Secured Notes & Shares Under The Microscope On Bon-Ton Stores

• Bon-Ton Stores Inc BONT shares are up by more than 33 percent since August 25, although they have lost 46 percent year-to-date.
• Imperial Capital’s Mary Ross Gilbert maintained an Underperform rating for the company, while reducing the price target from $4 to $2.
• Disappointing F2Q15 results and reduced FY guidance remain the concern areas, Gilbert said.

Analyst Mary Ross Gilbert commented, “While Bon-Ton’s shares have significant optionality associated with financial and operating leverage, anticipated higher average borrowings and lower cash earnings still indicate the shares are overvalued.”

Gilbert attributed the significant deterioration in Bon-Ton Stores’ operating performance over the past five years, despite the company’s efforts to improve execution, to the evolving retail landscape, lower apparel sales owing to lack of newness and a focus on big-ticket items.

Bon-Ton Stores reported lower-than-expected EBITDA for F2Q15 and reduced its full-year guidance from $150-$160 million to $145-$155 million. The company also now anticipates a slight cash burn for the year, which combined with higher average revolver borrowings, “reduces valuation to the shares,” the Imperial Capital report stated.

The merchandising initiatives taken by Bon-Ton Stores’ CEO Kathryn Bufano are expected to stabilize and potentially grow the company’s top-line and margins from FY16 onwards.

Imperial Capital maintained the Buy rating on the company’s $350 million senior secured notes “due on 6/15/21 (8s) at a recent price of 66 (17.59% YTW; 12.12% CY)” based on adequate liquidity over the next couple of years.