Tandy Brands Accessories Inc (NASDAQ:TBAC) presents an interesting conundrum: an undervalued asset situation with a current asset value that has deteriorated significantly over the last year and an activist investor with little track record pushing for change. TBAC last traded at $1.88, giving it a market capitalization of just $13.3M. Our estimate for its liquidating value is some two-thirds higher at $3.16 per share or $22.3M in toto. We note that its liquidating value has deteriorated by more than half over the course of the year from a high of $8.38 per share in the same quarter last year to its present $3.16 per share value. TBAC needs urgent, heroic, life-saving surgery, but we don’t think the current board are the ones to crack open TBAC’s chest and massage its heart. Seeking to fill the role of ER doctor is neophyte activist shop NSL Capital Management, which its website says is run by “N. Southwick Levis, Chief Equity Strategist,” who has “well over 7 years of professional investment, transactional M&A, and finance experience.” We don’t want to damn Nick Levis as TBAC’s undertaker, but we don’t see him in the role of its dashing young doctor either.
TBAC is a designer and marketer of branded men’s, women’s and children’s accessories, including belts, small leather goods, and gift accessories. Its product line includes handbags and sporting goods. Its merchandise is marketed under a portfolio of brand names, including Dockers, Levi’s, Levi Strauss Signature, Totes, Rolfs, Woolrich, Canterbury, Prince Gardner, Princess Gardner, Amity, Coletta, Stagg, Accessory Design Group, Tiger, Eton, Surplus, Eileen West, Goodyear, Geno D’lucca, Dr. Martens, and Dr. Martens Airwair, as well as private brands for major retail customers. Its investor relations website is available here.
The value proposition
According to its most recent 10Q, TBAC’s earnings and operating cash flow performance has been chequered, but mostly negative. In the last quarter the company made a loss of only $1.3M but managed to burn through $14.3M in cash as working capital blew out. The working capital hole was filled by $15M in new debt. At present, there is some vestige of value on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):
TBAC’s value is carried in its inventory, to the tune of $48.5M or $6.88 per share. We value that inventory on a liquidating basis at two-thirds of its carrying value, which is $32.5M or $4.61 per share. The other source of value on TBAC’s balance sheet is its receivables, carried at $26.4M or $3.75 per share and written down by a fifth to $21.1M or $3.00 per share. Our concerns with TBAC are its $15.4M in debt, which appears due this year and which we cannot see being met by cash flow. TBAC has other substantial liabilities, which, including the debt, come to $38.7M or $5.49 per share. Subtracting TBAC’s liabilities from its written down assets, we estimate TBAC’s liquidating value at around $22.3M or $3.16 per share. We note that the same valuation undertaken in the same quarter 12 months ago would have yielded a liquidating value of around $8.38 per share, which means that TBAC has managed to tear up more than half its value in a year.
NSL Capital Management and the Quark Fund filed an initial 13D on February 1, 2007 disclosing a 5.76% holding in TBAC. The latest 13D filing dated December 2, 2008 disclosed a “<5%” holding for the purpose of “nominating Nick Levis and Evan Kagan to the board of directors of Tandy Brands Accessories.” Mr. Levis took a run at TBAC’s board in October this year but was unsuccessful in his bid to unseat two directors. Mr. Levis’ letters to TBAC’s stockholders in the proxy fight are reproduced below. His first letter to TBAC filed October 14, 2008 is a classic (it’s not often you see the advantages of the unlicensed-firearm-DUI slate over the shareholder-value-destruction slate) and is reproduced below:
Dear Tandy Brands Shareholder;
Tandy Brands Management recently brought up the matter of a big mistake I made in 2004, for which I have paid the price. Although I regret not licensing my firearm, I am not embarrassed by my firm belief in the Second Amendment to the U.S. Constitution or in the Due Process of Law provided all American citizens.
