Special Red Flag Alert – Blurring the Lines

Taking a deep peek into the largest for-profit operator of thrift stores

(Note: I’m thrilled to be collaborating on this report with my friend Katherine Spurlock , a research analyst and former shortseller, who is proud to call herself a “thrifter.”)

Where there's a market, Wall Street finds a way.

That’s the moral of today’s story...

Enter Savers Value Village ($SVV), a roll-up of for-profit thrift stores. It’s also the largest, with 300-plus units in the U.S. and Canada operating under the brands Savers, Value Village, Village des Valeurs, Unique and 2nd Ave.?

The company’s IPO captured the attention of investors last year with its robust margins, claims of a “recession resistant” business model, and a forecast that its store base has the potential to ultimately grow to more than 2,000 units.

As it heads into earnings this week, its shares trade at a lofty 28x earnings. Management has primed investors to expect improved results, which is why it’s being added to the Red Flag Alerts list with a yellow flag… to be reassessed after earnings.

Keep in mind, with thousands of publicly traded companies to choose from, the Red Flag Alerts list highlights stocks to avoid. As of Friday, even with the market’s spiral higher, only seven of 18 red-flagged companies were positive, with the entire red-flagged list still a negative 22%. Adding in the two yellow-flagged companies, the list was a negative 19% in a market where everything that isn’t nailed down is flying.

In our view, Savers faces a variety of risks, including pricing, real estate, zoning and potential insider selling – some or none of which may turn into reality.

Perhaps the most interesting part of the story is an ongoing controversy about whether its business model blurs the line...

(To read, including the full Red Flag Alerts list, the rest please click here)

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