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CACH: Believer In Long-Term Turnaround Potential With New Mgmt Perspective

|Includes:Cache, Inc. (CACH)

When news hit yesterday that CACH Chairman of the Board and CEO Thomas Reinckins (CEO and Chairman since January 2008) was resigning and being replaced by the well-regarded Jay Margolis (most recently President and CEO of Limited Brands Apparel Group), I closed my eyes and bought. By the time the stock resumed trading and my order had been filled, the shares had already shot up nearly 10%. I believe (and clearly the Street agrees) that Margolis can improve the dismal operating results and stock performance at CACH.

First, I don't believe CACH's recent challenges can be blamed on Mr. Reinckins. He presided over the company during the most challenging times in modern retailing and I wish him a happy and healthy retirement. But sometimes when a concept runs into trouble, a fresh perspective from management is needed. With over 25 years of history at CACH, Reinckins didn't have that. Margolis, on the other hand, does and can approach the brand and business model with a new eye. Yet, he's also no newbie to retail turnaround stories given his prior experiences at Limited Brands Apparel Group, Reebok, and Tommy Hilfiger.

Secondly, Margolis will be personally incentivized in turning CACH, as he'll get to purchase $1 MM of CACH shares through the upcoming rights offering (offered at $1.65, a nice 49% discount to yesterday's closing price of $3.34). (Incidentally, Reinckins will also enjoy the benefits of the turnaround as he still owns 4.4% of the shares.)

Finally, and perhaps most importantly, I have confidence that CACH can turn be turned-around because of the concept's unique positioning within the retail landscape -- targeting an older +40s customer who wants to dress to be noticed with fashion flair, vibrant colors and non-frumpy cuts. These are not the same customers that the AnnTaylor, Talbots and Chicos in the same mall are targeting, which makes a turnaround easier to achieve once the merchandising, marketing, and clientelling issues are addressed and improved.

To me, these three factors (a fresh perspective in the CEO spot, a highly incentivized exec, and the uniqueness of the concept) are the reasons this management change announcement has driven such a big move in CACH shares -- with the stock another 19% mid-day today. I think this also explains why other note-worthy and recent management changes at the top have not generated nearly the same type of price outperformance--for example, WTSLA shares are up only 4% since new CEO John Goodman's appointment was announced on Jan 8, 2013, and BEBE shares are up only 7% since the company announced the appointment of Steve Birkhold on January 3, 2013.

That said, I by no means think the CACH turnaround will be quick and easy. Just as CACH can be helped by targeting a niche customer that isn't serviced by many other mall-based specialty retailers, defining and achieving the right blend of fashion and fit which appeals to a small niche group of customers is tricky but absolutely critical. Additionally, the company will have a challenge winning back customers who have doubtlessly been annoyed by multiple consecutive seasons of merchandising mis-steps, and the new management team will need to deliver a consistency in product offering from season-to-season that the company has sorely lacked over the past five years.

However, sometimes a fresh perspective from management can really make a big difference, and I think it can at CACH. With a nearly 25% return in a little over 24 hours, I'm taking profits on half my position and I do think the stock is likely to come in from here over the next few days. But I'll be watching to participate in the upcoming rights offering, as I think the long-term turnaround at CACH can lead to significantly more upside in the shares.

Disclosure: I am long CACH, WTSLA.

Stocks: CACH