EB,
dELiA*s: Initiating Coverage With a BUY Recommendation
12/9/98 11:27
Hambrecht & Quist (Genni C. Combes) DLIA
Company: dELiA*s, Inc.
Price: 11
Recommendation: BUY
Notes: a, b
Analyst: Genni C. Combes
Phone: 415 439-3695
Firm: Hambrecht & Quist
Department: Branded Consumer Growth
Industry: Apparel
Date: 12/9/98
52 week Price Range: $4-32 ** Total Customers 2+ M
Revenue(F1999): $218 M ** P/E FY98; FY99: 28;19
Monthly Site Visits 25 M ** Shares Outstanding: 14,735,000
F99Y/Y EPS growth: 52% **
Market Cap: $165 M ** F99Y/Y Sales Growth: 46%
** 99 Price to Sales: 0.7
1/2: dELiA*s: Initiating Coverage With a BUY Recommendation
* We are initiating coverage of dELiA*s with a Buy Rating.
* The company is currently leveraging its brand strength, fulfillment
infrastructure, and management team to expand its distribution reach into both
retail and electronic commerce. We believe that brand leverage and
cross-channel promotional opportunities will drive both revenue and operating
leverage opportunities as dELiA*s continues to aggressively execute upon its
strategy to broaden and deepen the strength of its brand within the teenage
market via new product and content offerings.
* We believe that retail expansion will dominate overall revenue growth in 1999
with significant investments expected during the first half of the year.
Specifically, we expect the SCREEEM!/dELiA*s retail and TSI retail business
units to post revenues of approximately $35 million in 1998 growing to $78
million in 1999. We expect significant operating leverage out of the retail
divisions during the second half of 1999.
* The Internet represents a huge opportunity for the company to both expand
sales of products via Electronic Commerce, but also to build new revenue stream
such as advertising and subscriptions through the creation of superior content.
More specifically, the company has the opportunity to leverage the first mover
advantage provided by its 10 million strong database, 2+ million customers, and
widely recognized brand name to create the largest teenage community on the web
The company is already generating 20 to 25 million page views per month and is
now generating 4% to 5% of its total catalog sales online. We expect the
company to generate several million in e-commerce revenues in 1998. E-commerce
revenues are likely to triple in 1999. We expect the company to forge a number
of key strategic relationships over the next six months, while dramatically
enhancing both the content as well as the targeted marketing capabilities of th
site over the next year.
* The company announced Q3 results this morning. Revenues and EPS of $40.8
million and $0.05 were in line with Street expectations.
* The company also announced that it is evaluating strategic opportunities for
its Internet business, which could include an IPO.
* We are projecting 1999 revenues of $219 million and EPS of $0.60. This
represents 46% top-line growth and 52% bottom line growth. Earnings growth is
expected to be back-end loaded at the company generates operating leverage from
significant near-term investments in the retail channel. Currently trading at
18x our 1999 EPS estimate and a multiple of 0.7x 1999 revenues, we are
initiating coverage of dELiA*s with a Buy rating. We believe that significant
value resides in the company's database, brand, and fulfillment infrastructure
that is not reflected in today's stock price.
Summary and Recommendation
We are initiating coverage of dELiA*s with a Buy Rating. dELiA*s is the leadin
direct marketer of casual apparel and other products to "Generation Y" girls an
young women. The company is currently leveraging the strength of its brand
name, fulfillment infrastructure, and management team to expand its distributio
reach into both retail and electronic commerce. We believe that brand leverage
and cross-channel promotional opportunities will drive both revenue and
operating leverage opportunities as dELiA*s continues to aggressively execute
upon its strategy to broaden and deepen the strength of its brand within the
teenage market via new product and content offerings.
We believe that retail expansion will dominate overall revenue growth in 1999,
with significant investments expected during the first half of the year.
Specifically, we expect the SCREEEM!/dELiA*s retail and TSI business units to
post revenues of $55 million in 1998 growing to $99 million in 1999. We expect
significant operating leverage out of the retail divisions during the second
half of 1999.
