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Bruce Berkowitz, founder of Fairholme Capital Management LLC
Jax Daily Record Monday, Sep. 22, 201412:00 PM EST

St. Joe considers a loan to Sears

by: Mark Basch Contributing Writer

After a major timberland sale early this year, followed by the sale of its RiverTown community in St. Johns County, The St. Joe Co. is sitting on a mountain of cash.

Could the real estate development company use some of that money to make a loan to retailer Sears?

It sounds strange, but according to a Securities and Exchange Commission filing last week by Fairholme Capital Management LLC and its founder, Bruce Berkowitz, St. Joe is considering a $100 million loan to Sears Holding Corp.

Berkowitz is chairman of St. Joe, and he and Fairholme are the largest shareholders of St. Joe with 27.1 percent of the stock.

Miami-based Fairholme also is a major shareholder of Sears, and has bought additional shares over the last two months to increase its stake to 23.1 percent, according to the filing.

Sears, which not only operates the Sears chain but also Kmart, announced last Monday that it secured a $400 million short-term loan from a group of investment firms.

According to Fairholme’s filing, it has been in discussions with Sears about that loan and “The St. Joe Co. may invest up to $100 million in participations relating to the short term loan.”

It didn’t take long for Wall Street to register its opinion on that possible deal. After the late Thursday afternoon filing, St. Joe’s stock opened $1.26 lower Friday morning at $19.90.

St. Joe moved its headquarters from Jacksonville to WaterSound in the Florida Panhandle in 2010. Other than its cash, the company’s assets include about 182,000 acres of land for development mainly between Tallahassee and Destin.

Analysts see Coach as still out of fashion

The retail fashion industry can be difficult to predict. A little more than two years ago, Jacksonville-based Body Central Corp. was flying high with booming sales growth, before its target market of young women lost interest in the fashions found in its stores.

Sales plummeted, and now Body Central is struggling to survive and hoping it has enough cash to keep going while it tries to entice customers back into the stores.

While not as dire as Body Central, Coach Inc. also began losing ground in the spring of 2012, with its stock value dropping by more than half since then. The handbag and fashion accessories company also is trying to win back customers, but two Canaccord Genuity analysts said last week that they are not impressed with Coach’s latest fashions.

“After seeing the product that is in stores and given the current competitive environment, our initial response was to downgrade shares of Coach to a ‘sell’ rating,” analysts Laura Champine and Jason Smith said in their report.

“The company is on track to cede more market share in fiscal 2015, and its grip on the top position is as loose as ever in our view,” they said.

The analysts are maintaining a “hold” rating on the stock because the company is still generating enough cash to pay a strong dividend and they think the low stock price could attract interest from private equity investors.

Jacksonville is an important part of the international company’s operations. Coach’s North American distribution center is located at the Jacksonville International Tradeport in North Jacksonville, and the 850,000-square-foot facility is by far the largest building in Coach’s global operations, according to its annual report.

It was something of a coup 20 years ago when Jacksonville landed the Coach center, because of the prestige and popularity of Coach’s products.

However, in recent years, the company has been losing sales to competitors such as Michael Kors and analysts expect it to have a hard time winning those customers back.

“The company reported sales declines in North America (accounting for roughly two-thirds of total sales) throughout fiscal 2014, while the premium handbag and leather goods market continued to grow at a steady pace,” Champine and Smith said.

“We expect it will get much worse for Coach in fiscal 2015 before it gets any better,” they said.

Champine and Smith said Coach expects its handbag sales to return to strong growth by fiscal 2017. However, “the basis for this assumption is beyond us, as it seems new product is aimed at a much smaller market of fashion acolytes,” they said.

“We are concerned that Coach is digging itself quite a hole this fiscal year, and the new product does not inspire great confidence in us that it will be enough to revive market share gains,” they said.

Analysts expect better retail results

Specialty retailers have been struggling in general to bring in customers, but Sterne, Agee & Leach analysts Ike Boruchow and Tom Nikic see better times ahead.

“Simply put, after lagging much of the year, retail stocks appear to be well situated for second-half outperformance, as comp trends have inflected, inventories are lean, and compares are easy,” Boruchow and Nikic said in a report last week.

