Almost three years ago to the day I looked at Danier Leather -a Canadian leather retailer- and walked away because I couldn't identify a margin of safety. The company was cheap at 2x EV/EBIT, earned an ROE of 12% and traded for slightly more than NCAV. After passing on the investment I mostly forgot about them until recently when I came across a post on a message board mentioning they were pursuing strategic alternatives. This news grabbed my attention although as you'll see in this post my interest faded quickly once I realized what had happened to the company in the years since I looked at them.
Danier Leather (DL.Toronto) is a Canadian leather retailer. They sell leather handbags, coats, belts and most anything that can be made out of leather. The company has a large sales presence in malls throughout the country.
Common sense would dictate that a leather company would be seasonal with most sales coming in the colder months. This is partly due to weather (winter coats) but also due to holidays and the fashion calendar. It was certainly true for Danier Leather up until a few years ago. The company made an incredible claim for a winter coat company in a recent report, they stated that last year's winter was too cold and sales were down as a result. Maybe sometimes there really is too much of a good thing. Danier Leather hoped to sell warmer winter coats this year to compensate for last year's cold and long winter.
I believe Danier Leather illustrates a number of different points regarding potential value investments: cheapness alone isn't a thesis, buybacks aren't always good, and that a margin of safety is essential for any investment.
Cheapness Alone Isn't a Thesis
Most people prefer to pay less for something verses paying more for the exact same thing. But just because something is cheap doesn't make it good. On weekends neighborhoods near us are littered with garage sales and estate sales in the spring and summer. Shoppers can browse through items sellers have determined aren't necessary anymore. Most things for sale are cheap, almost astounding cheap, but not much is worth purchasing.