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Posts Tagged ‘Breeden Capital Management’

Zale Corporation (NYSE:ZLC) has released its results for the quarter to January 31, 2009. After reviewing the results, we have significantly reduced our original estimate for the company’s liquidating value since we initiated the position at $4.82 on December 3, 2008. Our initial analysis of ZLC’s balance sheet was overly optimistic. We’ve now applied more dour assumptions to ZLC’s results and, as a result, we’ve decided to close the position.

We started following ZLC believing it to be an undervalued asset situation. With former Chairman of the SEC turned activist investor, Richard Breeden of Breeden Capital Management LLC, holding two seats on the board, we thought it looked like a reasonable opportunity. At its $4.82 closing price on December 3, 2008 the company had a market capitalization of $154M. We estimated ZLC’s liquidation value at that time to be around $243M or $7.63 per share. After reviewing ZLC’s Q2 financial results and applying more dour assumptions for the value of the assets in liquidation, we now believe there is a risk that ZLC has no value in liquidation.

The value proposition updated

Set out below is our summary analysis of the balance sheet (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

zlc-summary-2009-q2Conclusion

At its $1.35 close yesterday, ZLC has a market capitalization of just $43M. When we started coverage in December last year, ZLC traded at $4.82 and had a market capitalization of $154M. Our ZLC position is down a punishing 72% on an absolute basis. The S&P 500 Index closed at 848.81 on December 3, 2008 and closed yesterday at 764.90. That’s a return of -9.9% for the index and means we’re off 62.1% on a relative basis, which is still very disappointing. The simple fact is that this was an unforced error. Our original analysis of ZLC was overly optimistic. We’ve been applying more dour assumptions about the recovery values of assets in liquidation to our most recent analyses. If we had been applying the more dour assumptions at the time we made our original assessment of ZLC, we would not have initiated the position.

[Full Disclosure:  We do not have a holding in ZLC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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