DLIA: Not in fashion to continue posting weak numbers

Continued strength in denim, strong sales in dresses, and impressive sq. ft growth is no longer enough to keep me focused on the Delia’s story. The company posted results for the first quarter 2007 on May 30, and they were just unimpressive (much like 4Q 2006).

Based on the filing, revenue increased 11% to US$57.8 million from US$51.9 million last year, while same store sales were 9% for the quarter. Gross margin decreased to 36% of sales, SG&A expense was 42.1% vs 40.9%, for a net loss in the quarter of US$3.3 million versus US$1.2 million or a loss of US$0.11 versus US$0.05 for last year. The street was expecting a loss of US$0.07.

A decrease in margin from the retail segment reflects markdowns required to clear excess inventory. Also margins were hurt by what several one time items: CCS girl catalog test charge, and charges related to the moving of headquarters, relocations, severance, and recruiting.

In all honesty, after the call I was left with not much to look forward to. This is the second quarter in a row that I am disappointed by management and what I believe is their inability to execute. Sure, they say that they see strength in denim, dresses and the back to school assortment. But the reality is that denim is not as strong as it was 2 years back, and that their competitors seem to have lower prices. They spent a significant amount of money this quarter testing the CCS catalog when most of their direct segment sales are now coming from the internet (and are growing at a much faster pace). In short, their competitors are winning (significant in a sector where there are many substitutes), and they are banking on fashion trends that are losing steam.

The retail segment is starting to see some weakness in consumer spending, and no matter the prospects, Delia’s is too much of an immature company to weather any kind of downturn. There are better names in the space, and I would stay clear of DLIA until management proves they can for once and for all meet Wall Street’s, and their customers’ expectations.

DLIA vs. S&P 500 performance over the last 3 months

Case in point: ValueClick is next

I do not want to overplay / overhype the issue, I just wanted to highlight some of the comments from a research piece published yesterday by ThinkEquity Partners saying that VCLK "should be next."

It is no secret that ValueClick is one of the last remaining public companies in the business. Stewart Barry (ThinkEquity analyst) pointed out that even Microsoft could show interest since ValueClick would be complementary to the aQuantive acquisition. Time Warner could also be in the fray, if anything, to prevent Microsoft from buying it.

How have some of the publicly listed companies traded over the last week and since the announcement of AQNT?

Redefining how we think about media and the internet (Part III)

Continuing with some of the themes I lay forth in this blog, I wanted to highlight Microsoft’s latest move. Today it announced that it is purchasing aQuantive (NASDAQ: AQNT) for US$6 billion in cash, which represents an 85% premium. For those of you not familiar with the company, AQNT focuses on online advertising, and it operates in three segments: digital marketing services, digital marketing technologies, and digital performance media. Microsoft declared that the rationale for the acquisition was to expand the software company’s push into internet advertising.

The following are some of the latest acquisitions to make news:

Question is who will be the next target. These are some names that I believe are worth a look or could be of interest to the likes of Microsoft, Google, or Yahoo:

In the end they might never be bought, but one thing is for sure, the latest string of acquisitions is going to raise their profile and their value.

Not losing faith in AKAM

I have spent the better part of my time lately trying to understand what exactly is wrong with Akamai (NASDAQ: AKAM). The fundamentals have not changed at all, in fact, management continues to reiterate their expectations of 400 bps of EBITDA margin expansion in 2007. The company also seems to be very active in signing costumers and differentiating themselves from the competition, as exemplified in their live streaming of Adobe Flash Player video format (AKAM has broadcast events like Nickelodeon’s Kid Choice Awards in this format). And on an industry basis, content owners are becoming more concerned than ever with the need to deliver their content to broader audiences faster, a trend that favors CDN vendors. In short, it just seems like investors have lost faith.

But, from everything I have read, AKAM is doing just fine. Strong market share, strong market fundamentals. Only a weak share price. Since their 1Q announcement on April 25, shares have fallen close to 22%, while the S&P 500 has gained approximately 1.4% in the same period. On a 2008 P/E basis, the shares went from trading close to 32.0x (prior to earnings) to 25.0x (today). How much cheaper will the shares get? Companies with comparable 2008 growth (for example Google) trade at approximately 25.0x 2008 EPS estimates. Will investors regain faith if shares trade any lower?

As a strong believer in AKAM and their business model, I continue to wait for a catalyst, or for a sign that 2Q will bring the surprise that 1Q did not. In the end, that is what everyone was looking for, to be surprised (unfortunately, growing revenues by 57% q-o-q, proved to not be enough). I have not lost faith though. I remain positive, and I believe that at current levels (25x 08 P/E), it is tough to find a similar low price / growth story that has the potential to deliver in the long term the way Akamai can.


AKAM indexed price since 1Q '07 earnings release

Redefining how we think about media and the internet (Part II)

Looking at one of my favorite sources of information (SeekingAlpha), I stumbled upon two very interesting pieces that seem to support some of the arguments I made in Part I. I have included a link for your reading pleasure. Enjoy.

