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Insiders Like Turnaround Prospects for Retailer Charlotte
Russe
By Michael Brush
April 06, 2005
Even the most aggressive growth managers are scared of clothing retailers that
cater to fickle teens, for a simple reason. One season’s fashion miss can leave
a chain with racks of excess inventory, and the need to slash prices to clear
out goods.
But you can flip this equation on its head and wait for the fashion miss that
kills profit margins -- and a stock. Then pick up shares and hold on while the
retailer gets back on track with fashions that click. There’s no guarantee they
will. But sooner or later they often do, even if these kinds of turnarounds can
drag on.
This tactic makes especially good sense when insiders start buying after the
fall – and that’s what we see at Charlotte Russe (CHIC),
a chain that sells apparel to women ages 15-35. The chain’s Charlotte Russe
stores cater to younger women looking for established fashion at bargain prices.
Its Rampage stores target older women looking for more cutting-edge clothes.
Charlotte Russe crashed last year after a few fashion misses in the autumn
helped send the stock down to $10 range from a summer high of $22. Along the
way, chief executive Mark Hoffman and David Oddi, a director, spotted value in
the $9.50 to $11.35 range, where they bought over $300,000 worth of stock. The
shares recently traded for $13, and there are signs it could be moving higher.
First, the stock still goes for .5 times sales, despite the advances since
insiders bought. That’s cheap. In contrast, successful retailers catering to
young consumers go for twice that or more. Gap (GPS) recently sold for 1.2 times
sales and American Eagle Outfitters (AEOS)
trades at 1.9 times sales. Urban Outfitters (URBN)
and bebe stores (BEBE)
trade at 3.7 and 4.2 times sales. Charlotte Russe may never trade at these
levels, but even a significant move in this direction would reward shareholders.
Catalysts
What might get it there? The store’s move to reposition Rampage with better
quality merchandise at higher prices at first alienated consumers – but now the
change may be catching on. A recent survey by Piper Jaffray, a brokerage, found
that Ramage is moving up as a place to shop. “We believe this may indicate the
repositioning of the Rampage brand is beginning to resonate,” wrote Piper
Jaffray analysts in an April 6 summary of their ninth national "Taking Stock
With Teens" tour – a survey of teens about what they like and where they shop.
Next, Wedbush Morgan analyst Adrienne Tennant believes a revival of bohemian
fashion trends could favor Charlotte Russe. The company is also in the process
of hiring a new merchandising manager.
Progress on that front would help, of course. And there’s plenty of room for
improvement if any of these factors help sales catch fire. The company recently
had operating margins down in the 3% range – well off the highs of its heyday in
1999 and 2000, when operating margins were north of 13%.
One obstacle for the stock: A shelf registration for the sale of about 7.7
million shares by a venture firm that invested in Charlotte Russe years ago. On
the other hand, about 12% of the outstanding float is in the hands of short
sellers, which is fairly high. Their need to cover at some point offers some
protection against dramatic downside.
Bottom line: This stock is still hated by most Wall Street analysts who
cover it, but that news is out. Looking forward, a turnaround would rekindle
their interest, which would attract investors who will drive up your shares if
you buy now. Just remember, retail turnarounds don’t happen overnight. This one
calls for patience.
Disclaimer
At the time of publication, Michael Brush
did not own or control shares in any of the companies listed in this column.
Mr. Brush is an independent correspondent for this web site.
For more on Insiders Corner disclosure, see About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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