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There's a little more colour in the Brick's cheeks after last year's fleeting brush with death. This column looked at the stock a little over a year and reasoned that it was very cheap. And it must have been because it's almost doubled since, and tripled from its all-time low. It's not likely to triple from here any time soon but it still looks like good value.

Brick Group is the name of the trust that owns the Brick furniture chain among other businesses. Done right, furniture is a nice way to make money. But when you come face to face with a crash crunch, it can be a great way to go broke. That's what almost happened to the Brick.

It spent 2008 expanding aggressively. That, along with distributions that were probably too high, drained the coffers. So when the recession hit, it hit the Brick hard. Sales plummeted, creditors ran for the exits and suppliers panicked and slashed the amount of stuff they were willing to ship on credit. It was a vicious circle.

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But the company managed to find new investors- among them founder Bill Comrie and Fairfax Financial, the value investor - to refinance its debt. The goal was to put suppliers at ease. It worked.

New CEO Bill Gregson was brought in to manage the place and he's done a good job of it. Sales were way up in the latest period, although that was from a depressed base because of the recent problems.

The fund is producing cash even though it no longer pays a distribution. And the balance sheet is much improved.

I met with Mr. Gregson in his office to get an update. Based on that and the numbers, I think the stock - which I own - has legs.

Brick 1yr inline chart

There's nothing flashy about the story - "boring" is how Mr. Gregson describes it. But it's easy to understand. The retailer has a big footprint with almost 240 stores and all the attendant infrastructure. Mr. Gregson doesn't need to expand any more. He needs to wring out more from what he has.

When he arrived, the chain had cut spending on staff and promotions to protect the bottom line, but instead it killed it. So he spent, a little more, but mostly differently. And the results prove him right.

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Now he says he has to make everything better. The crucial yardstick will be sales per square foot. That's the most profitable kind of growth because it doesn't need much investment. The real estate is there and the costs are largely fixed.

Although Brick Group doesn't disclose its sales per square foot, Mr. Gregson does acknowledge that they're lower than competitors like Leon's and Brault & Martineau.

Pretty Rich Growth

I'm going to guess the difference isn't huge but not small either. It's enough that, if you narrow the gap, you'll make a big difference.

For each extra dollar per existing square foot, Brick makes an extra 20 to 25 cents pretax. That's pretty rich growth.

There are a variety of ways to get that growth. Sell higher-margin stuff, tweak advertising to get more traffic in the store, and make small improvements to the so-called conversion rate - in other words, turn more browsers into buyers. The point is that it's not hard to believe that the company can find ways to make small improvements, and those little changes can move the needle.

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That's especially important because it cost Brick Group a lot to get out of the mess it was in last year. To refinance its debt, it had to offer warrants to new lenders. The deals look generous in retrospect - the warrants are all in the money and the warrant holders have made more than $100-million, not much less than the stock market value of the entire company.


While you can't put a price on staying alive, the warrants are incredibly dilutive. There are about 120 million of them and less than 60 million units.

Now that the fund is producing cash, it's buying back some of the warrants but still, that dilution is a ball and chain. Improving sales per square foot would help a lot. And that shouldn't be too hard.

What makes the stock look cheap is that despite a weak economy, the company's earnings before interest, taxes, depreciation and amortization were a record in the first six months of this year at $30-million on sales of $632-million. The previous record of $29-million was in 2008 on sales of $681-million. In other words, the company is more profitable, but the market value, adjusting for the warrants, is lower today. If Brick shows that it can wring more from what it built, the stock price should respond.

The seeds have been sown, it's a matter of harvesting the crop.

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