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WestPoint Stevens Shredded

By Dave Marino-Nachison (TMF Braden)
May 22, 2000

Stockholders of home linens maker and marketer WestPoint Stevens (NYSE: WXS) got a bit of bad news after the market's close Friday night, the company announcing that a planned recapitalization -- which would pay investors $22 per share -- would be terminated.

WestPoint Stevens shares quickly plummeted this morning as the company also said it ceased its six-month exploration of strategic alternatives, which theoretically might also have included an outright sale or merger but were never actually options for WestPoint. Increased costs of debt financing ended the deal and the lead investor backed out.

Company executives talked up WestPoint's long-term potential, but the shares' sharp tumble may have suggested how much of the company's recent share price buoyancy was derived from the recapitalization offer, announced in early February by a group led by Chairman and CEO Holcombe Green Jr. The shares ended today down about 25%.

These aren't good times for textiles companies. Fruit of the Loom, for one, moved to the bulletin boards after filing for Chapter 11 bankruptcy protection in December, while Pillowtex (NYSE: PTX) , which snared a new CFO from the braking systems industry last week, has seen its market value decimated by bloated inventories and manufacturing difficulties. Recent industry weakness was in large part what limited WestPoint's options as it considered strategic alternatives.

The question for investors, then, might be what stands between WestPoint -- which markets linens under its own marques as well as brands such as Ralph Lauren and Esprit -- and a similar fate.

The story, admittedly, isn't really the same. WestPoint is profitable, and operating margins have steadily expanded over the last four years to 14.2% as of the end of 1999 from 12.6% for 1996. It's not quite cash flow positive, though, counting on credit to fund the balance. Funding doesn't appear to be a problem; WestPoint holds some $500 million in revolving credit in its carryall.

Among the confident is Investor Relations VP Lorraine Miller, who joined the company just days ago after more than a decade of following the industry on the sell-side and calls comparisons with the industry's fallen fixtures "painful."

Miller, who said she considered her new bosses the industry's best management from the "outside," also praised WestPoint's brands, distribution, and cost structure. In a telephone conversation this afternoon, she reminded us that WestPoint now points to full-year earnings before interest, taxes, depreciation, and amortization (EBITDA) of $370 million and says it is comfortable with current market estimates for sales and earnings.

Throw in the fact that WestPoint intends to cut capital expenditures in half this year -- the figure has run in the neighborhood of $150 million annually in recent years -- and the company stands to begin inhaling significant amounts of cash in 2000. Offered today as honey for investors was a special $2 per share dividend and a restarted stock buyback plan. The latter might help the company with earnings-per-share figures in the future.

Might that make the shares a potential bargain with the stock trading at less than seven times forward earnings? It's possible, but investors would nevertheless probably do well to wait until June 29's rescheduled annual meeting, at which management plans to make a more detailed the case for optimism to its stockholders. Keeping in mind that the reasons the shares were able to hang around the $20 level for three months have become academic, investors now must identify a new starting point for their research.

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