3SOF

First here's the initial analysis performed on MSI:

http://video.google.com/googleplayer.swf?docId=7722375774132999249&hl=en

So, the interesting part is the reverse merger with Fredericks of Hollywood, that's the factor moving the stock. On the issue we have the two following press releases:

Tue, Nov 14, 2006
• Movie Star, Inc., Reports Fiscal 2007 First-Quarter Financial Results
Business Wire (Tue, Nov 14)

• Frederick's of Hollywood and Movie Star, Inc. to Merge in Stock Transaction
Business Wire (Tue, Dec 19)

Michael Tokarz owns 22.4% of MSI's outstanding shares and owns 100% of Fredericks of Hollywood. So the deal is to merge the two companies.

The merger details are as follows:

- «Frederick's shareholders will receive approximately 23.7 million shares of newly issued Movie Star common stock.»

At yesterday's closing price, these 23.7 million shares are worth $44.56 M.

- «In connection with the merger transaction, Movie Star has agreed to issue to its shareholders non-transferable rights to purchase an aggregate of $20 million of new shares of Movie Star common stock.»

The company is asking for $20 M of investments from existing shareholders (that can be us if we buy the stock), but if existing shareholders don't buy the $20 M, Michael Tokarz and Fursa Alternative Strategies LLC will do it.

The current share price represents:

- 15.8 million MSI shares outstanding*$1.88 = $29.7 M;
- 23.7 million new shares to be issued to Fredericks*$1.88 = $44.56 M;
- $20 M of rights

So, $1.88, as I see it, is worth $94.26 M.

- «Frederick's generated approximately $139 million in revenues for its fiscal year ended July 29, 2006. For the fiscal year ended June 30, 2006, Movie Star had revenues of approximately $51 million.»

So, combined sales for the two companies were $190 M in fiscal 2006.

If we apply the average sales multiple of the Textile - Apparel Clothing industry  of 0.66, we get a value for the combined company of $125.4 M.

The current share price implies a value of $94.26 M.

But there are other issues. Is Fredericks of Hollywood a profitable business? How's its revenue and earnings history?

I'll have to dig more, but their website, I don't know if it's just the girls, but it looks awesome:

www.fredericks.com

Do I want this business?

Now MSI represents Movie Star and Fredericks of Hollywood. Moviestar's website is http://www.moviestarinc.com/. Frederick's of Hollywood website is http://www.fredericks.com/Default.asp?cookie%5Ftest=1 (just in case the other link doesn't work).

I found this on the company's website:

«A new era
Although Frederick's filed for Chapter 11 bankruptcy protection in June 2001, during that period it turned once again to its innovation and creative spirit, poising itself for significant growth and a turnaround of the brand. In true Frederick's style, the company has experienced positive sales and brand development since emerging from bankruptcy protection in December 2002.

Frederick's innovation, plus its 175 retail stores, highly successful catalog and Internet sales channels, have led the company to become one of the 25 most recognized brand names in the world.»

175 retail stores for $94 M?

Michael told me probably Frederick's is losing money from operations, he has that feeling.

This play is quite similar to BFLY, but with a physical presence too, not just online. But I enjoy the online business pretty much, as they can sell their products all over the world, to wanna be "Hollywood stars"

(check the products of their seduction line)

So, $94 M for $190 M in revenues. In BFLY I'm paying $159 M for about $78 M in yearly revenues and I love it !

MSI shares look very attractive to me. It's impossible to know all the information necessary to invest.

Next the phase 4, the trading plan.

The stock has been up a lot lately, but for a good reason. Today the futures are down some, so perhaps we'll get a lower open on ... you know what?

I don't care about the short term timing, that's unpredictable. The stock can open unchanged and go 10% higher or open unchanged and go 10% lower.

I don't know, but the trend is up and I see fundamental value on the company, more value than the share price implies.

