FirsTime Design Inc.'s Successful Turnaround - FTDL

Firstime Design Inc. is a fast-growing and profitable reseller of clocks and other home decor items. Firstime sells its products to many leading retailers, including Kohl's, Bed Bath & Beyond and Kroger. The company is purely a marketing operation; all Firstime products are manufactured by overseas suppliers. Firstime is based in New Berlin, Wisconsin.

The firm has a market capitalization of $5.7 million, just in case anyone was wondering whether I had lost my taste for the smallest of the small.

Firstime Design has a bumpy history. The current business is the surviving division of the former Middleton Doll Company, which hemorrhaged red ink for years before selling its doll manufacturing operations to a private equity firm in 2010. Middleton Doll was engaged in making and selling creepily realistic infant and child dolls so popular with.....I don't know whom.

After disposing of the doll division and going through further restructuring, the company changed its name to Firstime Design and set about cutting costs and growing sales in its remaining clock and home decor business. Results have been excellent. Quarter after quarter the company has reported record revenues.

Since shedding its doll unit in 2010, quarterly sales have more than doubled, and continue to rise. The most recent quarter showed revenues up 11.8% from the previous quarter and up 17.1% from the same quarter a year ago. Cost control has been impressive. Despite doubling revenues, quarterly operating expenses have held steady and even declined.

Healthy sales growth and close attention to costs have resulted in positive operating income since the beginning of 2011. In the most recent quarter, operating income hit a record $0.24 million.

Nearly all of Firstime's operating income drops straight to the bottom line because of a substantial hidden asset: millions in net operating losses built up over time from the failing doll business. These NOLS do not appear on the balance sheet because they have been fully reserved against, but the company's return to profitability gives the NOLs significant economic value. The gross amount of the net operating losses is listed as $22 million in the 2012 annual report. Some of the NOLs may expire before they can be used, but recent increases in the NOLs from the doll business's losses should shield Firstime Design from taxation for at least several years to come.

Firstime has double-digit revenue growth trends and a clean balance sheet, yet the company trades at a single digit multiple of trailing earnings.

These valuation metrics should contract rapidly as revenues and margins continue to grow.

Firstime's valuation is well-supported by its assets. Firstime's tangible book value per share is $2.66. This book value consists almost entirely of current assets. Net current asset value is only slightly lower at $2.60 per share. Compared to its previous structure as a doll manufacturer, the new Firstime Design is both liquid and conservatively-financed.

Firstime is not without its share of risks. As a "middleman" business, there is always a chance that its customers could choose to purchase directly from its suppliers. Firstime's revenues are also highly concentrated. In 2011, only two customers accounted for 65% of sales. And there is the possibility that FirsTime will mis-judge consumer tastes and find its products languishing on retailer shelves.

If FirsTime can succesfully manage these risks and continue to grow its sales and margins quarter after quarter, shareholders could see a nice return as FirsTime's value grows.

No position.