RG Barry Corp: Comfort, and the promise of joy
RG Barry Corp. (AMEX: DFZ), maker of Dearfoams, the coziest $18 slippers on the market, is full of comfort, indeed. The Pickerington, Ohio-based company has been very, very good to investors so far in 2007. And if sales of its rejuvenated Terrasoles brand are successful, what joy! There’ll be glad tidings for all at the end of the year.
Small-cap growth investors can find promise in an innovative marketing strategy for a virtually new product, Terrasoles, backed by an established company that dominates its category. Dearfoams has very strong brand recognition and a loyal customer base. RG Barry, founded in 1947, has an estimated 40% of the U.S. slipper market.
So far this year, excitement about Terrasoles has pushed RG Barry shares up 60%; the stock recently rose to more than $12 per share from $7 just before second-quarter 2007 results were released Feb. 13. The three-year gain is near 300%, compared with 32% for the S and P 500 and 14% for the footwear category. Market capitalization is about $116 million.
The company raised expectations in February, when it predicted net sales would increase 6% to 8% this fiscal year, up from 5% to 7% estimated previously. RG Barry said earnings should be up 28% to 32%--a steep rise from earlier guidance of 8% to 12%. Year-ago net sales were $106 million, and earnings were 78 cents per share. Year-ago comparisons are against 2005 because of a change in the company’s fiscal year.
The NYSE delisted RG Barry in June 2004 as the company’s results suffered because of poor product mix and reluctance to let go of the manufacturing side of its business. But with revamped product, inventive positioning of its Terrasoles brand and the sale of plants in Mexico, RG Barry is again on the move.
Style may win investment contests from time to time, but not when it comes to RG Barry—so far, at least. Dearfoams, RG Barry’s bellwether product, tend to be fluffy terry-cloth cozies. They complement a head cold, not a wardrobe. Dearfoams also come in newer designs that eschew terry, such as affordable micro-suede clogs, ballerina slippers and sports thongs. For men, there are suede moccasins and micro-suede boots. There is also a collection for children.
Steps in the right direction, certainly, but here’s what will set the pace: Terrasoles, which offer more support than traditional slippers and thus are billed as “transitional footwear”—shoes (or should we say shlippers?) that skiers, say, will put on after the snow boots come off, before leaving the chalet for a night on the town. Terrasoles are the choice to drive home in after a day on the slopes, a hike or après salmon fishing.
Terrasoles are also for those of us who prefer to come home to comfort, but don’t want to schlep around in a floppy slipper. Instead, we’ll let foot-supporting Terrasoles take us from the workday into “I’m done for the day.”
“Some people may have a drink to transition,” said Doug Ruth, an analyst at Lenox Financial Services. “Others may just change into slippers.” Ruth, who has covered RG Barry for four years, added, “There is real value in the Terrasole product, and I think it is really going to work.”
It could work so well, in fact, that it may add substantially to RG Barry’s sales. Ruth’s most optimistic outlook for Terrasoles sales in the next 12 to 24 months is $100 million, the top of a broad range of $20 million to $100 million. “Terrasoles could potentially double the business,” said Ruth. Ruth said shares are currently worth approximately $16 each, or more depending on Terrasole sales. RG Barry is currently trading near its 52-week high of $10.97, established earlier this month.
RG Barry’s choice of retailers is a key to Terrasoles sales. When Terrasoles were first introduced a year or so ago, the company sold the shoes to its main buyers: department stores and discount retailers. (Two of its biggest customers are J.C. Penney and Wal-Mart.) Sales of Terrasoles then resulted in cannibalization of Dearfoams slippers, and Terrasoles sales were pressured as well.
This time around, the company is seeking out new marketing channels, such as sporting goods retailers, outdoor retail shops, ski shops and specialty retailers. Sporting goods chains sell lots of apparel, and the markup on product there is likely to be much higher than at Wal-Mart, leading to healthier profit margins for RG Barry.
Company executives said on a conference call in February that they didn’t even let their Dearfoams people in on the Terrasoles marketing strategy or concept. The upshot: early orders for fall were exceeding expectations.
When third-quarter results are released in next month, investors will be intent to learn more about the strength of orders, and to whom these sales are going. Other results for the quarter are likely to be pushed aside; the bulk of sales take place from July through December, and the company usually posts a loss for current quarter.
Following those results will be the lead-up to fall, when hints, news and disclosures about how Terrasoles are selling at retail will determine whether the early promise of 2007 carries through the year.
