Hunting for value can take you to some very strange places. Today I am in the small-cap arena of the market, where there is obviously more risk but also the potential for much more reward.

Stanley Furniture

The company I have picked out is Stanley Furniture Co. (NASDAQ:STLY), which has been loss making excluding exceptional items since 2008. Established in 1924, Stanley Furniture is a leading designer and manufacturer of wood furniture targeting the premium segment of the market. However, like the rest of the industry that is related to home building, the company has been hit hard by the recession over the past five years.

Stanley Furniture launches redesign and new staff programs

On the other hand, the company offers value in its valuation. Currently trading at $3.54 per share, the company is trading at a discount to net assets, which are worth $5.63 a share – a P/B ratio of 0.6. Moreover, the company has $23 million in cash, worth $1.59 per share and no debt. Current assets cover current liabilities 6 times and current assets cover total liabilities 3.6 times. Indeed, discounting total liabilities from current assets returns a value of $53.4 million — $3.68 per share, so the current share price is placing no value on the $47 million in long term assets the company owns.

So, financially the company looks stable and offers some deep value but what about the outlook?

Well, the company completed the final stages of a restructuring plan during the second quarter of this year. Restructuring involved training new staff, implementing a new IT system to improve customer service, (the company’s first upgrade in 20 years) and redesigning stores with a view to utilizing floor space in a more efficient way. Part of the redesign involved selling down inventory to maximize selling space, the reason for a 5.5% decline in the company’s gross margin as it put stock on sale.

Stanley has also undertaken a showroom and office consolidation, which should reduce costs in the long run. Moreover, the new store layout has already attracted a positive response from customers.

The management’s decision to introduce new staff has slightly increased selling costs, (up $300,000 or, 6.7% year-on-year) but the company believes that this reorganization will make the company much more customer friendly, ultimately rewarding customers with a better shopping experience.

Still, a major red flag against investment in Stanley is the company’s consistent losses, which have bounced between -$1 and -$3.5 million for the past four quarters. Furthermore, as I have mentioned above, the company has not made a full year profit excluding exceptional items since 2008.

Stanley slashes operating costs

However, this could be about the change as the company has nearly halved its operating costs since 2008 and during 2012 Stanley made an operating loss of -$6 million, the firms lowest since 2009. In addition, several years of restructuring is now coming to an end and Stanley Furniture Co. (NASDAQ:STLY) should start to reap the benefits soon.

On the other hand, if the firm continues to flounder, it has enough cash on hand to last for several years and the company’s deep value looks attractive for any company considering a takeover.

So overall, Stanley Furniture looks highly attractive. The company is rising out of the ashes after several years of restructuring and the deep value on offer hedges some risk out of the equation. Unfortunately, Stanley Furniture Co. (NASDAQ:STLY) is still losing money but with a 60% discount to assets the stock offers plenty of reward for the risk.