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Wall Street believes hedge funds are looking to make some retail plays, and the shares of specialty chains such as Coldwater Creek Inc. could stand to benefit, according to some analysts.
“The company once had a $4 billion market capitalization and was trading in the mid-20s. People realize there is potential for earnings to recover and the ability for store growth if the merchandise is right,” said Mark Montagna, retail analyst at C.L. King & Associates.
Coldwater Creek has a strong financial position and is taking initiatives to drive earnings. The retailer is poised to cut inventories 15 percent a square foot by the end of the year, and is planning for a 20 percent stockkeeping unit count reduction by the second half of 2008. It is also working to reduce promotional levels. The discontinuation of the Spirit line, which was tested in 33 stores, could eliminate a distraction for the buying team.
Montagna believes the company is capable of returning to 5 percent operating margins despite a tough economy.
“It makes sense to bet on that, considering where the price is now,” he said.
Coldwater Creek has had a tough stretch since the fourth quarter of 2006. Shares of the company were trading in the $5.48 range as of April 4, better than the 52-week low of $3.40, but more than 78 percent off their high of $25.69.
In fiscal 2008, the company reported a loss of $2.5 million, or 3 cents a diluted share, from a profit of $55.4 million, or 59 cents, in the year-ago period. For the period ended Feb. 2, sales grew 9.2 percent to $1.15 billion from $1.05 billion.
“Hedge funds are looking to play retail. It is the first sector generally to jump out when the economy turns around. So hedge funds will look for familiar names that can shape up quickly. Coldwater Creek is one of those names that will lead the charge and have a few quarters of numbers blown out of the water,” said Eric Beder, retail analyst at Brean Murray, Carret & Co.
Chairman Dennis Pence bought 2.4 million shares from Jan. 24 to Feb. 1, bringing his holdings in the company to 15.1 million shares, or 16.5 percent of shares outstanding. Montagna said Pence was comfortable enough with the expected finances to make the purchases.
Analysts said when the economy starts to turn there will be a pent-up demand in the misses’ sector. If Coldwater Creek is able to inspire shoppers to update their closets, the company could win big.
“Wall Street wants this company to turn around,” Beder said.
“Investors should accumulate Coldwater Creek shares while the price is low, since any hint of improvement for second-half merchandise performance will likely drive the stock higher at a rapid clip as inventories pile into the stock,” Montagna said.
Other specialty retail plays that hedge funds might also consider are Delia’s and New York & Company Inc., according to Montagna.
On its fourth-quarter earnings conference call to Wall Street last month, Robert Bernard, Delia’s chief executive officer, said, “We came to the first quarter with lower markdown exposure, a higher proportion of forward merchandise, and have seen good customer reaction to our spring floor set.”
He boasted, “In Delia’s, we’re coming off one of our best quarters ever. And we see that trend continuing thus far in the [first quarter]. So far, with two books released, our direct business is up on a year-over-year basis in the quarter.”
Over at New York & Co., chairman and ceo Richard Crystal told analysts during its fourth-quarter conference call that the retailer is increasing the number of new fashion items within its assortment to be in excess of 20 percent above what they were in 2007, and that it has also reached out to new contemporary resources to develop fashion products for the chain.
Crystal also said, “For our accessories business, we have upgraded the fashion and quality of our offering, while revamping our entire pricing strategy in the jewelry business. Additionally, we are focused specifically on improving jewelry and handbags, which represent the majority of the volume and margin of this category.”
New York & Co. scaled back its new store openings plan to 25 to 30 new stores and 10 to 15 remodels in 2008, down from the 54 new stores and 25 remodels in 2007. It expects to open 13 stores in the first quarter and close two, ending the quarter with 589 stores.