I received a misdemeanor involving my firearm in the case the company has mentioned. It is my assertion that Tandy is guilty of sins far worse than DUI or similar misdemeanors. When a case is set aside in Arizona, it means that the judgment of guilt is dismissed – I am therefore not guilty of the charges the company has mentioned.
Can the company say the same thing about the charge of DESTROYING TBAC’S SHAREHOLDER VALUE – in my opinion the WORST SIN our trusted management team and board of directors at Tandy Brands could commit? The company argues that given this “recent” indiscretion in my personal life, I am unqualified to represent the beleaguered shareholders of Tandy Brands Accessories.
I have never been accused of mismanaging a public company and would never receive a large pay-out for poor performance. Management has also pointed to my experience… I can tell you this; my experience does not include rapidly destroying the value of a publicly traded corporation while receiving a large salary.
It is my argument that a CEO who loses fifty percent of a company’s market value in three quarters and a board of directors who fail to control the risks involved with running a public company should not be rewarded with excessive (or any) compensation – I think their errors in judgment are very relevant to this proxy contest. Tandy Brands Accessories shareholders have lost almost everything with Britt Jenkins in my opinion. Why should we continue to suffer so that insiders enjoy the trappings of high society life on our dime?
Could it be that the directors and the ex-CEO do not want you, the shareholders, to focus on their own recent indiscretions? What about the millions of dollars they collectively receive from shareholders yearly as the company’s value decreases? The data is in plain view for all to see in the company’s sec filings. The CEO alone has received around $1 million on average for the past ten or more years as we shareholders have lost almost everything (the stock has dropped from $13 per share to under $4 per share in the last year and a half). Britt’s son, Clay Jenkins, receives $150,000 yearly. Jane Batts received $250,000 this year but where is the justification for this hefty pay in the financial statements? Where is the return on investment for the TBAC shareholders? Where is the accountability that most major corporations have to their shareholders?
David Lawhon and his son collectively receive around $300,000 yearly. Craig Mackey, the only person in upper management receiving a fair paycheck in my opinion, makes $250,000. The Board of Directors is costing around $800,000 plus in fees and expenses yearly. If we add my estimate of the company’s convention and travel budget of $2 million plus, and the $500,000 spent yearly to rent a show room in the Empire State Building (I have heard that only 3-5 people work in the NY showroom), and the $500,000 in rent expense for offices in Dallas, we are at $6,000,000 in yearly overhead that needs to be reduced to $1,000,000 or less immediately in my opinion. I’d say that The CEO and the Board of Directors are desperate to distract your attention from the fact that they have lost $50MM in the last 3 quarters while raking in millions for themselves.
More performance accountability to shareholders is needed. My figures might be approximate, but as I see it, shareholders are paying nearly $6-8 million dollars yearly in overhead to an exclusive small group of people who want to keep it that way. Hiring a new CEO has allowed the gravy train to continue in my opinion. Although highly qualified, we feel the new CEO is not going to have the power to cut SG&A enough to make Tandy as profitable as it could be without changes to the board. Tandy leadership in my opinion wants you, the shareholder, kept in the dark while this small cadre receives 20% of the value of the company EACH YEAR as we the shareholders receive negative ROI on our investments.
NSL Capital owns 5.29% of Tandy Brands Accessories. Mr. Jenkins owns 5% but gets paid $1,000,000 yearly. Let us all keep in mind, that much of his stock was handed to him in the form of grants and awards, and not by way of making purchases with cold hard cash as we, the shareholders of Tandy Brands Accessories, have done. It’s time for shareholders to do a better job of minding the store in our opinion.
If elected to the Board I will:
1. Not accept any form of compensation from the Company other than the appreciation of my 5% ownership interest in the TBAC common stock and a 25,000 fee for expenses related to meetings.
2. Align the interests of all Company insiders with those of the outside shareholders.
3. Drastically reduce SG&A expenses including the 6-8 million provided to a select few who own little stock.
4. Set up a system of awards that focus on the creation of tangible shareholder equity per share.
5. Use a metric pay scale based for all company executives based on the percentage gain or loss in tangible equity per share per year.
