3 Reasons to Short Bon-Ton Stores

Bon-Ton Stores BONT is up more than 50% for the last month of market action. Just about everything else is down for the small cap department store chain based in Pennsylvania: sales growth is off by 6% on a quarterly basis, earnings-per-share are down by 73.10% for 2013, and the quick ratio, a measure of a company's ability to pay short term debts with its most liquid assets, has fallen to 0.20. A quick ratio of under 1 is considered to be troubling for a company. With such little cash, Bon-Ton Department Stores has a debt-to-equity ratio of 18.18. That is stunning. That means that it required more than $18 in borrowing to produce each dollar of equity. By contrast, competitors such as Wal-Mart WMT and Target TGT are much leaner. It is difficult to imagine how that debt can be serviced when sales are falling and there is so little cash in the til. By contrast, Wal-Mart has a debt-to-equity ratio of 0.84, with Target having one of 0.92. Bon-Ton appears to be a classic "value trap." It has some enticing financials that should be ignored. As an example, the price-to-sales ratio is 0.11. That is due to the goods on the shelves that no one wants not being valued properly. If it were a good investment, its financials would be in line with others in the industry. The sector price-to-sales ratio is 0.67. That hardly means that Bon-Ton is priced more than five times more attractively than others in the industry such as Wal-Mart and Target. Bon-Ton has risen more than 50% recently, even with anemic earnings. The most recent earnings reported that total sales declined by 2.6% year-over-year, which was a result of a 2.8% decline in comparable-store sales. The quarter was unprofitable. Its cash-conversion-cycle is 137.32 days. That is the time is takes a company to sell and pay for goods. The cash conversion cycle for Wal-Mart is 16.46, in comparison. For Target it is 19.24. It takes Bon-Ton at about seven times longer to sells its products than it does Wal-Mart or Target. That is a very, very bearish indicator for a retailer: it evinces that customers do not want is on the shelves. It most likely requires deep, deep discounts to move merchandise by Bon-Ton after four months, which is why the price-to-sales ratio is so low. So why the surge in the share price? The high short float (38.76%) resulted in a classic "short squeeze" as investors bought shares of Bon-Ton due due to it being perceived as being undervalued. Most likely it is not. Collapsing retail stores always end up with price-to-sales ratios under one due to items being improperly valued. The failing sales, the high debt load, and the rising share price in the short term are three excellent reasons to short shares of Bon-Ton Department Stores.