The Internet represents a huge opportunity for the company to both expand sales
of products via Electronic Commerce, but also to build new revenue streams such
as advertising and subscriptions through the creation of superior content. Mor
specifically, the company has the opportunity to leverage the first mover
advantage provided by its 10 million strong database, 2+ million customers, and
widely recognized brand name to create the largest teenage community on the web
The company is already generating 20 to 25 million page views per month and is
now generating 4% to 5% of its total catalog sales online. We expect the
company to generate several million in e-commerce revenues in 1998. E-commerce
revenues are likely to triple in 1999. We expect the company to forge a number
of key strategic relationships over the next six months, while dramatically
enhancing both the content as well as the targeted marketing capabilities of th
site over the next year.
The company announced Q3 results this morning. Revenues and EPS of $40.8
million and $0.05 were in line with street expectations. We are projecting 199
revenues of $219 million and EPS of $0.60. This represents 46% top-line growth
and 52% bottom line growth. Earnings growth is expected to be back-end loaded
at the company generates operating leverage from significant near-term
investments in the retail channel. Currently trading at 18x our 1999 EPS
estimate and a multiple of 0.7x 1999 revenues, we are initiating coverage of
dELiA*s with a Buy rating. We believe that significant value resides in the
company's database, brand, and fulfillment infrastructure that is not reflected
in today's stock price.
Huge Market Opportunity
Generation Y presents a tremendous opportunity for retailers and direct
marketers. According to Rand Youth Poll, there are 56 million 10-24 year olds
in the U.S., and the group is expected to grow to 62 million by 2005. This
year, teenagers (ages 12-19) will spend about $140 billion, a 16 percent
increase over 1997. According to Teenage Research Unlimited, the average
teenager has $90 a week to spend. Additionally, half of all teenage girls have
bought from catalogues at least once, though only two percent of all teen
purchases are made through catalogues. Not surprisingly, teenagers spend the
majority of their money on items such as clothing, entertainment, and food.
According to Rand Youth Poll, girls are more likely to make impulse purchases,
shop more often, have less consumer resistance, and are highly fad and fashion
conscious.
dELiA*s was the first to capitalize on the demographics and purchasing behavior
of this segment through direct sales. The company's core business is clothing
for girls, but has expanded its product offering to include teen housewares,
soccer apparel and equipment, cosmetics, music, footwear, and is increasing its
efforts to acquire boy and pre-teen girl customers. The dELiA*s franchise was
built through its catalogue business, and although growth has been slowed over
the past two quarters from declining response rates, the company's first mover
advantage has enabled dominance in the channel.
The company's core business, direct sales through its multiple catalogues,
continues to represent the majority of the company's revenues. Until mid-1998,
customer, catalogue request, and revenue growth consistently exceeded consensus
expectations. In Q2 and Q3, response rates began to slow in the core dELiA*s
catalog and overall profitability decreased because of diminishing returns from
its aggressive prospecting as well as increasing competition. Correspondingly,
the company's stock price has suffered in recent months. Nonetheless, the
company still receives more than 100,000 requests each month for its catalogues
and the recent launch of the Droog catalog for boys as well as the acquisition
of the Storybook Heirlooms mailing lists (5 million names, 1.6 million
customers) should help maintain respectable growth in the core business. In
total, the company now has a database of 10 million names and 2+ million
customers, providing a tremendous asset for directing product assortments as
well as expansion activities through all distribution channels.
Significant Retail Expansion Underway
Although dELiA*s has achieved phenomenal growth through catalogue sales, the
fact is that the vast majority of teen purchases is still made through
traditional retail channels (i.e. the Mall). Hence, dELiA*s has leveraged its
brand strength and infrastructure to expand into the retail sector. On the
success of its three recently opened outlet stores, dELiA*s is aggressively
entering the full-price retail arena. Specifically, the first full-price
dELiA*s store will open in February with about 10 more to follow throughout
1999. Moreover, following last year's acquisition of TSI Soccer (12 stores and
a 7 million unit catalogue business), the company recently acquired 24 SCREEEM!
and Jean Country stores.
1998 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
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these and other reasons, the investments discussed or recommended in this repor
may be unsuitable for investors depending on their specific investment
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