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Friedman's Falls Again

By Dave Marino-Nachison
March 26, 2004
Shares of Georgia jeweler Friedman's (NYSE: FRM), battered since mid-November amid news that the government was looking into its internal practices (as well as those of competitor Whitehall Jewellers (NYSE: JWL) in a related matter) fell further yesterday, approaching 52-week lows after the Securities and Exchange Commission (SEC) said it is considering a civil action against the company.

Friedman's, to its credit, has never taken a defensive posture in any of its public statements concerning the government's investigations. Yesterday's was no exception: "The company," it said, "believes that this action by the SEC is an important next step toward resolving the outstanding regulatory investigations and plans to continue to cooperate with the staff to try to settle these issues." As a result, investors who've been watching since November have little reason to be surprised by yesterday's news.

The question for investors continues to be whether a beaten-down company such as Friedman's deserves attention as a "closeout" buying opportunity. While current financial statements aren't available -- Friedman's has delayed filing its 10-K -- a look at recent quarterly documents provides some interesting information. At its current market capitalization of around $120 million, Friedman's still trades at a discount to the value of its inventory as of June, as it has for some time.

Competitors Tiffany (NYSE: TIF) and Zale (NYSE: ZLC) -- Zale recently reported solid quarterly numbers -- trade at healthy premiums to their inventory. Whitehall, it should be noted, commands an even bigger discount by this measure than does Friedman's, though this is likely in large part because its cash balance, even net of long-term debt, is substantially smaller than Friedman's. Thus, it might be more seriously affected by any government or legal penalties that might come its way.

Friedman's is in decent financial shape, reported February same-store sales growth better than Zale's, and turned in respectable holiday-quarter topline figures. There's a lot of reasons to be curious about Friedman's, but just one very big reason many Fools should hold back: It's almost certain that investors are waiting for the release of that 10-K not just because of the recent financial information it will contain but also because nobody knows what three years' worth of restated figures will look like.

Until those numbers are known, investors who bet on Friedman's to get moving upward again are working off a pretty iffy hunch.

Check out Motley Fool Stock Advisor for Tom and David Gardner's top two recommendations a month. Try it, risk-free, for six months.

Fool contributor Dave Marino-Nachison owns shares of Tiffany.

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