Monday, May 5, 1997

DM Management Co.
(Nasdaq: DMMC)
Phone: 617-740-2718
Price (5/5/97): $7 1/2

HOW DID IT DOUBLE?

After trading as high as $10 a share in the fall of 1994, this catalog marketer of upscale women's apparel followed a downward spiral to $2 a share just one year later. The expense of sending out more and more catalogs wasn't resulting in enough new sales to pay off.

DM Management rethought its strategy, discontinuing one product line and transitioning another, while putting less emphasis on boosting catalog circulation. The results so far look promising. For the last six months of 1996, sales increased 10.3% even as catalog distribution fell by nearly 17%. Selling and operational expenses have dropped as a percent of sales, boosting profits.

In the March quarter, sales rose 24% to $24.5 million and net income jumped 105% to $0.54 million. Earnings per share soared 83% over the year ago period, to $0.11. The stock has responded to the turnaround, rising from $3 1/2 in late December to the March high of $8 1/8.

BUSINESS DESCRIPTION

Based in Hingham, Massachusetts, DM Management uses two distinct catalogs -- J. Jill and Nicole Summers -- to market high quality women's apparel, accessories, shoes, gifts, and cosmetics directly to consumers. Each catalog targets mature, affluent women, offering both brand name and private label items. The J. Jill products are fashionable, relaxed, and use natural fibers; private label items account for about 65% of sales. The Nicole Summers catalog features traditional, sophisticated, tailored products; about 40% of sales are from the company's private label.

In the past year, DM Management has shifted its business strategy away from increasing catalog circulation (which reached 42 million early in 1996). The firm is now focused on providing superior customer service and increasing repeat business by issuing its own credit card. It also differentiates itself through catalog presentation (creating a "total look" wardrobe) and by providing a wide range of sizes. The company's mailing list contains 2.3 million customers. About 30% have made a purchase in the last two years.

The company recently changed to a calendar year from a June fiscal year. During the last six months of 1996, the company combined its The Very Thing! concept with its Nicole Summer title and recorded a one-time deferred tax benefit of $10.6 million. Last May, the firm discontinued its Carroll Reed segment, taking a charge of $8.5 million.

FINANCIAL FACTS

      Income Statement
      12-month sales: $89.4 million
      12-month income: $2 million*
      12-month EPS: $0.43*
      Profit Margin: 2.3%
      Market Cap: $37.2 million
      (*Excludes one-time gains)

      Balance Sheet
      Cash: $4.2 million
      Current Assets: $24.9 million
      Current Liabilities: $13.8 million
      Long-term Debt: $4.3 million

      Ratios
      Price-to-earnings: 18.6
      Price-to-sales: 0.4

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Spotting a turnaround usually involves looking for one. That's especially true of this little-followed micro-cap. Ninety days ago, the lone analyst following the shares was looking for FY97 earnings to come in at $0.35 per share. With the stock then at $4 1/2 a share and projected industry growth of 14%, DM Management looked fully valued.

But on January 15, the company announced that December quarter sales rose 34%. That could have alerted an investor to watch for the FY96 earnings release, which came out February 11 and showed that EPS jumped to $0.38, after backing out one-time adjustments. The stock then traded around $5, leaving room for a nice gain, though not a double.

WHERE TO FROM HERE?

The one analyst covering the company estimates that DM Management will turn in earnings of $0.51 per share in FY97 and $0.64 in FY98. Using the trailing numbers gives us an attractive PEG ratio of 0.66. Making the overly optimistic assumption that long-term growth could fall in line with this analyst's near-term growth target of around 25.5% would give us a YPEG of $13, suggesting these shares could indeed double again over the next year.

But a lone analyst's numbers don't inspire me with much confidence. That's especially true given that DM Management will no longer have the tax benefits of operating loss carryforwards and so must begin paying federal and state taxes at the full rates, according to the 10-K. Thus operating income will really need to pick up to meet the analyst's numbers; however, net profit margins showed no improvement in the first quarter, and women's apparel remains a highly competitive business.

For comparison, a lowball YPEG based on the projected industry growth rate of 14% would put fair value at $7 1/8. These shares may be all dressed up without much further to go.

-Louis Corrigan (RgeSeymour@aol.com)

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