Can Spar be spurred to a better bottom line?

Benj Gallander and Ben Stadelmann
Thursday, September 27, 2007

With a provincial election approaching in Ontario, voters are naturally picking and choosing the issues that are important to them. One that sticks out is the Liberals’ proposed “Family Day” holiday in February. Being the hedonists that we are, this idea sounds fantastic.

Some naysayers complain that the name “Family Day” is inappropriate, as they are not part of a family. Well, heck, how many Valentine’s Days passed when the then Contra Bachelors endured the evening with pinball and Swiss Chalet? And they still called it Valentine’s Day!

Single people were not the only ones with doubts about the February respite. The Canadian Federation of Independent Businesses warned that a holiday could cost the Ontario economy up to $2 billion a year, with the majority of the loss falling on the shoulders of the medium and small businesses they represent.

That number seemed suspiciously high, so we dialled them and talked to Plamen Petkov, policy analyst. He said that the figure was calculated by dividing Ontario’s gross domestic product by 250.

But sir, we intoned, won’t some of that GDP be accounted for on other days? For example, if someone doesn’t buy their groceries today, but instead puts it off till tomorrow, the economy loses nothing. Petkov replied that the figure was an estimate, a worst-case scenario. “We’re not in this to predict actual numbers,” he told us.

Data this specious, from a business group no less, made us consider a company in the market research field: Spar Group, purchased outside the regular Contra portfolio at between $1.05 and $1.21, with a target of $5.49.

This company, with revenues in the $55 million (US) range, has been struggling to regain its footing, having posted only one profitable year since 2002. Revenues did uptick last year, from $51 million to $57 million, but boosting margins above breakeven remains a bugaboo for this outfit.

Besides market research, this enterprise specializes in new store openings, product launches and in-store promotional events. They have also moved into the growing field of radio frequency identification devices (RFID).

Insiders appear to feel that better days are not far away. Since May, they have been heavy buyers of the stock. And they have a huge vested interest in the company thriving, as they own over 80 percent. This does make it a challenge for interested parties to buy in. Although there are almost 19 million shares outstanding, the float is less than two million, and the average volume for the last three months has been just over 5,000 shares on a stock that trades around the buck level.

This $1 price is problematic; if the stock price drops below this level for a 30-day period, it will be in danger of being delisted by the Nasdaq. Normally, a company then has a year to get its stock price back above that plateau for a 10-day period to regain compliance. If delisting does happen, then the enterprise has to endure life in the over-the-counter bulletin board or pink sheet wilderness.

The company faces problems with its US operation, which is critical to results. Revenues south of the border dropped on a year-over-year basis in the most recent quarter, from $7.9 million to $5.9 million. Quite simply, the American situation must be remedied before meaningful bottom-line results can be achieved.

Recently, a new CEO, Gary Raymond, was hired to replace founder Robert Brown, who remains as executive chairman. Raymond was previously in charge of Gillette’s Duracell North America operations.

When he signed on, he stated, “I look forward to building upon the company’s strong field execution and impressive advances in technology. My objective is to harness Spar’s strengths and capitalize on the development of new strategic business opportunities, while preparing the company for sustainable growth in the United States and abroad.”

Besides focusing on the States, Spar has to maintain operations in countries as dispersed as Australia, China, India, Japan, Romania and Turkey, amongst others. In Canada, President Larry Deverett has spearheaded its efforts for five years. Under his stewardship, the company’s client list includes such high-profile names as Best Buy, Canadian Tire, Indigo, Loblaws, Shoppers Drug Mart and Wal-Mart.

But enough about work. We’ve done our own research and believe that the pent-up demand and motivation of Ontarians to shop and work the day after the proposed February closure will lead people to buy and produce 50 percent more. That means that, besides the quality of life the vacation will provide, Ontario should see a net GDP benefit of $1 billion. However, we should add that it is not our goal here to predict actual numbers.