A Wish for Bear Stearns: New Coaches at NY & Co.

After his promotion to CEO of investment bank Bear Stearns (NYSE: BSC  ) , Alan Schwartz said he wanted to look at "opportunities to enhance existing businesses" at the firm as a way of righting the ship, following huge revenue and asset losses from its exposure to the mortgage market. Schwartz laid out a plan to get out of unwanted businesses and to strengthen the best ones.

At a $10 billion market cap (trading below its book value), down from a peak of $25 billion, Bear is now small enough that almost every strategy for value enhancement will help. Anything can move the needle, including changes at companies that Bear holds as investments.

If Schwartz wants to focus on fixable situations at companies he controls, I suggest that he take a long, hard look at having Bear Stearns Merchant Bank clean house at New York & Company (NYSE: NWY  ) . Current management has been paid a king's ransom to destroy what should be a nice little business.

The market's heard a lot about Bear's shuttered hedge funds and losses in fixed income. By the same measure, it doesn't seem that the slow bleed in value at Bear's merchant banking division has received any attention. In the past two years, New York & Company has decimated millions in shareholder capital. This matters to Bear because it owns 54%. Also, in the past two years, its investment has declined in value by 80%, erasing $460 million in value for Bear.

How have outside shareholders done during the same time frame? About the same. And the insiders? They've made out just fine.

The smartest investor in New York & Company
CEO Richard Crystal holds 1 million shares and has generated $16.8 million in profits from selling vested shares over the past two years. The shares he holds all came from options exercises at $0.11 per share (which means they were essentially free), and 677,000 of them he's held only since he stopped selling vested shares in May 2007.

None of the shares Crystal owns came from open-market purchases. And just to be clear, even if New York & Company's shares drop to $0.12, Crystal still profits on any sales. That's not his fault -- the board granted these options before New York & Company went public. But for management, it's not a matter of "if" they profit, it's "how much?" Unrelenting selling tells me they're not aligned with shareholders' interests.

Meanwhile, in January 2006, Bear Stearns sold 6.9 million shares of New York & Company, generating $127 million. At that time, the 31 million shares it continued to own had a market value of $582 million. They're now worth $124 million.

That means that 82% of the position Bear holds now is worth less than the 18% of its position that it sold two years ago. That's $460 million in share capital, gone. Given Bear's current condition, that amount matters.

Underperforming in a bad time
Of course, you can't open a newspaper today (OK, who actually opens newspapers anymore?) without reading story after story about tapped-out consumers and the stress they're causing retailers. But New York & Company's woes aren't new, and they aren't rooted in macroeconomics. Many are self-inflicted.

The company's purchase and subsequent shuttering of JasmineSola has so far cost shareholders more than $70 million. A recent Boston Globe column gives a fairly damning account of the affair. In fact, it cost more to close JasmineSola in 2007 than it did to buy it in 2005.

Meanwhile, New York & Company's namesake chain has endured serial season misses, followed up by heavy discounting as the firm blew out unsold inventory. The impact has been severe, with each dollar of capital spending since the last quarter of 2005 generating less than $0.77 of incremental revenue ($156 million versus $120 million).

The slowdown has affected every retailer in some form, save the incredible Abercrombie & Fitch (NYSE: ANF  ) . Guess? (NYSE: GES  ) spent less in capital expenditures during the same period, and generated $3.24 in revenue per new dollar invested over the same period.

Limited Brands (NYSE: LTD  ) , New York & Company's former corporate parent, has done better, as has Ann Taylor (NYSE: ANN  ) , Gap (NYSE: GPS  ) , and every other competitor I looked at. And while capital expenditures are by definition longer-term investments, New York & Company was already well into a restructuring in 2005, with the intention of improving operations. We're into 2008, and the company is sliding backwards. Enough is enough.

It's been too long. The concept has lost relevance, the company has lost market share, and additional investments have generated nothing in return. It's time for new management at New York & Company. And since Bear Stearns controls the majority of the stock and much of the board, it won't happen unless Bear says so.

I hope that Alan Schwartz has seen enough, and that he puts pressure on John Howard, who serves both as CEO of Bear Stearns Merchant Banking and a director of New York & Company, to demand better for shareholders than what they've endured.


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