On Roseman’s favorites list is Delia’s, which he didn’t sell on the way up and has continued to buy as the share price has tumbled. Serving the fickle teen market, the company has struggled to profitably extend its brand from a solid online and catalog business into mall-based retail stores. Its latest quarterly earnings report, for the fiscal quarter ended August 4, was hardly encouraging: gross margins fell, SG&A costs rose as a percentage of revenue and the company’s net loss grew to $5.1 million from the previous year’s $3.1 million.
Despite less than stellar results, Roseman still believes the strategy to expand the retail business – now 80 stores, up from 67 a year ago – is the right one, even if a detriment to shortterm profitability as the business grows. His confidence in management, led by one-time Limited Stores CEO Rob Bernard, remains undimmed.
“The thesis hasn’t changed but the shares are down 40%, partly due to more macro concerns about consumer spending,” he says. “It’s not fun seeing the stock tank, but we’re happy to have the opportunity to buy more.”
As was the case a year ago, Roseman thinks the current share price of around $4.65 ascribes little or no value to Delia’s retail business, which he expects to generate $100 million in revenue this year and $120 million next year. He values the direct online and catalog business alone at a minimum of $4.50 per share, based on estimated earnings next year of 30-40 cents per share and the 15x multiple he believes a third-party buyer would pay for the business.
In fact, in a letter earlier this week to Delia’s board members, Roseman recommended putting certain of the direct businesses up for sale because they are “not core to the Delia's growth story and, moreover, serve as a distraction from management's highest-payback effort – profitably growing Delia's retail [business].”
The shares rose nearly 8% on the day Roseman’s letter became public. What of increased concerns that retail chains such as Delia’s will take a hit as the housing downturn finally affects consumer spending? “If you look at personal-consumption expenditures in the U.S. since 1959, the chart is constantly moving up and to the right – through oil shocks, interest rates at 20%, Vietnam, Gulf wars, the tech wreck, you name it,” Roseman says. “That market sentiment toward retailers can swing wildly based on anticipated 1-2% moves in consumer spending in any month or quarter is kind of silly.”
The lesson in all this, he says, is to be very careful what you pay upfront for a stock. “The best way to deal with the fact that market sentiment can change so quickly is to try to own absurdly cheap things,” he says. “Given the embedded call option on its retail business, we think Delia’s shares are just that.”