3SOF

Today was a non event for MSI, since there wasn't any news out and no technical developments on a 23,100 volume day. I'm eager to know more about Frederick's but I need to be patient and wait for the news as I keep holding the stock, since I believe it is a great long term investment.

MSI rose 3% yesterday on a bit higher volume of 80,500 shares traded. Still, no news out. Let's check www.fredericks.com. All right.

I'll continue holding MSI.

There's no motive to move MSI higher or lower at this point in time, as everybody is expecting news about Frederick's. But you know that when the news hits the wires MSI can jump 30 to 50% in short notice, like it happened in 02-23-07 (in that day the stock didn't need news).

We know the merger between MSI and Frederick's is scheduled to close in Q2 2007 and we need to patiently wait for it, as buddjas1 says in another thread.

I'll keep holding MSI.

I called MSI's investor relations regarding the Frederick's merger.  He said that MSI has prepared the proxy, which will go to the shareholder for a vote.  He said that MSI has submitted the proxy to the SEC, which is reviewing it.  Unfortunately the SEC is "swamped" right now with IPO and is taking a lot of time to review it. 

I pressed IR regarding whether Frederick's was profitable and he would not tell me.  I still am suspicious why MSI would disclose Frederick's revenue but not Frederick's net income (if any). 

IR suggested that MSI would be in position to submit the proxy to the shareholders in April, which would disclose Frederick's income statement and other financial information.  At least we will not have to wait until the deal closes at the end of Q2 to know whether this was a good investment.

Question for David:  What if Frederick's is not profitable?

Quote from: buddjas1 on March 24, 2007, 03:31:09 PM
I called MSI's investor relations regarding the Frederick's merger.  He said that MSI has prepared the proxy, which will go to the shareholder for a vote.  He said that MSI has submitted the proxy to the SEC, which is reviewing it.  Unfortunately the SEC is "swamped" right now with IPO and is taking a lot of time to review it. 

I pressed IR regarding whether Frederick's was profitable and he would not tell me.  I still am suspicious why MSI would disclose Frederick's revenue but not Frederick's net income (if any). 

IR suggested that MSI would be in position to submit the proxy to the shareholders in April, which would disclose Frederick's income statement and other financial information.  At least we will not have to wait until the deal closes at the end of Q2 to know whether this was a good investment.

Question for David:  What if Frederick's is not profitable?

Before answering the question buddjas1, I want to thank and applaud this great contribution of yours

It's good to know we'll know Frederick's numbers in April.

Yes, it is  quite possible that Frederick's isn't profitable, as, for example, BFLY is also not profitable. I believe the valuation of the company, trading at $133 M market cap for $200 M in combined annual sales already reflects that negative scenario.

We need to remember that FOH was taken private, 10 years ago, for $70 M. At that time www.fredericks.com didn't exist, so I believe FOH is much more valuable now. If we consider this $70 M as a minimum value, with the $46.4 M currently attributed to MSI alone, the combined company would then be worth $116.4 M and that means a price per share of $2.46.

I believe this is the maximum risk, the combined company is worth $2.46 per share (a 12.5% downside potential). As for the upside potential, for example if we were to consider MSI+FOH would trade at a similar revenue multiple as BFLY, it would then be a 1.73*$200 M = $346 M, or $7.31 stock.

I believe the potential outweighs the risk and I'll keep holding MSI (thanks again buddjas1).

I do not know if you have found these numbers yet, but it appears:

FY00 - "Internet sales for the fiscal year ended July 31 totaled $10 million and are projected to increase 50 percent this year, LoRe said. Catalog sales, which totaled $35 million in fiscal 2000, are projected to increase 15 percent this year despite two out of eight catalog mailings being canceled last summer due to the reorganization. Store sales were $100 million in fiscal 2000, and have been relatively flat so far this year. "

http://www.encyclopedia.com/doc/1G1-71841029.html

Bankruptcy in June 2001

FY01 - "For fiscal 2001, we turned in our best performance in the past five years. We have seen the fourth-largest gain in profits in the last 15 years. Revenues were right around $150 million. And that is from really three distinct channels of distribution. We have retail stores, we have catalog and the Internet. And the Internet had a triple digit increase."

http://www.allbusiness.com/north-america/united-states-california-metro-areas/838310-1.html

FY02, FY03 - "Although the company closed 58 stores during its 30-month stay in Chapter 11 (it still has 156), sales for fiscal 2003, ended July 31, were $140 million, flat with the previous year. ***The company's earnings for fiscal 2003, meanwhile, beat internal projections by 20%. Profit for the direct division increased 47%. And for the first six months of fiscal 2004, profit tracked 60% higher than for the comparable period of the previous year. Comparable-store sales — a year-over-year comparison and an indicator of a retailer's health — for December increased 11%."

http://multichannelmerchant.com/news/marketing_fredericks_hollywood_redux/

"Frederick's 156 stores, mostly in malls, generated about half the company's estimated 2002 annual revenue of $150 million"

http://retailtrafficmag.com/design/interiors/retail_fredericks_suburbia/

FY04 - The President/CEO mentions that, as of then, Frederick's numbers were "70% better" than the bankruptcy plan

