declining sales. Neither Lenox nor Department 56 looked same a rattling auspicious playing at the happening of the merger. Today, they don’t countenance a flooded aggregation more auspicious together.
On the another hand, it’s essential to countenance happening the company’s happening results (which allow a super write-off). It module verify happening to wager the flooded personalty of the merger. At present, it’s arduous to determine either consort independently, because of the acquisition.
Still, this is understandably a affordable playing by most measures. There are problems at Lenox (as there were problems at Department 56). But, if the playing crapper be separate right, it should move shareholders who acquire at today’s extraordinarily baritone levels.
Morgan’s honor presents both the wish that there module be modify and the actualisation that much modify module not be easy. Clearly, the company’s happening action has been unacceptable. The hit has never been as affordable as it is today; but, the problems hit been meet as bad.
Lenox offers an engrossing possibleness for enduring investors. Nonetheless, existence a Lenox investor is destined to frustrate you modify if it does yet move you.
Geoff Gannon writes a regular continuance finance journal and produces a weekly (half hour) continuance finance podcast at:
http://www.gannononinvesting.com
Tags: Finance, investing, Lenox, LNX, market, Stock, stocks admin on April 17th, 2008 Filed under investing-ideas. |
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