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Research Report issued by the 3 Amigos on BizFN. Check out the fundamentals of this company. Bernard Chaus, Inc. By The Three Amigos Email: sheiber@esslink.com March 17, 1999 Small Cap Forum Newsletter Want to receive weekly independently research small and micro-cap stock research report in your mailbox? SUBSCRIBE TODAY to the Small Cap Forum Newsletter. Subscriptions are FREE so simply type your email address into the below box and hit the subscribe button now! Subscribe to the Small Cap Forum Newsletter TODAY! Bernard Chaus, Inc. (CHS) NYSE: CHS Recent Price: $1.75 Shares Outstanding: 27.1 M Float: 7.60 M 6 Month Target Price: $7+ General Description: Bernard Chaus, Inc. is a leading designer and manufacturer of women's career and casual sportswear. Their products are found in the nation's leading department stores, including Federated, May's and Dillard's. Chaus was founded in 1975 and had its IPO in 1986. It trades on the New York Stock Exchange. Briefing: I believe this is one of the best small-cap investment opportunities in the market today for the aggressive, yet rational investor. They are amassing a consistent record of profitability. Chaus earned .28 per share last year. For the first two months of the current fiscal year CHS earned a combined .15 per share in operating income. In a recent conference call Management confirmed .45 per share as their forecast for earnings for the current fiscal year ending this June. This forecast was again confirmed by their CFO on March 9th. At its current price of $1.75, that would give CHS a PE of 3.8 on this year's earnings! Since Chaus earned .28 per share last year, if they meet current year forecasts, net income will have grown by 61% yet the stock will be trading at a PE of under 4. Sales for this year should approximate $200 million. That provides a Price to Sales ratio of .27. Even if the stock quadrupled in price, valuations would be reasonable with a PE of just over 15 and a Price to Sales ratio of just over 1 to 1. History: In 1997 management began a massive turnaround. Chaus was losing several dollars a share, sales were declining and debt was mounting. Management initiated a corporate restructuring in which the company's largest shareholder and current CEO exchanged debt for equity, greatly increasing her share of ownership. This restructuring significantly reduced debt, and interest expense. It cleaned up the balance sheet, provided necessary working capital and extended borrowing capacity. As part of its restructuring, Chaus initiated a plan to return the company to profitability. As part of this plan, Chaus closed down nearly all unprofitable outlet stores and terminated its money losing licensing agreement with Nautica. Management then refocused their efforts on revitalizing their core CHAUS brand. Over the past two years management's efforts have really paid off. In June of this year the company will report its second year in a row of strong sustainable profits. Their Balance Sheet is clean and shows positive working capital of $22.6 million as of December 1998. Sales for the Core CHAUS brand have increased dramatically, while money losing operations and low margin sales have been eliminated. Recent Events: The company recently announced the launching of a new division focusing on two new lines of casual sportswear. These lines will be available in stores in the Fall of 1999. Early response from buyers has been very positive for these two new lines and they are poised to contribute significantly to the bottom line going forward. The company recently announced the launching of an Investor Relations Website at BernardChaus.com. It is an impressive site with lots of valuable corporate information and easy shareholder access to management to ask questions or make requests. Coming Events: 1) Sales- March is the month in which many apparel makers start booking sales for the Fall 1999 season. Chaus will begin the process of selling their traditional lines as well as their new lines this month. If wholesale orders go as well as the initial response from buyers, a substantial increase in sales could ensue. Also, a buzz could be created that could really move the stock. In past selling seasons, the stock price has more than doubled based on positive word from these wholesale sales efforts. 2) Advertising- The company has hired an advertising firm and will soon launch a major ad campaign. The large increase in sales of the core Chaus line occurred with no advertising at all. A major ad campaign should boost brand recognition, sales and hopefully the stock price. We may see a press release providing details of the advertising campaign in the near future. 3) The Website- The company is currently considering on-line sales. It is only in the consideration stage at this point and may never occur, but if they decide to sell on-line the stock price could explode. 4) Department Stores- The company currently sells in around 600 department store "doors" around the US. 1500 "doors" suitable for selling Chaus clothing exist in the US. Management's focus for the coming year will be to penetrate as many new "doors" as possible. Significant growth prospects exist. If the Core Chaus line continues its rapid sales increases and if the two new lines do well, Chaus will have no trouble greatly expanding the number of "doors" in which their clothes are sold. Technical Picture: The one year chart for CHS looks pretty disappointing. The stock has been in a downtrend since the reverse split over a year ago. The stock appears to have bottomed out at current levels and has formed a base from which to rise. Recent activity has the stock price crossing its 13 day moving average. The 50 day moving average resides at around $2. If the stock breaks $2, the next resistance level is around $4. As favorable fundamental developments continue to unfold, I believe the technical picture will improve in the near future. Companies don't grow earnings at 60% a year and maintain a PE ratio of 4 on the NYSE for very long. Other Factors: Josephine Chaus, the Current CEO and co-founder owns over 70% of the company. Her interests are therefore closely aligned with shareholders' interests. She is rumored to be exploring several options for increasing shareholder value. The company is a prime takeover candidate. At current valuations a suitor could offer a significant premium to shareholders without overpaying for the company. Conclusion: I believe CHS could be a massive winner in the coming weeks, months and years. Continued growth in sales of the existing Core Chaus lines, new sales from the new launched clothing lines, the coming advertising campaign and continued strong earnings releases should be the catalysts for major stock price appreciation both near term and long term. | ||||||||||||||
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