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

FY05 - "Frederick's generated approximately $139 million in revenue for its fiscal year ended July 29, 2006.***   Frederick's new store designs—the company plans to open approximately 50 more Frederick's of Hollywood stores during the next three years--are expected to drive top-line growth. New York-based Movie Star's sourcing capabilities are expected to help increase gross margins and improve operational efficiencies. "

http://multichannelmerchant.com/news/Fredericks_Movie_Star_12202006/

FY06 - "Fredericks has posted 43 consecutive weeks in positive weekly year-over-year sales. The company's catalog and Internet business has been posting mid-double digit growth  , the company said, declining to offer any revenue or profit growth.  Frederick's has fewer stores than it did at the outset of bankruptcy, 134 compared to 207, but the stores have more revenue per square foot, said Denise Marsicano, senior vice president of real estate and store planning. We got rid of the dead weight, the stores that were in undesirable locations, and got into better places," she said. Now Marsicano's goal is to be in only "A" malls, of which there are about 400 in the country. The new stores in Westfield Century City and Westfield Topanga malls are a prime example of the shift, she said. Now she's focused on not just the right mall, but the right placement in the right mall.  She's going to stay busy. LoRe is expecting to open up to 50 stores within the next 24 to 36 months."

http://www.encyclopedia.com/doc/1G1-157098819.html

Here's some more important reading:

http://www.answers.com/topic/frederick-s-of-hollywood-inc

From these articles, I think it is safe to assume that FOH's revenues are around $160-170 for the last fiscal year but growing.  I also think is safe to assume that FOH is not just profitable but increasing profitability q-to-q.  The President/CEO has removed the unprofitable parts from the company and has expanded into the most profitable areas.  I am more confident than ever that MSI is a great buy. 

Apparently, a director of MSI has agreed, purchasing $100,000 worth on Jan. 18, 2007, not long after the merger was announced.

http://www.secform4.com/93631-000109489107000037.htm

The merger is taking place just when FOH is really coming into its own.  I think your $7.31 target is a valid target.

Excellent research, buddjas1 ! Applaud!
It'd be hard to imagine that whilst Victoria's Secrets is
profitable, FOH is not. Thank you 

buddjas1 already made an awesome work on FOH, discovering several issues that I didn't know of, increasing our confidence in this investment.

MSI stock continues to be all over the place as investors can't wait for confirmation of the merger between MSI and FOH and financial details on FOH.

I believe we have the edge and know more than the average investor about this wonderful investment opportunity. Let me check www.fredericks.com again (probably responsible for $70 M or more of FOH's $150 M in annual sales) and say that I'll continue ignoring short term volatility and will keep holding MSI.

Again, let me pick up one of the excellent articles buddjas1 left for us, this one:

Frederick's shift from fantasy to fashion pushes up sales: less-racy lingerie draws more female customers.
From: Los Angeles Business Journal  |  Date: 12/18/2006  |  Author: York, Emily Bryson

The article is just 4 months old and it looks like Frederick's is in terrific shape.

I'll keep holding MSI.

Another article from Dec. '06.

http://www.podcasternews.com/programs/152/fashiontribes-daily/3371/va-va-voom-fredericks-of-hollywood-merges-with-movie-star/

Not sure if I like this one.  DeRoe states:

"That will be the biggest opportunity for us: access to the capital market and a publicly traded company. It will give us the resources to enable us to open 50 additional stores in the next 24 to 36 months…This strategy allows us to partner with landlords at shopping malls and open up stores we've had our eye on for a while."

Dilution??? 

My strategy now is to sell on the release of the FOH financial information and, perhaps, buy back after what I assume will be a private placement after the close of the merger.

Wow, MSI fell off a cliff there toward the end of the session, though it bounced just a little, anyone know what happened?  Or was it just noise?

I think I am also of the mind that selling the merger might be best if the market continues this way and energy prices rise etc.  Retail gets hurt pretty bad in the kind of environments we seem to be setting up for now.  The retail expert Jeff Macke was talking about this last night.

Technically, MSI fell below its support today and exited the triangle. But volume was a bummer. I think some short term trader closed his position due to the technical breakdown, i.e. this is the noise tokyopua is mentioning. It is a bit unnerving waiting for the news though, I agree.

Quote from: tokyopua on March 28, 2007, 04:12:50 PM
Wow, MSI fell off a cliff there toward the end of the session, though it bounced just a little, anyone know what happened?  Or was it just noise?

I think I am also of the mind that selling the merger might be best if the market continues this way and energy prices rise etc.  Retail gets hurt pretty bad in the kind of environments we seem to be setting up for now.  The retail expert Jeff Macke was talking about this last night.

Thanks for that macro view Tokyopua, which may be accurate, but I prefer to use a micro, case by case, analysis. I believe a small company's destiny lies more in its management hands than on the general economy strength. I also say this because I live in a country that is living in a deep economic depression for about 6 years, and yet, some very well managed companies are thriving.

Quote from: berloga on March 28, 2007, 04:42:03 PM
Technically, MSI fell below its support today and exited the triangle. But volume was a bummer. I think some short term trader closed his position due to the technical breakdown, i.e. this is the noise tokyopua is mentioning. It is a bit unnerving waiting for the news though, I agree.

I agree with your assessment of reality berloga.

The chart shows an ugly breakdown, which I believe it was possible only because of the low liquidity of the stock, because there wasn't any fundamental reason (at least that I can see) for the break.

Trendlines and moving averages are fancy things to put on a chart, but, above all, support and resistance levels are memory phenomenons. What was the previous resistance level, the one that put a ceiling on the stock for several weeks as we waited for a bullish breakout? It was $2.6, remember?

$2.6 was the most important prior resistance, now acting as a support level. I don't think the stock will close meaningfully below that level (say 3% below), without any additional fundamental information, and when that comes, from what we've been studying here, I expect it to be positive.

MSI + FOH is now valued by the market at $128 M, for $200 M in annual sales. I think its cheap, and I'll keep holding it.

David, what do you think about the possibility of dilution after the merger, in accordance with DeRoe's statement (above), to pay for the expansion of dozens of stores?

I'm not liking this selling yesterday and today.  Is this just TA gone wild or is there more behind the selling?

Big time drop again. Yuck!  I am wondering also if there is something going on MSI isn't saying. IS there a rumor out there or something?