Blair Corporation (BL)

Wednesday October 4, 2006

Blair Corporation

• Index: AMEX• Sector: Services• Industry: Catalog and Mail Order Consumer

Products • Employees: 1,900• Senior Management: 10 members• Board of Directors: 9 members

Company Overview• Product categories

– Womenswear• Coordinates, dresses, tops, pants, skirts, lingerie,

sportswear, suits, jackets, outerwear and shoes

– Menswear• Suits, shirts, outerwear, active wear, slacks, shoes,

and accessories

– Home merchandise• Bedspread ensembles, draperies, furniture covers,

area rugs, bath accessories, kitchenware, gifts, collectibles and personal care items

Company Overview

• Markets/Sells product(s)– Direct mail

• 81% of total sales

– E-Commerce: launched in 2000 • 18% of total sales

– Three Retail Stores• 1% of total sales• Two in Pennsylvania• One in Delaware

Company Overview

• Targets customers in low to moderate income range – $40,000-$75,000 annual income

• Offers exclusive Blair credit card• Suppliers outside United States account for

roughly 32% of company’s merchandise (expanding)

• Properties consist of HQ, 2 distribution centers, 4 warehouses – all located in PA. 4 'call centers'.

Company Overview2005 Sales B reakdow n

8 5 %

1 5 %

M e n's a nd W o me n's W e a r

Ho us e ho ld P ro duc ts

Note: Product Mix largely unchanged over past 5 years

Major Risks to Business• Significant increases in the costs associated with its direct mail

business could negatively affect results of operations

• Consumer concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact e-commerce sales and costs

• The Company’s increasing reliance on direct sourcing from foreign vendors may negatively impact the cost to source and deliver merchandise

• New management of Blair credit operations may impose more strict credit guidelines, which may have a negative impact on sales.

Competitors

• Competition consists of discount retailers and other retail catalog businesses

• Major competitive advantage: Discounted prices, and competitive credit program.

Senior Management

• John E. Zawacki, President and CEO– 1971 graduate of Thiel College, Greenville,

PA – Began employment with Blair Corporation in

1972: • Assistant Vice President of Womenswear 1977-

1988• Vice President of Womenswear 1988-1999• President and CEO 1999-Present

Senior Management (cont.)

• Larry J. Pitorak, of Tatum Partners, interim Chief Financial Officer (CFO) – 1969 graduate of Thiel College, Greenville, PA– 1974 graduate of Cleveland State University Marshall– College of Law– CPA; Tatum Partner since 2002– Previous employment:

• 28 years with The Sherwin-Williams Company, Cleveland, Ohio includes:

• Chief Financial Officer, Senior Vice President-Finance and Treasurer 1991-2001

Senior Management (cont.)

• David N. Elliott, Senior Vice President, Merchandising and Design– 1976 graduate of the University of Toronto– 1978 graduate of Harvard Graduate School of

Business (MBA)– Began employment with Blair Corporation in 2004– Previous employment:

• 9 years with Petals, In., Tarrytown, NY:– Executive Vice President, Merchandising and Product

Development 1994-2003• Ross Simons, Cranston, RI:

– Vice President and General Merchandising Manager 2003-2004

High Level Financial Information

• Stock Price: $25.80• P/E: 5.72• EPS: 4.51• Current Ratio: 2.25• Quick Ratio: 0.89• ROE: 6.0%• ROA: 4.8%• Total Liabilities as % of Equity: 52.8%• 2005 Year End Data

– Net Sales: $456 mln– Net Income: $31.5 mln

Investment PROS

• Strong Liquidity Position– 5 yr avg Quick Ratio of 2.19– 2005 Quick ratio is 0.88 – add $75mln available credit

for ratio of 2.07

• Very Little Debt– Virtually no Long Term (LT) Debt– 2005 Debt/Equity (DE) is 53% -- historically below 35%

Investment PROS

• Low capital investment requirements

• Growth of international sourcing may further reduce future costs

• “Focusing on Core Business”– Shed Alleghney Wholesale business / Crossing Pointe– Sold receivables for $28mln gain

• Simple/Predictable business

Investment CONS

• Loss of $30 mln per year revenue stream from credit programs (valuation effect)

• Increasing costs – advertising/paper/ink

• Sales declined at 5 yr CAGR of 5%

• $61.4 mln in returns in 2005 – 14% of net sales

Investment CONS

• Blair rejected $297mln ($36/share) offer to buy the business.– Instead bought back over 50% of shares outstanding

for $42/share – shares subsequently lost half their value

– Investor group entered “standstill” agreement

Investment CONS

ValuationA ssum pt ions D e p r e c i a t i o n 9 . 0N e t S a l e s G r o w t h - 6 % C a p e x 9O t h e r R e v e n u e s 3 D iscount R ate 10%C O G S M a r g i n 4 7 . 2 %S G & A M a r g i n 2 3 . 1 %A d v e r t i s i n g M a r g i n 2 6 . 7 %T a x R a t e 3 8 . 0 0 %

F ree C ash F low 9.4 8.9 8.4 8.0 7.6

D i s c o u n t e d C a s h F l o w 8 . 5 7 . 3 6 . 3 5 . 5 4 . 7 7 6 . 3

D C F V alue 108.7

C u r r e n t M a r k e t V a l u e 1 0 0 % D iscount 8.7%

Major Risks to Valuation

• Sales Growth– Benefits from advertising– Negative effect of new credit program

• Cost Margins– Cost of paper/ink– Effectiveness of advertising– Cost benefits from sale of receivables

Conclusion

• An investment in Blair Corp is not attractive at the current market price.