Market Overview

3 Reasons to Short Bon-Ton Stores

3 Reasons to Short Bon-Ton Stores

Bon-Ton Stores (NASDAQ: BONT) is up more than 50 percent 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 six percent on a quarterly basis, earnings-per-share are down by 73.10 percent 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 one is considered to be troubling for a company.

With such little cash, Bon-Ton Department Stores has a stunning debt-to-equity ratio of 18.18. That means that it required more than $18 in borrowing to produce each dollar of equity. By contrast, competitors such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) are much leaner. Wal-Mart has a debt-to-equity ratio of 0.84, with Target having one of 0.92. It is difficult to imagine how that debt can be serviced when sales are falling and there is so little cash in the till.

As a result, 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.

Related: 3 Reasons Debt Should be Avoided in Investing

Bon-Ton has risen more than 50 percent recently, even with anemic earnings. The most recent earnings reported that total sales declined by 2.6 percent year-over-year, which was a result of a 2.8 percent decline in comparable-store sales. Although there were some positive numbers, 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 about seven times longer to sells its products than it does Wal-Mart or Target.

That is a very bearish indicator for a retailer: it reveals that customers do not want what 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 percent) resulted in a classic "short squeeze" as speculators bought shares of Bon-Ton due to it being perceived as being undervalued, with the positive results being overplayed in a liquidity-driven bull market. 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.

Latest Ratings for BONT

Apr 2016DowngradesNeutralUnderperform
Sep 2015DowngradesBuyHold
Aug 2015MaintainsUnderperform

View More Analyst Ratings for BONT
View the Latest Analyst Ratings

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