We have been patient, passive shareholders for several years. We currently own over 1.6 million shares. The reason we invested was based on management's communication of cost savings initiatives, Project Excellence (net savings of $15 million annually), and a long-term target of a high single digit operating margin, all of the above dating back to 2013. The sad reality, is that our stock has declined dating back to June of 2013, from $6.50 to $2.20, representing a 66% decline. Simultaneously, during the same period, XRT, the benchmark for retail stocks, has appreciated approximately 20% with dividends.
When we compare the actual results with management's stated objectives under Project Excellence of $30 million in total savings and $15 million in net savings coming from a combination of COGS and SG&A, we are left perplexed. Adjusted EBITDA has declined from FY 2014 of $36.3 million to $28.3 million over the last 12 months (ended 10/29/2016). Essentially, the impact of Project Excellence to the financial results has been non-existent. Management has paid lip service to improving operating results with nothing to show for it. NWY has been generous to its executives at the top (annual raises) while not being very kind to us people at the bottom (shareholders). Project Excellence, as well as the 2013 cost savings initiatives have been merely "token gestures", that as stated in the above referenced financials, have not only failed in generating net cost savings but Adjusted EBITDA has actually declined! We are calling on the Board and management to uphold their fiduciary responsibility and take aggressive actions with a sense of urgency.
We are calling for the following:
1. A DETAILED REVIEW OF ALL EXPENSES
Some of which are, but not limited to, travel and entertainment, rationalization of real estate/leases, unnecessary overtime, optimization of matching labor hours with "peak times", cost of internet and telephones in every location, rebidding cleaning services, rebidding and negotiating shipping expenses, communication with every store manager to have a goal of saving $1,000 per month per store ($5 million cumulative annual impact at stores alone).
We are calling on top executives, to voluntarily agree to salary reductions that result in a cumulative annual savings of $1.5 million, with an offsetting increase in stock based compensation (aligning interests with shareholders).
The goal of this expense reduction initiative will be a minimum of $8 million annually, which is only half of the original Project Excellence goal.
2. A $30 MILLION STOCK BUYBACK
It is time that NWY return cash to shareholders. We estimate that by the end of Q4, January 31st 2017, NWY will have approximately $91 million in gross cash and $78.5 million in net cash. Our math is as follows: NWY will collect $22.5 million under their new Private Label Credit Card agreement on January 10th, plus a minimum of $15 million in Q4 free cash flow generation (the past four years Q4 FCF has ranged between $15-35 million). We estimate the pro forma Enterprise Value at <$62 million. Furthermore, under the substantially improved royalty agreement with their PLCC, as per the company's 10-Q, we conservatively estimate in excess of $9 million in incremental royalties. When combined with $8 million in net expense savings, we estimate forward EBITDA to be greater than $44 million. Also worth noting, over the past 5 years NWY has run the business with net cash ranging from $48-$61 million, and will clearly be overcapitalized by January 31st 2017. It is worth reiterating that excess cash be returned to shareholders in the form of a stock buyback. For example, assuming a pro forma run rate of $44 million in EBITDA, our stock will be trading at approximately 1.5x EV/EBITDA, we can hardly imagine a better use of cash than our own shares!
3. NEW BOARD MEMBER – with a track record of operational excellence and creation of shareholder value.
We thank all of the hard-working NWY employees. We wish them and their families a blessed and safe holiday season. We look forward to a constructive and amicable dialogue with NWY management and the Board. Lastly, a prosperous 2017, that is inclusive of the shareholders, not just a few at the top.
President, Kanen Wealth Management, LLC
Philotimo Fund L.P.
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SOURCE Kanen Wealth Management LLC