Cost-U-Less, Inc. (NDAQ:CULS) is under pressure yet again from Monarch Activist Partners as the hedge fund increased its stake and again demanded that the company put itself up for sale. The hedge fund first got involved with Cost-U-Less back in September, when it issued its first 13D filing disclosing a 5.4% stake in the company with purchases dating back to early August of this year. Since then, Monarch has held multiple discussions with management over the phone discussing ways in which the company could unlock shareholder value. In particular, the hedge fund urged management to consider putting the company up for sale. Monarch filed its most recent 13D/A filing yesterday, which disclosed a 6.4% stake in the company and elaborated on their reasoning for suggesting a sale of the company. In a letter attached to the filing, they said:

"While we appreciate your desire to grow the business organically, it is apparent that the market refuses to assess fair value to the company in its current form. A quick review of your peer group clearly states this point. Currently, Pricesmart (PSMT), your self-acknowledged closest competitor, trades at an Enterprise Value to EBITDA multiple of close to 16 times, whereas CULS trades at approximately a 4.5 multiple. Taking a very conservative valuation approach by applying a 40% discount to the median EBITDA multiple of your industry peer group, CULS is worth at least $12 a share.

Compounding matters, the business, according to your latest earnings release, is dealing with a 9% increase in operating expenses which is largely attributed to rising utility expenses, an issue that does not lend itself to a quick resolution. Outside of operating expenses, the cost of being public with Sarbanes Oxley expenses and other regulatory costs makes the rationale of "going it alone" far less viable.

We fail to see how even the most ambitious growth plan will resolve the deep multiple discount the market attributes to CULS. Not to mention, given the capital required to open each new store combined with all the site specific requirements, rapid expansion appears highly improbable. In light of the issues raised in this letter and as a significant shareholder we ask you and the Board to engage the services of an investment banker to facilitate the sale of the company. While you have stated that the Board continues to look at all options and keeps an open mind to any potential offer, it is time for the company to take a far more proactive stance." (Read More)

According to this analysis, CULS should be worth near $12 a share, which is a hefty 44.75% higher than the stock's current price. Monarch also noted that if management failed to acknowledge their advice, they may choose to seek board representation - in other words, they threatened a proxy battle. Those considering investment in CULS should know that the stock is thinly traded, and therefore subject to increased volatility. Moreover, if management decides against putting the company up for sale (which is a definite possibility), a proxy battle is often a long and drawn out process. And finally, there is no guarantee that there will be bidders in the $12/share range. However, if Monarch is able to convince or force management to put the company up for sale, it could mean a very nice 40%+ return on investment in (likely) less than a year. This makes CULS a stock worth watching closely into 2007.

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