Midwood Capital Discloses 8.7% Stake in Factory Card & Party Outlet (FCPO); Requests Sale
In a 13D filing on Factory Card & Party Outlet Corp. (Nasdaq: FCPO), Midwood Capital Management disclosed a 8.7% stake (288K shares) in the company. The firm disclosed a letter sent to the company saying they believe the company's stock is trading today at a substantial discount to its intrinsic value, and strongly encourage management to take immediate steps to maximize shareholder. The firm requests that the company hire an investment banker to explore a sale.
The Letter:
August 2, 2006
The Board of Directors
Factory Card & Party Outlet Corp.
2727 Diehl Road
Naperville, IL 60563
Attention: Tim Benson - Corporate Secretary
Gentlemen:
As you should be aware, Midwood Capital Management LLC and its affiliates("Midwood") are presently the largest owners of the common stock of Factory Card& Party Outlet Corp. Our interest in the company is simple and consistent with the interests of all outside owners of the company - to maximize shareholder value.
Midwood has been an investor in the company since September 2005.Analyzing the company's performance up to that point and its results thereafter we have found no evidence that the current management team is capable of helping us achieve this objective for shareholders. We believe the company has paid lip service to the concept of increasing shareholder value since last fall by providing investors with only one specific financial goal for the company: a2008 target for after-tax returns on invested capital (ROIC) of 13.5%.
We met with the company's CEO and Chairman of the Board in late May to discuss Factory Card's financial performance and operational plans going forward. Our analysis subsequent to that discussion has led us to the firm conclusion that the probability of achieving the combination of 1) comparable store sales growth, 2) inventory reduction, 3) operating expense control and 4)operating margin improvement required to attain this after-tax ROIC target is extremely remote. As a benchmark, our calculation of the company's after-tax ROIC for the 12 months through April 29, 2006 yields a result of negative 1.5%.
In addition, we find it imprudent of the board to allow management to set a 2008 target without providing any interim milestones. Are shareholders expected to wait until financial results for fiscal 2008, which will arrive sometime in April 2009, to ultimately determine whether management has achieved its goal? Given the historical performance of this management team, we as owners would be foolish to grant management this much latitude to prove themselves.
Rather than delivering results that have created shareholder value, we have found a situation where the company has built a governance regime that serves as an obstacle to shareholder democracy. Fortunately, one pillar of that governance regime, the staggered board, has just been voted away, and we are pleased to see a new director join the board. However, we do not believe that management or the board is operating with an adequate sense of urgency. With the terms for all directors ending at the company's 2007 annual meeting, the board does not have the luxury of waiting for management's turnaround efforts to bear fruit.
We believe the company's stock is trading today at a substantial discount to its intrinsic value. With attributes such as the scale provided by 192stores, its self-distribution capabilities and approximately $20 million of store level cash flow (by our calculation), we believe that Factory Card has value well above that represented by its stock price. Therefore, as the company's largest shareholder we strongly encourage you to take immediate steps to maximize shareholder value for all of the company's owners. To be more specific, we request that the company hire an investment banker to explore a sale.
We appreciate the significance of this request and would be eager to have a discussion in person with the full board at its next scheduled meeting. We also suspect that other large shareholders in the company might be interested in having such a discussion. We look forward to your prompt response to our request and to the opportunity to meet with the board.
Sincerely,
/s/ David Cohen
-------------------------------
David Cohen
Managing Director
Midwood Capital Management, LLC
The Letter:
August 2, 2006
The Board of Directors
Factory Card & Party Outlet Corp.
2727 Diehl Road
Naperville, IL 60563
Attention: Tim Benson - Corporate Secretary
Gentlemen:
As you should be aware, Midwood Capital Management LLC and its affiliates("Midwood") are presently the largest owners of the common stock of Factory Card& Party Outlet Corp. Our interest in the company is simple and consistent with the interests of all outside owners of the company - to maximize shareholder value.
Midwood has been an investor in the company since September 2005.Analyzing the company's performance up to that point and its results thereafter we have found no evidence that the current management team is capable of helping us achieve this objective for shareholders. We believe the company has paid lip service to the concept of increasing shareholder value since last fall by providing investors with only one specific financial goal for the company: a2008 target for after-tax returns on invested capital (ROIC) of 13.5%.
We met with the company's CEO and Chairman of the Board in late May to discuss Factory Card's financial performance and operational plans going forward. Our analysis subsequent to that discussion has led us to the firm conclusion that the probability of achieving the combination of 1) comparable store sales growth, 2) inventory reduction, 3) operating expense control and 4)operating margin improvement required to attain this after-tax ROIC target is extremely remote. As a benchmark, our calculation of the company's after-tax ROIC for the 12 months through April 29, 2006 yields a result of negative 1.5%.
In addition, we find it imprudent of the board to allow management to set a 2008 target without providing any interim milestones. Are shareholders expected to wait until financial results for fiscal 2008, which will arrive sometime in April 2009, to ultimately determine whether management has achieved its goal? Given the historical performance of this management team, we as owners would be foolish to grant management this much latitude to prove themselves.
Rather than delivering results that have created shareholder value, we have found a situation where the company has built a governance regime that serves as an obstacle to shareholder democracy. Fortunately, one pillar of that governance regime, the staggered board, has just been voted away, and we are pleased to see a new director join the board. However, we do not believe that management or the board is operating with an adequate sense of urgency. With the terms for all directors ending at the company's 2007 annual meeting, the board does not have the luxury of waiting for management's turnaround efforts to bear fruit.
We believe the company's stock is trading today at a substantial discount to its intrinsic value. With attributes such as the scale provided by 192stores, its self-distribution capabilities and approximately $20 million of store level cash flow (by our calculation), we believe that Factory Card has value well above that represented by its stock price. Therefore, as the company's largest shareholder we strongly encourage you to take immediate steps to maximize shareholder value for all of the company's owners. To be more specific, we request that the company hire an investment banker to explore a sale.
We appreciate the significance of this request and would be eager to have a discussion in person with the full board at its next scheduled meeting. We also suspect that other large shareholders in the company might be interested in having such a discussion. We look forward to your prompt response to our request and to the opportunity to meet with the board.
Sincerely,
/s/ David Cohen
-------------------------------
David Cohen
Managing Director
Midwood Capital Management, LLC
posted by Lon at 1:47 PM
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