• Another blow to newspapers: Facebook classifieds http://media.seekingalpha.com/article/35302
• Do newspapers and public ownership not mix? http://media.seekingalpha.com/article/35215

Redefining how we think about media and the internet

Once again I was inspired by Google. It was reported that Google is likely to accelerate the pace at which it makes acquisitions and will consider larger deals. The company currently has close to US$10 billion to spend, and it is estimated that it is buying one start-up company a week. The news comes on the heels of the DoubleClick acquisition, and the announcements linking up Microsoft and Yahoo.

So what exactly is taking place, what are the market forces driving all this activity, how are the people at Microsoft, Google, and Yahoo looking at the space? I believe that it can be narrowed down to the following three drivers:

• Increasing relevance of internet advertising. Advertising has suffered such a steep decline in traditional media that many often overlook the future it will have on the internet. As broadband access becomes more widespread, so does internet usage, and the internet is fast becoming the next frontier in advertising. Currently, internet advertising as a % of total advertising stands in the single digits. Yet the internet is a marketers dream. It allows you to segment audiences and better target advertising. Tools such as Google Analytics were created for the purpose of improving efficiency in advertising, giving marketers the chance to better measure ROI, as well as measure traffic. More importantly, it gives advertisers the chance to better understand how to reach the consumer / target audience.
• Focus on user generated content. Focus on user generated content is clearly becoming a priority. That is why Rupert Murdoch bought MySpace, and why Google wants to make acquisitions that play a larger role in this segment. The beauty of the internet is and will always be that it provides the user the ability to create his or her own content; it allows the user to interact and participate. You have the freedom to create a profile and add pictures, or to write (blog) your opinions and publish your thoughts. You can share videos, music, or even live in your own created World Wide Web universe (Second Life). I recently read a piece that stated: “the internet has virtually demolished the barriers to entry that exist in broadcast media and print publishing which require large upfront capital investment in equipment and technology.” Better yet, the internet is re-defining media everyday.
• Evolution of the internet. The internet is fast becoming a place where at the touch of a keyboard we can shop, search for a job, search for a house, apply to schools, read the news, and do pretty much everything we need or want. And users are becoming more comfortable with the idea - something that was not so about 3 to 5 years ago.
  

These three factors play a significant role in my decision making when it comes to internet related stocks (or “new media” stocks). When looking at names such as AKAM, VCLK, GOOG, IACI, or KNOT, I ask myself what is their role or how is it impacted by these market forces.

Overall, I strongly believe that these drivers should be used as guidelines for how we think about the growing relationship between media and the internet. Who knows, they might even hold the key to Google’s next move.

Akorn Inc. - what the street is expecting for tomorrow

Akorn Inc. (NASDAQ: AKRX) is scheduled to release earnings for the 1Q 07 on Monday May 7 at 4:00 pm (EST). The conference call is scheduled to begin at 5:00 pm. Below is a brief review of what the street is expecting for the first quarter:

• Revenue of US$12.0 million, gross margin of 37.5%
• Net income of US$(3.0) million
• EPS of US$(0.04)

Much has changed since the first quarter of 2006, however, during the same period the company posted US$29.7 million in revenue and US$0.04 of EPS. The company is forecasted to post revenues of US$84.7 million and EPS of US$0.00 for 2007 versus revenues of US$71.3 million and EPS of US$(0.09) for 2006.

JetBlue, the airline sector, and why I remain on the sidelines

Over the last couple of months my experience with airlines has consisted mainly of delays and cancellations. Through all this, JetBlue (NASDAQ: JBLU) has done everything in their power to keep me happy, from discounts, to credits, to apologies. But from an investment standpoint, should you be long or short?

The airline industry is weathering some difficulties: higher jet fuel prices are beginning to eat away at margins, and concerns over demand are keeping investors’ money away. Easter traveling occurred earlier this year, and JBLU expects relatively weak comps versus last year. Additionally, the carrier is experiencing softness in May and June bookings. Higher fuel prices are also a bit worrisome. With summer season ahead, increasing fuel prices will have an impact (and if not, it should) on the airline sector. I believe this bearishness will drive the price of JBLU shares to the low US$9s.

JetBlue will continue to expand its network in 2007 by launching new routes from its core airports (New York JFK, Boston, Fort Lauderdale, Long Beach, and Washington DC). This week they announced the addition of low-fare service between Boston, Bermuda and Charlotte. Management will also continue their efforts to increase aircraft utilization and reduce corporate overhead. The company is in the process of removing six seats on its A320s in order to legally reduce the number of flight attendants per flight.

But in an economic environment of low growth and high inflation, airlines have historically not fared too well.

I still believe in JBLU’s superior service. They truly offer a different flying experience, and it is because of their focus on service and customers (and the incredible ability by management to apologize for a winter storm that cost the company US$41 million) that I remain bullish. For now though I am short on its shares. Not because I don’t believe in the strength of their brand, but because I know the impact that fuel prices can have on the share price. If the shares trade anywhere around the low US$9s I will once again be a buyer, until then, I remain grounded, waiting for signs of a turnaround.

LTM Indexed Performance: JBLU vs. S&P 500

Source: FactSet