Thinking Points

  • Tiemco is a niche retailer of fishing gear and outdoor clothing.
  • It’s stock is a Graham-style classic net-net.
  • Though the company has a mountain of inventory, it could still deliver modest to attractive investment performance if you are patient.

Tiemco is a niche retailer of fly-fishing equipment and outdoor clothing. The company got its start in 1969 as an import/exporter of fishing gear. The outdoor clothing business came about later on in 1982. Today, Tiemco still imports and exports fishing equipment and outdoor clothing, but also sells its own branded products as well. In fiscal 2017, the outdoor clothing business delivered 69% of company revenues while the fishing gear business delivered 31%.

 

Tiemco Operating model not great

Overall, Tiemco runs on slim margins, having recorded operating losses in 3 of the last 5 fiscal years. With that said, the company is in deep value territory. On a classic Ben Graham NCAV screen run on Japanese companies, Tiemco tops the list with the biggest discount to NCAV.

Often times when looking at net-nets, investors aren’t on a hunt for excellent operating businesses (and would be in for great disappointment if they are). Frankly, Tiemco doesn’t have a fantastic operating model. In fact, the company tends to run close to break-even, just within +/- 1% net margins for most of the last 10 years.

 

Fiscal 2015 write-off

In fiscal 2015, however, Tiemco recorded a net margin of negative 52.3%. This is due to a major write-off totalling 1,397 million yen ($12.4 million USD). The write-off itself had little to do with the operating business and more to do with the value of its land and buildings. Over half of the value written off was from the building where Tiemco is headquartered (Sumida district, Tokyo).

Essentially, the carrying value of these assets were adjusted to the recoverable amount. The recoverable amount is based on the net sale value of the property as determined by a real estate appraiser. The impact of this write-off will be more visible in a chart under the “Financials” section below.

 

Piles and piles of inventory

Tiemco’s inventory (and/or product) strategy is somewhere between awful and absolutely terrible. On a CoGS basis, the company maintains 11 months of finished goods inventory. As a reference, the same figure was at about 6 months of inventory 10 years ago, gradually increasing over the years. With revenues going roughly nowhere, an inventory write-off is highly likely in the near future.

The clothing products that Tiemco sells are similar in concept to what you would see at REI, The North Face, or Columbia Sportswear in the US. High quality, premium price outdoor gear.

Source: Foxfire online store

According to company filings, much of the outdoor clothing business consists of its own Foxfire branded products. Tiemco operates 43 Foxfire stores while also selling Foxfire branded products to numerous others.

Recently, the company has been pushing its Foxfire Scoron products. Scoron is a bug-repellant material developed through a collaboration between Teijin (TSE: 3401) and Earth Corp (TSE: 4985). Teijin is known for high-performance fibers and Earth Corp is known for bug sprays. Since Tiemco is (sort of) known for outdoor gear, the company started using Scoron for some of its Foxfire products.

Still, revenues have remained more or less even over the last decade.

Source: Amazon Japan

 

Second generation CEO

For Tiemco’s market cap being less than 15 million USD, the CEO is surprisingly visible. A quick Google search in Japanese returns several interviews conducted over the last few years.

A good portion of the interviews centered around the difficulty of being a second generation CEO. While I didn’t find these portions particularly insightful, a couple of the interviews did reveal two interesting points about the company.

  1. Fishing gear designed by fishing enthusiasts

In one of the interviews, CEO Seiichi Sakai mentioned that before being a developer or a salesperson, Tiemco employees are first and foremost fishing enthusiasts. And so, the enthusiasm often carries over into product development.

  1. Focusing on work-life balance before it was cool

Fly fishing is a leisure activity. As a company that makes leisure equipment, Tiemco’s company policy is such that working outside of regular work hours is prohibited. This includes after hour business dinners and meetings with clients often seen in Japanese business. Additionally, Tiemco gives its employees an extra couple of days for summer break (typically taken in mid-August in Japan) so they won’t spend the first and last day or two of their time off stuck in traffic. The company does this to create an environment where employees are comfortable taking time off – a rather common problem in Japan.

 

Financials

Here’s the 30 second briefing of Tiemco’s 10 year financials.

First let’s have a quick look at this chart:

Tiemco’s current assets have remained stable for the last decade. During this time, a considerable portion of what used to be cash has turned into inventory. My best guess is that Tiemco is due for a 800 million yen ($7.1 million USD) or so write down in inventory in the near future, with an additional 50 million yen ($440k USD) or so in associated cash charges. The rationale is that Tiemco operated with 7~800 million yen in inventory 10 years ago, had no top-line growth, and inventory is piling up. It’s not always free to get rid of inventory so add a 50 million yen provision for moving obsolete inventory to Goodwill (which is actually the name of a computer store chain in Japan, not a donation station, but you get the idea).

About the only good financial thing that Tiemco has done in the last decade was to repurchase shares in fiscal 2009 and 2015. A lot of them. In 2009, Tiemco repurchased 520,000 shares, or 15.6% of outstanding shares at 558 yen per share for a total cost of 290 million yen ($2.57 million USD). In 2015, the company repurchased 342,600 shares, or 12.15% of outstanding shares at 547 yen per share for a total cost of 187 million yen ($1.66 million USD).

Thanks to the repurchases, Tiemco’s per share revenues actually have a 2.3% 10 year CAGR. That said, the “growth” is meaningless with no money being made.

 

Valuation

Though there are sprinkles of goodness to Tiemco’s operating business, there is next to nothing to be excited about from an operating performance perspective. Again, this isn’t so surprising with net-net stocks.

Best case scenario is that Foxfire gains more traction (probably from online sales), fishing magically gains popularity, or Tiemco develops an off-the-wall product that catches fire. In other words, the operating business doesn’t have much going for it. Worst case is probably a continued slow decline. I say “continued” here because a more disciplined approach to inventory management would have likely forced Tiemco to record small operating losses every year from fiscal 2009 and on.

But the whole point of net-nets is that the operating business is usually irrelevant. Adjusting for my guestimated inventory write-off of 800 million yen and an additional 50 million yen in cash charges, Tiemco still has an NCAV per share of 960 yen. In comparison, Tiemco shares trade for 595 yen. And then you have another 630 yen per share in long term assets excluding intangibles.

There’s no clear catalyst in sight for investor psychology to shift. Perhaps either more buybacks or a clothing company buying out Tiemco. Even at 0.37 times book or 62% NCAV (both adjusted for inventory write-off), Tiemco is only worth considering for a patient investor. Assuming fair value is 100% of today’s NCAV and it takes somewhere between 3 and 10 years to play out, that’s an investment CAGR of somewhere between 4.9% and 17.3%.

 


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.