Teens & Tweens: Still Fueling Retail

10/27/2006 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Known for his ability to find interesting investment opportunities, Jon Markman presented this recommendation to investors at the San Francisco Money Show. A hot market, boosted by rising teen fortunes, this company seems ripe for expansion.

"I recently added dELiA*s (DLIA NASDAQ GM), the small teen apparel retailer, to our special situations Buy List, and mentioned it to many of you at the San Francisco Money Show. Now trading around $9 a share, I think it's headed toward $11 and beyond over the next few years.

"Analysts at Rochdale Research recently met with top management of the company and their notes provide support to my buy recommendation.

"DLIA has two important elements going for it: It is in a turnaround mode with a new strategy and new management, and it has potential for a fast and long growth cycle.

"Management is targeting 800 malls that it can enter and they plan to open 400 stores, half of its potential market. Currently, it has 65 stores, while fellow teen retailer American Eagle Outfitters has 800, and Hollister has 380, with a target of 800.

"Distinguishing DLIA from its competitors is its powerful catalog business. This $158-million-per-year segment has provided 5 million names of buyers who have made purchases within the last two years, and through catalog requests, generates 500,000 new names per year for its "Gen Y" database. DLIA's 10 catalogs per year have the same or complementary merchandise as found on the web and in stores, all reinforcing the same message.

"The company pinpoints the locations where its message captures the most interest, and focuses its new retail efforts there, similar to the successful tactic employed by Talbot's, which leveraged its great catalog business to roll out 700 stores with only one closure, according to Rochdale.

"Management said that since launching their new store concept last year, it has reduced the cost of new openings to $600,000 from $800,000. And they think they'll get the number down to $500,000 over the next two years, with about a 20% annual return out of each.

"These efforts should help the company achieve profitability in the second half of 2007. Its direct-mail brands are already there, but retail will take a little longer due to investments in technology, fixtures, and personnel. Retail is expected to turn the corner to profitability in 2008 after the 100th store is in place.

"I urge you to continue to buy DLIA shares now and on dips over the next year. We'll have a lot of opportunities to see whether management can execute on its plan, but so far I am impressed and optimistic."

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