A shareholder group sent a letter to the board of directors for Charming Shoppes outlining several concerns about the company and suggesting a possible sale of the catalog business. The group, which includes New York hedge funds Crescendo Partners II and III, also nominated three directors to the women’s apparel retailer’s board for election at its upcoming annual shareholders meeting.
The shareholder group, known as The Charming Shoppes Full Value Committee, owns nearly 8% of the merchant. The group’s Jan. 15 letter to the board touched on several concerns and outlined measures to “refocus the company’s business operations and unlock the true intrinsic value of the company. We believe the company needs to regain its focus on providing high-quality, fashionable and differentiated merchandise at value prices to its mostly moderate to middle-income, plus-size female consumer.”
The committee’s goals include:
– Exploring the sale of non-core assets (i.e., real estate, credit card operations, catalog business) to simplify the business and focus management on improving its underperforming retail operations.
– Slowing store expansion to focus management on fixing the current mix of businesses and increase free cash flow by reducing capital expenditures.
– Focusing on merchandise improvements to appeal to the company’s core customer base.
For its fiscal third quarter, Bensalem, PA-based Charming Shoppes reported a net loss of $3.6 million for the period ended Nov. 3, 2007. That’s a far cry from last year’s net income of $19.4 million for the same three-month period. Net sales decreased 4%, to $669.4 million, compared to net sales of $695.3 million for the same period last year. Net sales for the retail stores segment were $588.8 million, a 4% decrease from last year’s $615,3 million. Same-store sales sunk 8%, compared to a 1% increase last year.
Holiday sales fell 5%, to $622.7 million, for the nine weeks ended Jan. 5. Holiday direct sales increased 1%, to $125.2 million. The company’s direct-to-consumer segment includes the Crosstown Traders catalogs and Websites made up of Coward Shoes, Lew Magram, and Old Pueblo Traders. Last week company shares hit a 52-week low of $4.01.
The committee’s letter notes that since acquiring Crosstown Traders in preparation for taking the Lane Bryant catalog in-house, the direct-to-consumer division has seen a steady deterioration in revenue and profits. Charming could have instead focused on improving its retail and Internet presence at its core brands and could have generated significant free cash flow by licensing out the Lane Bryant catalog brand to an entrenched mail order company.
Claire Gruppo, president of New York-based investment bank Gruppo, Levey & Co, is unsure how much weight a shareholder group owning less than 10% of the company carries. “It’s not significant ownership, but this is bringing massive pressure to bear on the board, and they are trying to be activists and make some changes.”
Charming Shoppes “is in a pretty weak position to rebut a lot of this stuff,” Gruppo says. “But it depends on how much faith the board still has in the management team.”
She adds that the women’s apparel segment “has been really hammered. It’s been tough for the last couple of years.”