A War of Words at Calloway's Nursery - CLWY

Last December I wrote about Calloway's Nursery, a tiny chain of nurseries operating in Texas. Calloway's was profitable, but also highly indebted. My post focused mainly on the company's earnings power, but some other bloggers chose to focus on the company's substantial real estate holdings, concluding they were worth far in excess of the company's enterprise value. Jeff Moore has posted a Google document with full details on his blog.

At that time, Calloway's traded at $0.73 per share. Shares have since doubled, driven by the news that 19.9% shareholder 3k Limited Partnership (Peter Kamin's vehicle) will attempt to replace the board of directors. Since that announcement, Calloway's management and 3K LP have sent letter after letter to shareholders, urging them to support each side's respective slate of directors.

I have read each letter with increasing amusement. Management's letters have grown increasingly desperate, seeking to paint Mr. Kamin as a mustache-twirling villainous caricature, a corporate raider who seeks only the destruction of shareholders' precious company. The letters are filled with dramatic statements, exclamation points and bold-faced type, warning of dire consequences should 3K succeed in electing its directors.

Letters from 3K, on the other hand, are factual and calmly-stated, continually pointing to management's abysmal track record and sneaky habit of issuing shares to insiders on the cheap.

3K has used its letters to describe some astoundingly poor acquisitions that management has pursued, resultingly in millions of dollars of shareholder money lost. In its most recentl letter, 3K compared growth in book value since 1991 for the S&P 500 Index, versus Calloway's performance. From 1991 to 2012, the book value of the S&P 500 Index rose 319.9%, from $158.85 to $667.00. Calloway's on the other hand, somehow succeeded in reducing book value per share from $1.57 to $0.84. That's right. In 21 years, Calloway's management generated not a cent of book value growth for the company's shareholders. Instead, they destroyed 46.5% of shareholder wealth! That is bad, shockingly bad.

3K goes on to point out that even after the recent run-up, Calloway's shares are down 85% from their IPO price.

Good corporate governance practices call for a majority of a company's board members to be independent. 3K points out that three of Calloway's' five board members are company insiders, resulting in a board that is incentivized to put management's interests first.

3K also calls attention to Calloway's' repeated stock sales to insiders at discounted prices. Per 3K, Calloway's has issued nearly 20% of shares outstanding to insiders in the last four years alone!

3K describes repeated attempts to work with management in a friendly manner and to attain board representation. 3K was rebuffed at every juncture by Calloway's' CEO and chairman, James Estill. In fact, Mr. Estill went even farther, filing suit against 3K and seeking to shut down efforts to call a shareholder meeting.

In its responses, Calloway's' management makes no attempt to explain away its awful track record. Instead, management emphasizes recently improved results and the growth in book value per share since 2009. To an extent, management has a point. Book value per share grew at a rate of 11.3% annually from 2005 to 2012. Not exceptional, but acceptable. The company has also made progress in reducing its debt, which now stands at the lowest since 2007. But this recent improvement should come as cold comfort to longsuffering investors who have seen their investment dwindle and dwindle over the years, even as management has enjoyed fat salaries and shares on the cheap.

Calloway's' management also claims that the 3K's slate of directors lacks any experience in the retail sector, but 3K carefully rebuts this assertion in its most recent letter. In fact, 3K's nominees have extensive experience in both turning around and growing retail operations, having been involved with Tile Shop Holdings and Insurance Auto Auctions, both of which provided excellent returns to insiders and outside investors alike.

Investors are left with a choice: more of the same from current Calloway's management, or a revamped board of directors and strategy from 3K and Peter Kamin. Despite management's loud protests and promises of shareholder riches to come, investors should examine their long-term record and find it lacking.

It's too late in the game for Calloway's' management to trumpet a solid strategic plan and pretend that shareholder value is important. Investors should vote out Calloway's management and allow 3K to streamline the company's operations and produce real value for shareholders, of which 3K is the largest.

No current position in Calloway's. (Sold my shares into the run-up when the proxy contest got heated.) May repurchase.