6. Reward top performers and regain the trust of the Company’s best employees.
7. Focus on the bottom line, growing liquidation value (not shrinking it as Britt Jenkins has done.) by focusing on the company’s profitable niche businesses and private label markets while bringing costs in line to sales volumes and gross margins.
8. We believe that their attempt to find a new CEO will not lower the $6,000,000 yearly discussed earlier and is likely not going to change the present control structure of the company. We cannot place the same people responsible for the overnight disintegration of the company in charge of the cleanup.
9. Act at all times in the best interest of all stockholders – End the Agency Conflict at Tandy Brands.
10. Allocate Capital with conservative return expectations and lower the company’s risk of loss.
11. Maintain and grow the balance sheet by making wise long term investments.
12. Focus on the bottom line, putting TBAC shareholders first.
I have a solid long-term plan for this company which involves allocating capital in a more conservative, shareholder friendly manner and monitoring costs like a hawk. It is my belief that the company plans on spending more of your hard earned money on themselves, regardless of your performance as a stockholder.
“Don’t let Nick Levis derail the company’s plan”
My response is that:
“It is NSL Capital’s belief that the company’s plan is to continue to enrich entrenched management and the well paid board of directors at the expense of the shareholder – the time for change is now!”
Please vote and return the Gold Proxy Card sent to you by NSL Capital Management, LLC and throw away the white card sent to you by management. Let’s save what we have left of our investments in TBAC and grow it into the future by voting for thriftiness and shareholder value. NSL Capital and Quark Fund own 370,610 shares of TBAC common stock representing approximately 5% of the company’s outstanding shares.
Nicholas Southwick Levis
NSL Capital Management, LLC
Mr. Levis followed that October 14 letter with another on October 17, reproduced below:
We believe that Britt Jenkins has Earned Millions from Shareholders While Running Tandy Brands Into the Ground: We feel the Board of Directors at Tandy Brands are receiving excessive fees each year (around $100,000 per board member) and are not independent. Furthermore, we believe that TBAC Management and the Board of Directors desperately want to continue enriching themselves at your, the shareholders and true owners of Tandy Brands Accessories, expense.
TBAC: Turnaround Story… or 25% Yearly Front Loaded Closed End Mutual Fund?: It is my opinion that Britt Jenkins and the top brass of Tandy do not want you to know that $6,000,000 of your money is spent EACH YEAR on salaries to the board and Mr. Jenkins ($2,000,000), for expenses related to the fancy Empire State Building showroom in NYC and the plush Dallas offices ($1,000,000), for travel and conventions ($2,000,000), and for upper management pay or perks ($1,000,000). To me, and to other concerned shareholders, $6MM in executive expenses each year on a stock valued at $24MM is like paying a 25% sales charge or “Load” to a money manager each year. In the mutual fund or hedge fund industry, this type of pay for underperformance (or abhorrent performance) fee structure would truly never stand…. At Tandy Brands, this pay scheme is “good governance.” Please Vote the Gold Proxy Card.
NSL Capital’s slate offers hope for the company that what we see as corporate waste, greed, and inflated pay packages will no longer rule the boardroom at Tandy Brands Accessories and no one will ever charge this 25% yearly “load” from the shareholder ever again. I do not hold fault to CEO’s of companies that perform. Good CEO’s are the backbone of American Business. The fact that Britt Jenkins destroyed $49MM in shareholder value last year while charging shareholders over $1,000,000 in compensation, however, is not acceptable to me. Making matters worse for us shareholders, Mr. Jenkins and the Board continue to rent an entire floor in the Empire State Building and lease lavish offices in Dallas that have almost no use whatsoever in my opinion to the operations of Tandy Brands other than its service as what we view as a management perk – why can’t we office out of a small rental space like most $24MM companies? Berkshire Hathaway has less lavish offices that Tandy in my opinion.
