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Karp Investment Group Bids for Charlotte Russe

Offer by former principal and affiliates, KarpReilly Capital Partners and H.I.G. Capital, values firm at nearly $200 million.

Investment firms KarpReilly Capital Partners and H.I.G. Capital are making a run at Charlotte Russe Holding Inc.

They submitted a nonbinding offer to the teen retailer’s board Wednesday to acquire all of its outstanding stock at $9 to $9.50 a share, a 31 to 38 percent premium on Tuesday’s close of $6.89. The offer values the company at $188 million to $198 million.

Late in the day, Charlotte Russe appointed John Goodman, former president and chief executive officer of bankrupt Mervyns LLC, as ceo and reported a second-quarter net loss of $6.6 million.

Charlotte Russe said it would review the offer “in due course,” and noted the bidders’ criticism of the lack of a permanent management team was contradicted by the appointment of Goodman and others.

The KarpReilly/H.I.G. transaction would be for cash, the investors said, and funded entirely from equity available from the group’s committed investment funds. KarpReilly revealed that it has a 5.4 percent ownership stake in the retailer.

KarpReilly said it pursued an acquisition of the specialty chain last year, but was rebuffed by the board. Since then, the firm said the share price has declined “67 percent from the 52-week high.” On Wednesday, the stock was one of the few retailers to pick up market capitalization, gaining $1.26, or 18.3 percent, to close at $8.15 on the strength of the offer.

“We believe that investors have lost confidence in the current direction of Charlotte Russe,” said Allan Karp, partner at KarpReilly and previously a director of Charlotte Russe for 11 years. Karp had been a principal at SKM Investment Fund, an original Charlotte Russe investor that sold its position in September 2006.

“While we believe that this erosion can be reversed, we don’t believe it will be without fundamental change, which will be very difficult to implement in the context of being a public company,” Karp said. “Given our deep experience in retailing, and with Charlotte Russe in particular, we believe that we and H.I.G. can offer Charlotte Russe stockholders superior value to what they can realistically expect to receive remaining as stockholders of the current public company.”

The San Diego-based retailer operates 487 stores throughout the U.S. and Puerto Rico.

Amy Noblin, analyst at Pali Capital Research, said the “offer is credible.” She said the deal could be good for shareholders given an extremely challenging retail environment and lack of stable management, but the company’s future is “not necessarily” better with KarpReilly because a case could be made “that SKM’s prior influence over the company, along with previous management, contributed to its poor positioning today.”

In addition to Goodman’s appointment, after the market closed Charlotte Russe said Emilia Fabricant was appointed president and chief merchandising officer. She held the same post at Babystyle. Frederick Silny, former senior vice president and chief financial officer of Guess Inc. was named executive vice president and cfo. Len Mogil, interim ceo and cfo, will stay on the board.

Pressured by markdowns that exceeded expectations, the retailer posted a net loss of $6.6 million, or 32 cents a diluted share, in the quarter ended Sept. 27 versus net income of $8.4 million, or 33 cents, in the year-ago period. Excluding impairment and transition costs, fourth-quarter EPS would have been 1 cent, below analysts projections of 14 cents. Sales rose 8.6 percent to $206.7 million from $190.3 million but were down 3.8 percent on a same-store basis.

For the year, income fell 50 percent to $18.2 million, or 79 cents a diluted share, from $36.3 million, of $1.43, last year. Sales gained 11.1 percent to $823.3 million from $740.9 million.

The company expects comparable-store sales to fall 4 to 9 percent during the first quarter, which includes holiday, with diluted EPS between 10 and 18 cents. In the year-ago quarter, comps rose 1.5 percent and diluted EPS was 55 cents. In addition, the company plans to open 20 to 25 stores in 2009.