Delia - Unfit Managment robbing shareholders

I recently bought the cheap stock Delias (Dlia). It is typically graham selling less than the liquidation value. It is never a good feeling when the stock drops 20% (10% from the time I bought). I have seen 50% drops before and made more than 3000% in tstocks like GGP.  This bothers me. This company historically never made money. Looks like I will be happy only two times like what warren buffett said, the time I bought the stock and the time I sold this stock.

The company had lofty goals of improving gross margins by 50 bps points. In 2006 - 39%, 2007 - 36%, 2008 - 35.7%, 2008 - 35%

Operating expenses - 2006 - 43.7%, 2007 - 45.2%, 2008 - 44.3%, 2009 - 42.4%


I also saw something funny in cash flow statement. It says Prepaid catalog costs of $6.8MM. Did they already spend this or postponing the expense?

 It looks like they spend around $25MM - $30MM on catalogs. I am not sure how much of these catalogs are driving the internet sales.

All the senior executives have atleast $3MM compensation and $1MM options. This is outragious when they are losing money and not making a single cent. Almost 5% of the market cap.

Is their retail stores a profitable business at all?

Technically if they expand more stores, the operating expenses as a percentage should decrease. But it is pretty flat in the last 4 years, how are they going to make a profit? They are still expanding. Very interesting.  Is this worth more than dead by selling and liquidating. Ofcourse they have off balance items for $113MM. Even though I recently bought this position, I don't know how they are going to make money. They need to find another buyer like Footlocker and sell this for $100MM as they sold CCS for $100MM. 

Here are few things Delias mgmt should do

- Cut Mgmt salaries by 50% until they make profit.  I am ok with giving more options as long as the strike price is more than $3.5.
- All senior managemnt should buy atleast $4.0MM of stock to have more skin in the game. With out proper incentives and skin in the game, it is tough for share holders to trust them.  As they put in more money, they should get more options at higher strike price.
- Reduce operating expenses and bring it close to 33%-35% from 43% typical to other retailers. you are not a start up company. you already have close to 100 retail stores.
- Reduce catalog expenses. I cannot comment a whole lot on this as I cannot see how much of the direct sales are driven by catalogs. But the expenses are pretty high though - almost  $30MM
-  Do not renew any of the leases ($15MM), unless they are performing stores. Better to close rather than having unprofitable stores. Renegotiate all the leases even though they are not expiring. In this market all the retailers are renegotiating their expenses
- Improve gross margins by atleast 2%. If you think, you cannot raise the prices then you should ask all the supplier to cut the rates by 3%-5%
- Reduce overhead expenses, travelling expenses and any other fancy expenses
- It is better to have lower revenue and profitable rather than higher revenue and unprofitable
- If you cannot do any of these, find another foot locker and sell this for atleast $150MM - $200MM. 1 times the sales.
- Since the brand is valuable, why not find other deals where they can lease their brand name

I had high hopes from both Royce and Tilson. Both of them own close to 25% of the company and so far they have disappointed me. We need Dan Loeb, third point management who has guts to call a spade a "spade".

Since I am trying to be more patient with my stocks after learning from Chris Browne and  Walter Schloss. I will give this atleast a year for this to  turn around unless I find other values.

Learning from Michael Burry - Excellent post

Here is an excellent post from Street Capitalist.

I spent more than 10 hours reading this Silicon Investor but Street Capitalist did a good job of taking notes.

http://streetcapitalist.com/2010/03/24/learning-from-michael-burry/

This week round up

1. Confessions of value investor - Must read by Mr.Bakshi. It takes 15 minutes to download but enjoyed every slide but worth's the effort.. This provides the intelligence equivalent to 1 level of CFA.

2. Good Article from Tip Blog - http://www.tipblog.in/life/conversation-my-first-hour-with-an-ex-collegue/.

I read this article and I cannot imagine after spending 10-15 yrs and you finally say, I am flat and my returns are zero. Obviously it is better than losing but still a sinking feeling.

Warren Buffet 3 hrs on CNBC

When ever we read Warren Buffet, he can summarize what he has learned in years and the summary of more than 5000 annual reports. Always good to learn
Ask Warren Buffett - Complete CNBC Squawk Box Transcript - 2010-03-01

This week I picked some CHCG, PARL, DLIA

I will starting posting some of my picks. This week I have picked three cigar butts. Currently these are not doing well. That's why they are cheap. We are hoping that some day thing will turn around hopefully in the next three years.

CHCG - China 3C group:
Profile: The Company is engaged in the business of the resale and distribution of mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players, radios, Walkmans, and audio systems. We sell and distribute these products through retail stores and secondary distributors.

Market Cap: $30MM
Cash: $28MM
Working Cap: $55MM
Total Debt: Zero
P/B: 0.3
P/S: 0.1
P/CF: 2.0

PARL - Parlux Fragrances designs and manufactures fragrances and beauty-related products such as lotions, creams, shower gels, deodorants, and soaps. The company offers its products through specialty stores, department stores, mass merchandisers, and pharmacies. Holding licenses to do so, the company manufactures Guess, Paris Hilton, Maria Sharapova, XOXO and Ocean Pacific products. In addition, Parlux offers watches, handbags, and a variety of small leather items under the Paris Hilton brand name.

Market Cap: $35MM
P/B: 0.3
P/S: 0.2
P/C: 24
Cash: $11MM
Working Cap: $95MM

We need to be carefull as the working capital might not be worth much. Remember they make perfumes. They got a new CEO and his options strike price is $5.00. I like that


DLIA:
Delias engages in the direct marketing and selling of its clothing line. Intended for a target market between ages 12 and 19 Delia sells its apparel and accessory products through the Internet, catalogs, and retail stores. It also owns two subsidiaries called Alloy and CCS. Alloy targets the youth junior apparel market and CSS offers snowboarding apparel and accessories. The company currently operates over 60 stores in over 20 twenty states.

Market Cap: $62MM
P/B: 0.6
P/S: 0.3
P/CF: NA
Working Cap: $33MM.

The reason why I bought this, historically they did not make money due to high capital expenditures. Tilson has taken a position on this fund. I am hoping Tilson will make sure that the management behaves in a share holder interest. Let's see what happens. I always like value funds taking positions in my pick as they have the clout to make management behave in a certain manner.

20 lessons from Seth Klarman from 2008

Thanks Value Investor Insight / Seth Klarman

Twenty Investment Lessons of 2008

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.


2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.

Great Article about Dr.Mike Burry

Thanks to Vanity Fair

http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004?printable=true¤tPage=8

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Excerpt
Betting on the Blind Side
Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession.
By Michael Lewis• Photograph by Jonas Fredwall Karlsson
April 2010
Dr. Michael Burry in his home office, in Silicon Valley. “My nature is not to have friends,” Burry concluded years ago. “I’m happy in my own head.”
Excerpted from The Big Short: Inside the Doomsday Machine, by Michael Lewis, to be published this month by W. W. Norton; © 2010 by the author.