Let’s talk about those director fees… Can someone please explain to me why we should pay $800,000 a year to a Board of Directors who we feel just lost nearly half the value of this company and who own almost no stock? We feel this company is run for the enrichment of stakeholders alone with no regard at all to stockholder value. We have asked the board of directors to drop their yearly fees to $25,000 each which is all we will accept from the company if you vote the Gold Proxy Card. We feel the company over the years has performed just well enough to stay below the radar – management remains unaccountable for their actions and mistakes that cost us shareholders real money.
Please vote the Gold Proxy Card for the NSL nominees and vote for paying TBAC executives for performance. Vote for accountability. While the opposition complains about the “distraction” of this proxy fight and my lack experience, they are making thousands of dollars each day as we lose more and more money on our investment in the company. I can get the job done. Let’s stop the spending spiral right now.
With Warm Regards,
His final letter to stockholders was filed October 21 and is reproduced below:
Dear Fellow Shareholders,
We feel that Tandy Brands needs to take action to turn around the business to save employee jobs, eliminate wasteful spending, and create lasting value for shareholders. We are very happy with Rod Mcgeachy’s qualifications and background, however, we feel he would have a better chance to save the company if Tandy lowered board fees and rental expense as well as other overhead that is unrelated to headcount. Frugality is the cornerstone to any turnaround story.
In my last two letters to shareholders focusing on my plan to implement needed cost cuts the first step is lowered board pay and lowered lease expenses. I am sure these suggestions have made me unpopular in the short run at the company, but given the present perilous times we face, drastic action is necessary for survival.
I believe I have the experience to aid in this turnaround having sold several companies as a merger advisor, having placed needed capital with cash starved companies, and having years of experience investing and in financial markets.
Survival depends upon a program of forceful expense reductions. I believe it is time for a turnaround. Who is going to save this company — the same board of director members who are hunkered down and who have lost significant shareholder capital? I believe we need a fresh start and an immediate turnaround and restructuring of the company. I have spent around $25,000 and will ask only for this amount as reimbursement for out of my pocket expenses related to this proxy contest. Compare that with the $175,000 Bill Summitt received after settling with the board last year or the $100,000 each board member receives every year and you will realize what a bargain my slate truly is. I am not saying the board is filled with bad people, just that the business is in a turnaround and we need leadership who recognizes that these are the most difficult times the company has faced and everyone must make sacrifices. We feel the new CEO will not have the power to lower expenses enough to make the company profitable, because the Board of Directors is comprised of the same individuals who failed to prevent the problems that began in 2005. I would argue that the Board has failed to provide the guidance that we, the shareholders and true owners of the company, expect from an independent Board. If I am elected I will work to reduce overhead by urging the new CEO and Board to reduce overhead by at least five million dollars per year by working to implement lower convention, travel, lease, legal, and compensation expenses. This step will provide immediate aid to the company’s turn around.
I am not in this for personal gain from fees or from “gaining control” of the company. My slate will represent a minority on the Board and I will not be able to make decisions without majority vote. Furthermore, I feel my 5% ownership in the company’s common stock uniquely positions me to represent the interests of outside shareholders. I am not a corporate raider and do not intend to sell or liquidate the business. If you elect me to your Board of Directors, I want to retain and grow jobs at the company, but turnarounds start by recognizing that there is a problem first. We should consider retaining a turnaround firm to immediately work on taking Tandy off the fast track to bankruptcy and onto the long road to recovery. Surely, reigning in spending will be my top priority along with regrouping and rebuilding the business. I think in this environment it will take hard work from every single member of the business to make a full and complete turnaround a viable possibility. Please Vote the GOLD PROXY CARD.
