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Friday, September 25, 1998
dELiA*s Inc.
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Phone: 212-807-9060
Website: http://www.delias.com
Price (9/25/98): $6 7/8
HOW DID IT FIND TROUBLE?
This Trouble was as easy as XYZ. Recognizing that Generation X is followed by Gen Y, dELiA*s created a catalog biz built on terrific word of mouth among teenage girls, who thought dELiA*s was the coolest. After focusing on the XX part of the Y crowd, it broadened its appeal to the XY set by acquiring retailer TSI Soccer last December. Yet such diversification signaled the beginning of the end for the stock.
That's because it meant that dELiA*s had started facing adult problems beyond just how to deal with boys. With the response rate on catalog mailings falling, the company sought retail stores to broaden its customer base and provide a more profitable means of selling off closeout merchandise. So dELiA*s started opening its own outlet stores.
Then, in early June, it acquired Screeem!, a 26-store establishment that includes 11 Soho-inspired stores featuring DJs and fashion models. Meanwhile, dELiA*s purchase of Web publisher gURLS.com last December highlighted efforts to create a dynamic online shopping experience and to cultivate an image as something more than just a retailer.
While this flurry of activity may pay off in the long run, the short-term reality was that the company's grrrls business was becoming less profitable even as management faced new challenges (and expenses) turning a single concept catalog company into a multi-faceted mall-based retailer.
Despite hot first quarter results, the stock soon became unfashionable. On June 17, dELiA*s reported in a SEC filing that sales and net income for the second quarter would be hurt by higher expenses on the retailing front and slowing catalog circulation due to soft response rates. The stock dropped into the mid-teens on that news.
It was then sliced to $5 1/4 following the September 9 announcement that the company lost a penny per share in the second quarter and would miss estimates for the latter half of the year.
BUSINESS DESCRIPTION
dELiA*s markets apparel, accessories, home furnishings, and soccer merchandise primarily to girls and young women ages 10 to 24. Last year, 75% of sales were from apparel.
The flagship dELiA*s concept sells its own house brand designs plus trendy brands such as Vans, Paris Blues, and Quicksilver through a handful of retail outlets and its catalog. This year, the company expects to mail 55 million catalogs, up from 40 million in 1997 and 13 million in 1996. In the last 12 months, the number of individual buyers increased 87% to 1.6 million; total potential customers (buyers plus those requesting a catalog) increased 80% to 5.4 million.
TSI Soccer sells soccer shoes, apparel, and equipment, mostly through its catalog and team sales force. TSI also operates 13 retail stores in the South.
Acquired for $10 million in cash and 813,000 dELiA*s shares, Screeem! includes 26 stores located in malls in the northeast. Though 15 stores currently operate under the Jean Country name, those will be converted to the unisex Screeem! concept by next summer.
The company runs a family of websites (including www.delias.com, www.gurl.com, www.tsisoccer.com, and now screeem.com) that are generating 19 million page views per month. Insiders control about 48% of the stock, with three million shares held by Chair/CEO Stephen Kahn.
FINANCIAL FACTS
Income Statement*
12-month sales: $131.9 million
12-month income: $5.6 million
12-month EPS: $0.42
Profit Margin: 4.2%
Market Cap: $93.3 million
*Prior to Screeem! acquisition.
Balance Sheet*
Cash: $17.6 million
Current Assets: $47.9 million
Current Liabilities $13.2 million
Long-Term Debt: None
*Prior to Screeem! acquisition. Liabilities as of April 30.
Ratios
Price-to-earnings: 16.4
Price-to-sales: 0.7
HOW COULD YOU HAVE SEEN IT COMING?
In March, a mass of insiders sold shares for around $25, well off the high of $32 set just weeks earlier. Although these sales followed a lock-up period, they at least suggested that the stock was ripe for profit-taking.
The diversification, the predictably softer response rate from new catalog mailings, the move into retailing -- all of these things should have been reasons for caution. Management was making its job harder even as the core business was becoming less profitable. Growing pains seemed likely.
Also, dELiA*s very success had spawned imitators, not the least of which was a revamped Limited Too.
WHERE TO FROM HERE?
The company now expects to earn $0.05 to $0.06 a share in the October quarter and $0.21 to $0.23 in the January period. That's substantially below Zack's earlier consensus earnings estimates of $0.16 and $0.35 a share, respectively. So management projects dELiA*s will earn about $0.40 a share for FY98.
It's also planning to add 12 to 15 new Screeem! stores next year and 10 to 12 new dELiA*s stores, pushing sales to $200 to $210 million and earnings to $0.60 to $0.65 per share for FY99.
While the stock may represent a real value at current levels, investors probably should wait to see how well management does digesting Screeem! and operating the few additional dELiA*s stores set to open this year. The company is simply going through an unavoidably tough adolescence and, with competitors stepping up pressure, it's worth waiting until the acne is under control.
Still, dELiA*s has already made its mark among Gen Y, which is projected to grow from 56 million people to 62 million by 2005. The retail website launched in May also seems surprisingly dynamic and a nice addition to the popular catalog. Combined with gURL.com, the company is positioning itself as an attractive teen marketing vehicle. Indeed, its catalog already has a wider circulation than any teen-oriented magazine.
Along these lines, dELiA*s has arranged in recent months to offer its customers a promotional CD from Sony Music and to even sell discounted CDs of the featured artists over its website. SegaSoft is offering dELiA*s customers a Virtual Makeover CD-ROM. Also, Scholastic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHL)") else Response.Write("(Nasdaq: SCHL)") end if %> will publish Deal With It, a book for teenage girls based on content from the award-winning gURL.com site.
Fashion is fickle, but dELiA*s has shown the kind of teen spirit that's worth keeping your eye on.
-- Louis Corrigan
([email protected])
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