Comparable-store sales (sales at stores open for more than one year) for a group of 15 specialty retailers they follow (including Coach) rose an average of 1.4 percent in the second quarter.

That’s not a big increase, but it was much better than the flat sales performance those companies produced in the first quarter and was an encouraging sign, the analysts said.

“Prior to the second quarter, top-line trends had decelerated in 9 of 11 quarters, so the improved performance this summer may be reflective of the start of a recovery,” they said.

Boruchow and Nikic did caution that the weak first quarter was at least in part due to bad weather in much of the country.

“Thus, third-quarter performance will be the key to determining whether the second-quarter bounce was due to improving fundamentals or just normalized weather,” they said.

Besides improved sales, the analysts also are hoping for improved earnings as the retailers rely less on discounting.

“The general moderation of promotional trends across the mall should help alleviate some of the markdown-related margin pressure that has plagued retailers over the past 12 months,” they said.

Simon’s spinoff company expanding

Speaking of shopping malls, Washington Prime Group Inc. last week announced it is acquiring another mall operator just three months after it was spun off from Simon Property Group Inc.

Washington Prime reached a $4.3 billion agreement to acquire Glimcher Realty Trust, which operates 28 retail properties.

The combined company will be renamed WP Glimcher after the merger is completed.

Washington Prime operates 96 shopping centers, including the 959,331-square-foot Orange Park Mall and the 163,254-square-foot Westland Park Plaza in Orange Park.

Simon, which continues to have ownership interests in the St. Johns Town Center and The Avenues mall in Jacksonville, spun off Washington Prime as a separate company to operate some of the smaller properties that were in Simon’s portfolio.

Glimcher Realty CEO Michael Glimcher will become chief executive of the merged company, which will be headquartered in Glimcher’s offices in Columbus, Ohio. Washington Prime CEO Mark Ordan will become executive chairman of the board of directors.

“We went public just three months ago, expecting to utilize our strong platform, relationship with Simon, cash flow and investment grade balance sheet to grow. This transaction with Glimcher checks every box, very early in our company’s trajectory,” Ordan said in a news release.

WhiteWave announces acquisition

Another somewhat recent spinoff company with interests in Jacksonville announced a deal last week to expand with an acquisition.

WhiteWave Foods Co. announced a $195 million deal to buy So Delicious Dairy Free, which produces plant-based beverages, creamers, cultured products and frozen desserts.

Denver-based WhiteWave also produces a line of plant-based products, including Silk brand foods and beverages and International Delight brand coffee creamers.

The company said the acquisition provides WhiteWave entry into the plant-based frozen dessert market, and it said So Delicious is the No. 1 U.S. brand in that market.

So Delicious had sales of $115 million in the 12-month period ended June 30. WhiteWave had almost $1.6 billion in sales in the six months ended June 30.

WhiteWave was spun off from Dean Foods Inc. with an initial public offering in October 2012.

The company operates four production facilities in Europe and six in the U.S., including one in Jacksonville.

Ranbaxy gets another U.S. inquiry

Ranbaxy Laboratories Ltd., the India-based pharmaceutical company that has its U.S. sales and marketing office in Jacksonville, is facing another inquiry from a U.S. government agency.

According to a filing with the Bombay Stock Exchange, the U.S. Department of Justice issued a Civil Investigative Demand seeking information on how Ranbaxy reports pricing data for certain products eligible for Medicaid reimbursement.

“The CID is a request for documents and information, and is not an allegation of wrongdoing or demand for compensation. The company would fully cooperate with this civil investigation,” the filing said.

Ranbaxy has been under scrutiny from U.S. government agencies in the past, including inquiries by the U.S. Food & Drug Administration over quality control concerns at its India manufacturing plants.

In the first quarter ended June 30, Ranbaxy reported a charge of almost 2.4 billion rupees (about $40 million) to provide for possible losses related to “on-going settlement discussions with certain government authorities in USA.” It gave no further details.

After the charge, Ranbaxy ended the quarter with a net loss of 1.9 billion rupees.

Ranbaxy in April agreed to a $4 billion buyout by another India-based drug company, Sun Pharmaceutical Industries Ltd., that will create the fifth-largest generic drug company in the world.

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