Don't Discount Delia's

The fashion sense of a teenage girl is fickle. Just ask Delia's (Nasdaq: DLIA  ) .

The youth retailer reported a loss of $0.05 in the first quarter, but don't discount the trendy chain just yet. Delia's is reshaping its strategy to quickly respond to fickle fashion sense, which should make a stylish fit for investors.

The New York-based company reported a total sales increase of 16% to $51.9 million during the first quarter. Retail sales were softer than expected at $14.7 million, up 9.3% from $13.5 million the previous year. Direct sales hit $37.1 million (up from $31.2 million the previous year), helping that segment realize an operating profit of $1.7 million, compared to a loss of $500,000 the previous year. And Internet sales saw the strongest leap, reaching $26.1 million, up 26% from $20.7 million the previous year.

Delia's narrowed its first-quarter loss with just $0.05, compared to a loss of $0.58 in Q1 '05. However, excluding a $0.52 loss last year related to discontinued operations and an $0.08 gain resulting from a change in inventory accounting, a year-ago loss of $0.14 might be a more appropriate comparison.

A fashion shift in apparel drove down first-quarter comps for premiere stores by 7.1%. Those fickle teens. On the bright side, retail gross margin improved 110 basis points thanks to "more conservative inventory management," according to the company.

Expect the comps trend to continue during the second quarter, but new stores, back-to-school sales, and a more effective planning structure should improve comps in H2 '06, according to management.

Delia's has made personnel and logistics changes, including shaking up in-store management and implementing new inventory tracking with the Arthur Planning system. The company also plans to open six stores during the second quarter while closing two. Given strong Q1 direct sales and softening brick-and-mortar traffic, Delia's might fare better focusing heavily on the direct segment. With displays that change at the click of a mouse, the direct segment also lends itself well to fickle buyers. However, management remains confident that catalog distribution will drive greater brick-and-mortar sales in H2 '06.

Compared to other trendy teen retailers American Eagle Outfitters (Nasdaq: AEOS  ) , Aeropostale (NYSE: ARO  ) , and Hot Topic (Nasdaq: HOTT  ) , Delia's needs to improve comps and operating margins. But with $30 million in cash and a projected $17 million in capital expenditure for FY 2006, Delia's has wiggle room for change and management is showing the initiative to take it.

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Fool contributor Amanda Tyler has no financial interest in any company mentioned.


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