With Warm Regards,
TBAC’s management, in its proxy materials, attacked Mr. Levis on the basis of his inexperience. The relevant slide from the presentation is produced below:
We don’t know a great deal about Mr. Levis, NSL Capital Management or the Quark Fund. The earliest filing we can find for them is February 11, 2008, which is, coincidentally, the initial 13D for TBAC. His TBAC proxy material described him as follows:
Nicholas Levis , 29, is a C.E.O. of NSL Capital, a deep value hedge fund. Mr. Levis served as Acquisition Director for Journey International, a middle market M&A advisory firm headquartered in Scottsdale, Arizona prior to founding NSL Capital. Journey was run by Steve Gootter (www.Stevenmgootterfoundation.org ). At Journey, Mr. Levis worked on a three person team that secured merger advisory engagements totaling over $250MM in revenues. Mr. Levis served as Account Executive Assistant with Inc. 500′s Alliance Capital Corporation, prior to working with Journey securing financing for the purchases of industrial machinery and equipment. Mr. Levis has held positions with Merrill Lynch’s Institutional Advisory Division and with Merrill’s Private Client Group. In the summer of 2000, Mr. Levis worked under a top investment manager with Solomon Smith Barney. Mr. Levis holds a Bachelor of Science degree in Finance from the W.P. Carey School of Business.
NSL Capital Management’s website sports in Mr. Levis’ biography his “summer analyst positions with Merrill Lynch’s Institutional Advisory Division in Dallas Texas and with Merrill’s Private Client Group in Santa Barbara, CA.” It describes Mr. Levis’ “probalistic” (sic) approach to the markets” in this way:
NSL Capital Management, LLC is run by value investor Nicholas Southwick Levis and takes a probalistic approach to the markets, which we believe are Complex Adaptive Systems. There is no certainty in life or in the markets, just chance events and random probabilities. These probabilities are what we at NSL Capital Management, LLC constantly study and apply to the financial markets.
The website invites those seeking more information to contact Mr. Levis at a hotmail account (you can find us throwing stones from a glass house at firstname.lastname@example.org). On the positive side, the NSL Capital Management website says that “Nobel Laureate Physicist Dr. Murray Gell-Mann serves as Senior Advisor to the hedge fund.” A “Nobel Laureate Physicist” is a credit to NSL Capital Management. We’ve only got a few Fields Medalists and Nobel Prizes in Literature toiling away in the Greenbackd sulphur mines. (We’re kidding about those awards. We did get a gold star from Ms. Thomas in 3rd grade for a pretty amazing crayon drawing of what we’d be doing when we grew up – it wasn’t writing a blog.) To be fair to Mr. Levis, none of the foregoing necessarily prevents him from shaking up TBAC and wresting what value there is to be had from the company for the stockholders. While he has no track record as NSL Capital Management, he makes some excellent points in his letters to shareholders. In our opinion, he’s clearly identified in the letters why TBAC’s value is deteriorating and why it’s so deeply undervalued. Unfortunately, we think he’s also identified why it’s destined to remain that way.
The stars are not aligned in this situation. TBAC is undervalued at present, but it has a deteriorating value. Normally we would ignore any apparent “trend” in the liquidation value on the basis that it would regress to its long-term mean, or stabilize. In this case we have to consider the real possibility that TBAC will have no value in liquidation in short order if it continues on its current path. TBAC needs urgent, heroic, life-saving surgery, and we don’t think the current board are the ones to crack open TBAC’s chest and massage its heart. We don’t want to damn Nick Levis as TBAC’s undertaker, but we don’t see him in the role of its dashing young doctor either. Given his penchant for guns, the whole situation is beginning to feel a little “vaudeville” for our tastes. It’s as if we sat down to watch some MSNBC and found a Three Stooges film playing instead. Only the diehard fans will be laughing if Mr. Levis gets on the board but we can still admire his ability to inflict pain, if only to himself. As much as we’d like to see Mr. Levis hold TBAC’s nose between his knuckles and belt it, we think this one is better seen from the comfort of the couch. We’re not buying, but if you don’t mind a poke in the eye, go right ahead.
TBAC closed yesterday at $1.88.
The S&P500 Index closed yesterday at 885.28.
[Disclosure: We don't have a holding in TBAC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]
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