Therefore I'm recommending MSI shares for the Stocks on Fire Portfolio, between ... now that I see the intraday chart, that upper shadow might be an error, look here: http://money.cnn.com/quote/quote.html?symb=MSI

The trading plan is:

Buy MSI between $1.85 and $1.95 today, 6.66% of capital as usual.

Valuable links of interest to better understand MSI's play:

http://www.bankruptcydata.com/fredericks.htm

http://www.findarticles.com/p/articles/mi_m3870/is_11_17/ai_78805323

http://www.lingerie-uncovered.com/labels/fredericks-of-hollywood.htm

http://www.tei.net/presidentsforum/2005/0223/LindaLoRe.asp

David, thanks very much the fundamental analysis for MSI

and what a great way to start of the new year. I throughly enjoyed the reading provided and learned more about why this is a great stock to own.

I just checked out fredericks.com and I have to say I love it to.

Buying shares of MSI now is almost like buying Frederick of Hollywood shares before its IPO.

I've listened to the CEO's presentation in February 2005 and here are some highlights:

- They had 146 stores in February 2006, but as we've read on the recent press releases, they have 175 stores now, so the company is expanding;
- www.fredericks.com had 22 million unique visitors to its website in 2004 alone;
- 70% of their direct sales in 2004 were already through fredericks.com (I believe she means "catalog" and "internet" as direct sales). I bet the internet business is even larger now;
- They had to file for Chapter 11 in 2002. She explains it was a painful and expensive journey, but they re-emerged from chapter 11, I guess in late 2003 or early 2004. I like to invest in companies that were able to come out of chapter 11, because usually they come out clean of debt.

The presentation has many more points of interest, but not much talk about the future. Anyway, we're almost 2 years from the date of that presentation, so perhaps the company changed a lot, I guess to the better, over this 2 year period.

So, what do we have here? We have a 60 years old company, a pioneer in sexy lingerie, making its IPO through a reverse merger. It is trading quite below the industry revenue multiple average. And the prospects seem appealing to me.

My brother lived in China (Macao) for about a year, and when I talked to him about my play on MSI and Fredericks of Hollywood, and I showed him www.fredericks.com, he said: "Wait a minute, there were stores in China with that kind of look but a slight different name, say Fred's lingerie".

Now, with the internet and www.fredericks.com selling throughout the world, people will be able to buy the "Original Sex Symbol", not just a cheap imitation. And now they have money to do it.

This MSI play resembles BFLY, I even saw someone comparing the two companies on the Yahoo board. You know I'm a big fan of BFLY.

If MSI were to be valued at the same revenue multiple as BFLY, it would be a $190 M revenues*2.1 (BFLY's revenue multiple) = $399.5 M company.

At today's close of $2.04, the share price represents 39.5 million*$2.04 + $20 M = $100.5 M market cap.

The stock would need to go up to ($399.5 M/$100.5 M)*$2.04 = $8.11 to have the same revenue multiple as BFLY.

Is this possible? Why not?

I'll keep on holding MSI.

(The previous post was corrected, there were some basic math and English errors there You might want to read it again)

I've sent this e-mail to the company, let's see what they reply:

«Hello, I've been buying shares of MSI because I love Frederick's of Hollywood as a long term investment.

I'm Portuguese and made my wife browse your website and she wants to buy some stuff you have for sale. My question is: do you sell across the world from www.fredericks.com or just to the US market?

Thank you !
Cesar Borja

(a suggestion: Video on the web is getting very hot now, you should make some videos of your models wearing your sexy lingerie, not just pictures - people would probably start sharing those videos through their friends, creating a free chain advertising model)»

http://www.fredericks.com/services/help.asp?63


"International Shipping

International:We currently only ship products to the U.S., U.S. territories, and Canada. If you have any additional questions, you may call Customer Service at 1-602-760-2111, or use our Feedback Form."

