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BAMM looks way too much like RHD and IAR (yellow pages) to me.  25% FCF yield until it isn't.  I guess the way I'd look at it is to ask if this company will be around in 6-7 years?  If it generates 25% FCF for 4 years and has residual equity value, then you make good money.  If it doesn't, you have a problem.  The company has almost $100 million in payables but only $6 million in cash.  This is fine because it has $200 million in inventory and a revolving credit facility.  The problem with the revolver is it comes due in July 2011 and I haven't seen any update on this beyond the 3Q10 10-Q where it claims it is looking into refinancing this.  After BKS, banks will not lend at the same rate, which will negatively impact the company's ability to fund itself (potentially).

Other questions:  Why did it invest in Yogurt Mountian Holding, a soft-serve yogurt concept??

One thing I don't understand is why it advertises for the Nook on its webpage.  Does it get a cut of eBook revenue sent through the website?  That may be interesting.

Borders has filed for bankruptcy. A good thing for BAMM?

It's one less competitor. I wonder if this'll increase negative sentiment for the whole retail book industry. 

I agree with all of the analysis. BAMM is a cheap stock. It is trading at 50% of its intrinsic value. It was on my buy list until I came across an article on WSJ 5/21/10: ebook rewrite bookselling.

In that article, there are serious concerns regarding the traditional bookseller business model:

1. while ebooks only comprised of 3-5% of market, there are fast accelerating the decline of physical books, forcing retailers, publishers, authors, and agents to reinvent their business model.

2. with advent of Apple ipad adding 120 million of itune subscribers, ebook has cross the chasm and it will further accelerate the decline of physical books.

3. ebooks require no printing, paper, storage space, delivery truck, and sell less than half of physical book. If physical book sales decline precipitously, chain retailers won't have enough revenue to support the stores.

4. Leonard Riggio, chairman and the largest share holder in Barnes & Nobles, says in the article, "a different Barnes & Nobles retail will evolve, selling a variety of merchandise and serving as showcase of digital products." It sound to met that they are looking for a profitable business model. Isn't BAMM also try to add Yogurt store to have the shopper better experience?

5. Mr. Mike Shatzkin, chief executive of Ideal Publishing consultant says this about the brick-mortar retailers, "Their time is limited. I can't see anything but sales continue to erode, and probably at an accelerated pace."

While I agree that traditional bookstore will not go away, but the digital revolution has turned its business model upside down. In my opinion, the market values these companies correctly. They are value traps.

I am taking Bamm off the buying list. 

Kai fann

If we use the Rocky Mountain Chocolate Factory as a similar (RMCF) company for valuation purposes, we can come up with some numbers:

2008 retail sales revenue was $1.8M with 5 retail stores, or about $300k/store.  EBIT on this $1.8M was approximately $76,000, or 4.2% of revenue. Yogurt has 2 stores, let's call it $600k/revenue total, and EBIT of $25,000. They're paying 180 times EBIT right now with a $4.5M premoney valuation.

If this $3M lets them open 7 more stores, projected revenue could be $2.1M, and projected EBIT $88,000. That's a price/EBIT ratio of 85.

The real money comes from scaling the operation – design 1 store, use the same menu at each, consolidate administrative functions like VP's, etc., get better pricing on your ice cream, etc. and you could probably get earnings up significantly.

BAMM has basically acted as an investor here because they believe this will work. If the business works and franchises start opening up, I don't have any doubt that they can make this valuation seem very low. Startups are tricky in general and there's a lot of risk, but if you do the math of hitting 80-100+ retail stores, they probably believe that if they can scale it to that much, the overhead they expense to just 2 stores will be significantly reduced and costs will be lowered too, allowing them to increase the earnings quite a bit.

Basically all startups have this "hockey stick curve" in them at some point. If they hit it, this kind of investment could see a 10x. VC's setup funds for this, make 10 investments, and they believe each will hit that 10x, but in reality, only 1 will, if that. Some turn out to be 4-5x'ers, and some they just get an average return or they go to 0.

Venture Capital has the same basic principles of due diligence, but it involves a higher degree of speculation based on what you think the business will do in the future.

I could go on and on about venture capital, but I think most value investors would choke trying to make any investment in that space.

With that, I leave you folks, because I need to go and get some ice cream now.

Here's another look at BAMM from Seeking Alpha.

http://seekingalpha.com/user/5…../instablog (you have to scroll down)

Frankly I didn't like the valuation of Yogurt mountain at $3M in cash for 2 stores !! You wonder what were this guys thinking. But it seems Yogurt mountain may be using this cash to expand and open more stores. I hope this wasn't a family favor since both companies are based in Alabama. Only time will tell whether it was a good investment or not.

The fact that insiders – The Anderson family  has a considerable stake in the company is a positive I forgot to mention in the last post although that can also lead to corporate governance issue.

Btw, same store sales figure or revenue/sq feet metric for BAMM is conveniently absent from the 10K. That's a very important metric for retail stores and that's a visibility i would have liked to see in the 10k.

Thats a great coincidence. I arrived at a very similar valuation (DCF of ~$15 ..using a FCF of 13m and a conservative 8% growth rate, Graham of around $7.4 using $0.7 and 8% GR). I bought it last week, although I wish I had waited for the pull back after it went up sharply from ~$7 to $8+ in the last few weeks. But then again, as a value investor, timing the market has never been my forte !!

Yes, I understand that there's risk from people moving to e-content but I think most traditional bookstores have diversified their business enough and looking at different revenue streams. Just as coffee makers and espresso machines won't drive Starbucks out of business,  IMHO Kindle or Ipad won't drive traditional bookstores out of business (atleast not in the short term)

What I like about BAMM

- undervalued from DCF perspective (of course !!)

- Low LT debt (esp. from bonds which expire in 2019)

- Low store closing costs

- prudent management

What I don't like about BAMM though is

- Revenues have been stagnant for the last 5 years ~ $500-$550M (although the fact that they have managed to keep revenues steady in the recession should be a good indicator)

- Operating margin ~4-5% although, again to be fair, is at par with other B&M book sellers.

- business with no moat (which should be no surprise from it operating margin numbers) with intense competition from more well established companies.

- cash balance has reduced significantly during 2008-2009 from 2007 and earlier

This was a pure value play for me and it may take a while for BAMM to reach it's proper valuation ( given it's track record during the last 10 years I hope this doesn't become a value trap for me).

Would also like to know your thoughts on BAMM as well.

-Regards

Ranajit