Fool.com: Delia's Disappoints (News) September 1, 1999

Delia's Disappoints

By Dave Marino-Nachison (TMF Braden)
September 1, 1999

Generation Y-tailer Delia's (Nasdaq: DLIA) turned in second-quarter earnings today, reporting losses of $0.42 per share, well off last year's penny loss and a penny worse than First Call's four-analyst consensus estimate for the apparel and "lifestyle gear" chain.

Revenues rose 26% to $33.4 million, driven by new catalogs and retail stores. That offset lower circulation of the company's summer catalogs and sales at Delia's TSI Soccer subsidiary, which were lower than in last year's quarter. The shares moved slightly lower this morning.

(That last tidbit puts into question the extent of the influence of this summer's Women's World Cup held here in -- and won by -- the U.S.A. TSI sales were lower in this year's quarter than last year's despite the fact that the Americans won, rather than imploded, as they did in the men's quadrennial last year.)

In an attempt to expand its footprint, Delia's appears more concerned with the buildout of its retail store base and Internet assets than its catalog operations, if President Evan Guillemin's comments are any indication. It's a key development and investors need to keep in mind that while the catalog is still the company's "core" concept, Delia's isn't the same chain they bought into two years ago when direct mail marketing was its main revenue source.

Seems the company isn't happy with the performance of its back-to-school mailing and is counting on its catalog concepts planned for the rest of the year to pick up the slack. "We believe our mailings for the remainder of the year better reflect our strategic initiatives," Guillemin said. But investors shouldn't underestimate the importance of Delia's being out of touch with teenagers this fall when Q3 results start rolling in.

At least you were warned: Guillemin said to look for "lower-than-expected operating income" for the remainder of the year. He didn't get more specific.

The company began converting its 15 Screeem! stores this past quarter and opened eight full-price Delia's retail locations -- a dozen should be open by the end of fiscal 1999 with three more announced today. Until this year, you couldn't buy full-line Delia's merchandise in stores -- you had to trek to one of the company's handful of outlets. The company's stores are confined mostly to the Northeast; it announced the $6.2 million purchase of a Pennsylvania distribution center it had been renting for the past two years.

So by the end of the year Delia's will be not only a catalog retailer, but a chain with a store base upwards of 60 (in all its lines, including TSI and Jean Country) and a significant stake in the Internet as majority owner -- about 72% -- of iTurf (Nasdaq: TURF). The ownership figure is expected to decrease to closer to 66% in September if iTurf's acquisition of the OnTap college site network goes as planned.

On August 25, iTurf -- which operates a network of e-commerce and other sites aimed at Delia's target market -- reported Q2 results indicating vastly improved site traffic, commerce usage, and promotional spending. Two online areas of note are droog.com, which targets boys, and contentsonline.com, a site that sells trendy housewares. Together with the rest of Delia's and iTurf's offerings, the company appears to be way ahead of equally hip retailer Urban Outfitters (Nasdaq: URBN) on the Web.

"We believe the investments we have made are critical to regaining our momentum in fiscal 2000 and beyond," Guillemin insists, but there's reason to be wary.

With its heavy spending on stores and online real estate, the company is heading in several directions at once and it isn't clear that the unique and popular catalog -- which got Delia's into the limelight in 1997 -- is getting the attention it deserves. It's becoming increasingly difficult to predict the company's performance and investors should proceed with the sort of caution they use when giving their teen a first set of car keys.

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