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The Brick


basl1
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Yesterday, the brick dropped it's monthly dividend. It's price dropped like a Brick. Any idea if this is a good buy now?

:o

 

Can't say if it is a good buy.

 

This is a great example of why I'm happy to own FFH and not try and mimic their portfolio. They have 8M plus shares. The impact on the overall portfolio is minimal but for an individual this could have hurt.

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I own some of this in an RRSP.  I bought in January after the price had dipped and then began to recover. 

 

My reasons for buying were I liked that they had cut their distribution to preserve cash, I liked that insiders had made some decent purchases on the open market after the declines in December and I really liked that Fairfax had increased their position but what I liked most was that monthly distribution which amounted to about 2% per month based on my average cost.

 

Now obviously a furniture retailer can not continue to pay out 2% per month in the current market as I am sure sales are way down, but it would have been nice to get more than one payment!  A final metric I used was the number of stores.  They have 228 stores Canada-wide.  At the market Cap when I bought, this placed an approximate value of $590,000 per location which seemed low to me.  There's no real estate portion here - just the brand and their abiltiy to move furmiture, mattresses and home electronics.  At current market cap that number is down to $373,000 per store.

 

The negatives I can see are that the entire operation loses money regularly.  So how much is a money-losing machine worth per location anyway??  The stated equity on the balance sheet is pretty well all Goodwill when you boil it down, however I don't think there's much Goodwill in the brand.  Quite frankly I couldn't care less where I buy my furniture if it's decent stuff at the right price and when I do buy, I check out all the retailers anyway and they all seem the same to me.

 

The only real moat they have is that their size allows them to buy well.

 

I don't know what I'll do with my position but I'm not going to add to it (average down). 

 

 

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The furniture operation loses money chronically.  However, The Brick normally makes up for it through financing and extended warranties.  Their target market is the middle or lower middle class who do not mind buying shoddy inferior furniture on unattractive credit terms...."Pay nothing until 2012!!!!"  "Oh, by the way, do you need an overpriced extended warranty for that TV that will be obsolete in 2 years?"

 

This market is not that competitive.  There are a few other regional players like Leons or Brault et Martineau, but it ain't exactly crowded.  At one point, the middle class sucker will come back to buy new crappy furniture on credit....and the Brick will probably be their ONLY option.  I would expect that their credit arm will be able to extract even more ridiculous terms in the future.

 

Can they keep the doors open long enough to last through this turbulence?  The $80m term loan isn't due for another 5 years, so they just need to live off depreciation for a while.....

 

 

SJ

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