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Dreams, Inc (NYSEMKT:DRJ) is a vertically integrated seller of sports licensed products operating under several major brands, including the flagship FansEdge.

The company's operations include manufacturing, online retailing, e-commerce services, catalogs, and brick-and-mortar stores. In the last few years, the company’s sales growth has been driven by e-commerce related activities - this has now become the focus of the company going forward.

The US sports licensed products market has stayed relatively flat from 2002 to 2009, with annual sales rising slightly from $11.3 billion to $12.5 billion. In comparison, Dreams, Inc sales are projected to more than double from 2006 to 2010; this growth can be attributed entirely to its e-commerce division successes, built around the FansEdge brand. Offline sales consist primarily of nine Field of Dreams stores, six FansEdge stores, and direct sales from the manufacturing unit.

Total company revenues are projected to more than double from $43 million in 2006 to $100 million in 2010. Importantly, the share from e-commerce sales has increased steadily from only 44% of sales in 2006 to 80% of all sales in 2010. For another view of the significance of e-commerce sales, if these sales were stripped out, Dreams, Inc revenue would not have topped $30 million in any of these years.

The e-commerce division has sustained ten years of double digit growth and in 2010, FansEdge became the 58th largest online apparel/accessory retailer; it was a “hot 100” online retailer in 2009. It offers an astounding array of licensed merchandise from the NFL, NHL, NBA, MLB, NCAA, and many others.

The online retailer carries over 200,000 products in its wide selection of merchandise. As a stand-alone entity, the e-commerce division was profitable in both Q1 and Q2 of this year, growing 37.3% in the first six months of 2010 to $20.2 million from $14.8 million for the same period in 2009.

Dreams is focused on its e-commerce business. It is getting close to becoming a pure internet company, with 80% of sales from e-commerce. The company intends on building up a single unified brand, the FansEdge brand, for all its products. Six FansEdge retail stores were opened in US markets beginning in 2008 to cross-market with the online store. These stores contain kiosks to facilitate online ordering.

On the other hand, three Field of Dreams stores were closed in 2009 due to poor performance; additional Field of Dreams stores are on the chopping block. Even manufacturing has been downsized to focus on FansEdge and web syndication. The manufacturing unit will stop selling to outside buyers who compete with FansEdge and the Company’s partners on-line sites to provide a competitive advantage to Dreams.

Leveraging the infrastructure already in place for FansEdge, Dreams, Inc entered the Web Syndication segment in late 2008 with Dreams Retail Solutions (DRS). DRS provides a suite of services for online sites with interests in the sports industry. Services include hosting, custom site design, order fulfillment, purchasing, inventory management, marketing, and analytics. Clients range from media companies to apparel manufacturers to superstores. By allowing Dreams to manage their online stores through DRS, companies have experienced increased traffic, better selection, increased sales, and enhanced customer service.

The syndication network has grown to 65 clients as of June 2010 from 50 in 2009. Walmart (NYSE:WMT), JC Penney (NYSE:JCP), and Sears (NASDAQ:SHLD) have been some major additions. These large clients should add validation and heft to the proprietary platform benefits Other prominent clients include NBC (NYSE:GE) sports and AOL (NYSE:AOL) sports. Many smaller clients are in the network, and with an abundance of online sites, there is substantial room to grow.

Web Syndication is the company's fastest growing business. At its inception in late 2008, it garnered only $3 million in revenue. The service was very well received, with revenue rising to $17 million in 2009 and a projected figure of over $30 million in 2010. For that year, it will exceed revenues from all non e-commerce operations.

Indeed, the syndication network is the engine driving Dreams' growth. Internet retail sales grew rapidly from 2006 to 2008, but slowed with the US recession. Management embarked on Web Syndication at a very opportune moment, enabling the company to maintain its sales growth.

Dreams has historically grown both organically and through acquisitions. Earlier this year, it strengthened its balance sheet with a $2 million private placement from Henley & Company, and a $6 million equity raise led by William Blair & Company. The company intends to use these funds to build infrastructure and make acquisitions. It is currently closing on the assets held by , a company that manages the retail, online, and game day operations for The University of Texas Athletics program.

Game day operations is a new service for Dreams. The ability to provide a comprehensive retail solution (online, off-line, catalogue, gameday) is an important differentiation factor from competitors when wooing colleges and universities.

College athletic programs are ideal targets for syndication. Top programs can generate significant merchandise revenue, but with outdated technology and poor merchandising, sales are usually below potential. There is a growing trend to outsource sales, from retail to online to professional managers. Dreams is in an ideal position to fully leverage this situation. With its cash raise, it can roll up smaller players in this fragmented industry, or pursue programs independently.

As low performing Field of Dreams stores continue to be eliminated over time, the proportion of sales attributed to e-commerce should continue to grow quickly, leading to higher operating margins and a more favorable valuation as an Internet company Growth of the high-margin syndication business will also help in this respect.

Vista Partners recently put a 12-month price target of $3.74 on Dreams, Inc stock, which considering the strong growth looks entirely realistic, unlike many price targets set by analysts and brokers!

Disclosure: No position

Source: Dreams Inc.: Scoring Big From Shift to Online Retailing