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dELiA*s' new CEO has an influential fan

by contributor Lisa Allen  |  Published June 21, 2013 at 9:42 AM
dELiAs.gifAfter a meeting with the new chief executive of dELiA*s Inc., major shareholder Whitney Tilson of New York hedge fund T2 Partners LLC is optimistic about a turnaround.

Tilson has never gone activist when it comes to the direct marketer and retailer of clothing for teenage girls, even though he's winced through persistent losses in the five years his hedge fund has owned the stock.

But things are changing at dELiA*s. The company hired retail veteran Tracy Gardner as its CEO last month, and since then the company has moved to shore up its balance sheet.

On Monday, for example, New York-based dELiA*s refinanced its debt, gaining an extra $20 million of borrowing capacity, and also sold its Alloy brand for a total consideration of $6.8 million including assumption of liabilities.

"As a longtime and long-suffering shareholder of dELiA*s, I can't tell you how thrilled I am to have someone of the caliber of Gardner on board," Tilson said in a phone interview. T2 is dELiA*s' second-largest shareholder at 9.05%, according to data from Bloomberg Financial.

DELiA*s, which had $82 million in assets and $49.85 million in liabilities as of May 4, according to a Form 10-Q filed with the Securities and Exchange Commission on Tuesday, reported a loss of $9 million on $35.2 million in revenue for the first quarter of 2013, compared to a loss of $4.5 million on $41.2 million in revenue for the same quarter last year.

"It's been a classic value trap," Tilson said, referring to a stock selling midday Thursday at 92 cents that was trading in a range between $1.50 and $3 five years ago.

While dELiA*s' shares look deceptively cheap because it has traded at low multiples of cash flow, earnings or book value for a long time, Tilson believes they have potential.

Tilson believes Gardner, who has worked with retailers including Gap Inc. and J.Crew Group Inc., will freshen up the product line and create synergies between the retailer's brick-and-mortar stores, catalogue and website.

"They have a great niche -- girls ages 10 to 17 with a more wholesome image -- but they haven't had the right products to convey that," Tilson said.

For one thing, Tilson believes dELiA*s carries too many products that are also available at other stores. He added that dELiA*s still needs to differentiate itself from other teen retailers such as Wet Seal Inc., which has a racier image. Once those changes are in place, the company would look to expand with more stores.

Although the company's recent debt refinancing and asset sale are a good start, Tilson believes dELiA*s will need more capital at some point to expand its business and open more stores.

"I told Tracy, 'if you need more capital, go ahead and raise it, and I will participate,' " Tilson said, affirming his willingness to put more money into dELiA*s. He said the company hasn't mentioned any capital-raising plans, but he hopes that would be an option in a year or two down the line, when the stock price is higher.

Tilson may be optimistic, but he's still nervous. "This is not a risk-free situation," he said. "The company used to have a lot of cash, and now it's almost all gone."

For that reason, it's fortunate that dELiA*s refinanced its credit facilities to increase its borrowing capacity. On Monday, the retailer announced it has replaced a five-year, $25 million revolving credit facility from GE Capital Corp. with a four-year, $30 million revolving credit facility from Needham Heights, Mass.-based Salus Capital Partners LLC. Additionally, GE Capital's corporate retail finance division has agreed to give dELiA*s a $15 million letter of credit facility, which includes a cash collateral requirement to support the letters of credit issued under the facility.

"These new facilities, combined with the sale of Alloy, will improve our financial flexibility as we continue to transition our business," Gardner said in a Monday statement.

The Salus facility bears interest at either 6.25% or an unspecified base rate plus 300 basis points, whichever is higher, and matures on June 14, 2017. The loan, which does not include any financial covenants, is secured by substantially all of the company's assets.

DELiA*s entered into its original credit agreement with GE Capital in 2011. The original GE facility would have matured on May 26, 2016. As of May 4, dELiA*s still had $5.7 million available under that facility before terminating it and replacing it with the Salus facility.

The retailer's other big move this month was the sale of its Alloy clothing and accessories brand. DELiA*s announced in March that it had retained Janney Montgomery Scott LLC to seek a buyer for the brand.

On June 4, the company announced that HRSH Acquisitions LLC, a special acquisition fund that will do business as Alloy Apparel and Accessories, had agreed to buy the brand. HRSH agreed to pay $3.7 million in cash and assume $3.1 million in liabilities. DELiA*s took legal advice from Troutman Sanders LLP, while the acquirer got legal counsel advice from Lowenstein Sandler LLP.

Tilson was happy with the sale. "They sold it for a decent price, and now it's no longer a drag on the business," he said.

The largest shareholders of dELiA*s are New York-based Prentice Capital Management LP (9.19%), followed by T2 Partners, San Francisco-based Wells Fargo & Co. (8.06%) and Boston-based North Run Capital LP (7.92%), according to data from Bloomberg Financial.

DELiA*s is listed on Nasdaq under the symbol DLIA.

Tags: Alloy | dELiA*s | Gap | GE Capital | hedge fund | J.Crew Group | Prentice Capital Management | Salus Capital Partners | T2 Partners | Tracy Gardner | Whitney Tilson

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