As consumer spending slowed significantly in December and January, the market value of many retail stocks plummeted. Shares of Jo-Ann Stores were not immune. They entered 2008 at $13.08 and fell to a multi-year low of $9.03 on January 16th after trading as high as $34 in June 2007. As we watched the shares fall below $10 we asked ourselves - was anybody looking at its income statement or balance sheet? We knew Jo-Ann Stores had a tangible book value of over $17 and sales of over $70 a share. With EBIT margins historically in the 5-6% range, its earnings per share could once again reach over $2.00 a share given a bit of sales growth. Our hunch was that investors were indiscriminately selling based on their macro-economic view of a slowing economy without doing much research on the company itself.

Nevertheless, we decided to revisit our investment thesis and reexamine our fundamental analysis. While many retailers were, in fact, facing slower store traffic, we felt Jo-Ann Stores would probably fare better than most companies. First of all, arts and craft stores tend to hold up better during a slowing economy. The average ticket at Jo-Ann Stores is only $20, and most of their customers earn higher incomes which means they are not as affected by rising oil and food costs. Second, we knew the competitive environment was improving. Jo-Ann’s largest competitor, Hancock Fabrics, had been closing stores and Wal-Mart was exiting the category at many of its locations. Finally, management had made great efforts during the last 18 months to improve the shopping experience for its customers. Better signage, wider aisles and improved merchandise selection we felt would lead to increased purchases and a higher frequency of visits. In the end, we felt comfortable with our analysis and decided to stick with our Jo-Ann investment. We were patient and would await a positive catalyst. Fortunately, good news was not long in coming.

On Feb 7th, Jo-Ann stores announced that its same store sales rose 3.3% in the fourth quarter that ended on January 31st 2008. This was impressive given the very difficult retail environment and the fact that sales at Wal-Mart, an important comparable, were up only 0.5%. Investors reacted positively to the news. Shares of Jo-Ann Stores have risen by 25% since the news and have rallied 78% from their January low of $9.03 to $16.14. More importantly however, we believe this story highlights the significant opportunities that are present in our ABC portfolios. In our opinion, many of our holdings, due to the recent panic in the markets, have been taken down too low relative to their intrinsic and/or net asset values. Fortunately, as these fundamentally undervalued companies report positive financial results such as improving sales, better margins etc, they are likely to be rediscovered by inquisitive investors.

Irwin A. Michael, CFA