Quote from: Dracull on January 05, 2007, 07:24:57 AM
http://www.fredericks.com/services/help.asp?63

"International Shipping

International:We currently only ship products to the U.S., U.S. territories, and Canada. If you have any additional questions, you may call Customer Service at 1-602-760-2111, or use our Feedback Form."

Thanks for the info Dracull

I also received this e-mail from Fredericks:

«Dear Customer,
Thank you for your inquiry.
Due to new shipping restrictions and regulations, we can no longer ship to International destinations.

In our continuing effort to give our customers world class customer service, Frederick's of Hollywood feels that we can no longer provide the level of service our International customers deserve.

We can ship your orders to Canadian or USA addresses.

Thank you for choosing Frederick's of Hollywood.

David Hilderbrandt
Email Associate
Frederick's of Hollywood
1-866-729-3232
1-602-760-2111»

So, just selling to the US and Canada and they had $139 M in revenues in the year to June 2006? (MSI had $51 M).

That's ok. Probably they'll go international again after the "IPO".

I maintain that their business is similar to BFLY's (but also with a physical presence), yet BFLY's trades at 2.04 times revenues (and I buy it) and MSI+Frederick's trades at  0.52 times revenues. For MSI to trade at the same revenue multiple as BFLY the share price would need to rise to (2.04/0.52)*$2.01 = $7.88.

Frederick's of Hollywood has a past trading on the NYSE. I want to investigate about that past, for example, how much was the company worth when it was operating normally, about ten years ago?

I'll try to get that information, but probably it won't be easy. Anything you can find is welcome.

Over the short term there can be some consolidation, but the motives that took this share price so high (relative to the recent lows) will probably take it much, much higher, we just need strong hands to hold for the big push up.

I'll continue holding MSI.

I searched for old information about Frederick's of Hollywood shares, but until now just got the following two articles, one from 1997 and the other from 1990 (still didn't get the "normal" market cap in the old days):

- FREDERICK'S OF HOLLYWOOD: OOH LA-LA (June 1997)

-  Frederick's of Hollywood Inc. reports earnings for Qtr to Dec 2 (January 1990)

I'll keep searching and holding MSI.

Here's an interesting article, dated December 2000, about Frederick's of Hollywood in general and www.fredericks.com in particular:

Lingerie Heating Up Online Sales.

A few highlights:

- «While online ventures are notorious money-losers and long-established brick-and-mortar operations are solid, the Internet site for Frederick's of Hollywood has been profitable since its first day, even as the retailer is struggling to emerge from Chapter 11 bankruptcy protection.»

- «After a year and a half of selling through Yahoo, Frederick's launched its own Web site at the end of 1998 but continues to be linked through Yahoo. Since then Fredericks.com has soared. Its sales more than tripled from $3 million in 1998 to $10 million in 1999, according to the New Generation Research Inc.'s bankruptcy profile on the firm.»

- «By contrast, Fredericks.com has been exceptionally profitable. Landry declined to provide current figures but said revenue, after more than tripling in 1999, has doubled again so far this year.»

So, we're talking about revenues for www.fredericks.com of $3 M in 98, $10 M in 99 and about $20 M in 2000. How much for 2006?

Well, Frederick's of Hollywood in general (counting on its 130 brick and mortar stores), sold $139 M for the 12 months through June 2006. Probably more than 50% of this number were internet sales ... let's say www.fredericks.com sold $70 M over the last 12 month period:

Average annual growth since 2000 would have been 23%. Perfectly possible.

Fredericks of Hollywood can now be a profitable company due to its online presence. And I feel this is only the beginning of a global powerhouse.

Why? I agree with this:

«Zrike said e-commerce is very efficient for interacting and selling a known brand to consumers but falls short as a tool for building brand recognition.

"Frederick's of Hollywood has built a strong brand platform for themselves through catalogue and brick-and-mortar that has helped them with e-commerce offering," Zrike explained.»

I'll continue studying and holding MSI.

Nice!!