so what if they actually turn it around?

I have been reading a lot of the posts on BBG the last week or two. There have been plenty of stories about the stock going to zero (which I can understand given what the company and share price have been through), so I thought it worth looking at some examples of when retail businesses do turn around. Retail businesses can have significant operating leverage and while shareholders have been exposed to the negative side of this with BBG lately, in an improving micro and/or macro environment things can go up just as quickly as they have come down.

To illustrate some examples of this:

1. In Mar 2009 the shoe manufacturer and retailer CROCS (ticker CROX) hit a low of approx US$1.00 after witnessing a staggering fall from grace. Similar to BBG this company had been a darling of the retail world during the previous economic boom. At the time many analysts and commentators suggested the company would go bust given excessive inventory and retail stores that no one wanted. Fast forward to today and CROCS are trading at approx US$16.00 per share.

2. In Sep 2010 the athletic retailer Foot Locker (ticker FL) was trading at approx US$12.00 per share and while the stock had recovered from crisis levels the shares were floundering, with investors and the press arguing that changing consumer habits and e-commerce were too much for the company to compete against. Today the company is trading at US$36.00 per share after witnessing a significant increase in sales following the successful implementation of their turnaround strategy.

Now closer to home, BBG management are targeting a FY16 EBITDA of A$210m. Quiksilver is currently trading on a 2013 expected EV/EBITDA multiple of approx 7.0x. Applying that multiple to BBG implies a 2016 EV of A$1,470m, discounted back 3 years at a conservative discount rate of 12% and then subtracting net debt of approx A$120m produces a market cap of A$926m today (on a per share basis equal to A$1.93 per share). At a valuation of A$1.93 today, it indicates that should BBG deliver on their restructure then the shares in 3 years time based on current competitor valuations could be worth close to $3.00 per share (upside of approx +360% from today).

Sure some people will still say the stock could fall to zero if the implementation of the restructure is done poorly or the macro environment does not recover. However if I short today the absolute most I can make is 100%, whereas a long position has the opportunity to deliver multiple times my investment. If you assume the odds are a coin toss being 50:50, the upside opportunity starts to look relatively a lot more interesting.