FOH

[David Randolph]

The rationale on MSI's trade is simple. MSI share price represents:

- 15.8 million MSI shares outstanding*$2.49 = $39.3 M;
- 23.7 million new shares to be issued to Fredericks*$2.49 = $59 M;
- $20 M of rights

So, $2.49 is worth $118.3 M.

The things we've been finding about Frederick's of Hollywood tell me this is a profitable company. They reduced the number of brick and mortar stores and www.fredericks.com probably saw its revenues surge over the last 6 years, since e-commerce has been growing at a 30% average annual rate.

www.fredericks.com already sold $20 M in 2000, if those sales grew 30% a year through 2006, this year sales were something like $96 M. And this has been a profitable operation since the beginning in 1998.

Also, Frederick's came out of Chapter 11 reorganization recently, so probably it is completely clean of debt.

MSI + Frederick's of Hollywood can trade at two times revenues, and that would mean MSI's share price would be:

($380 M/$118 M)*2.49 = $8.02.

I don't have to say I'll continue holding MSI with strong hands. I already have a 29% profit on this stock, but I don't care at all about my entry price, the market doesn't care either.

[oicpecnoc]

I got burned trying to get a better entry price on this one like I did on syx, and it did a fly by on me with no entry at all.  Dang it.  What a great call David.  MSI seems to have missed the memo that stocks do pull back sometimes.

[David Randolph]

I got burned trying to get a better entry price on this one like I did on syx, and it did a fly by on me with no entry at all.  Dang it.  What a great call David.  MSI seems to have missed the memo that stocks do pull back sometimes.

You're not alone oicpecnoc, I know of other people that loved the story on MSI but still couldn't buy it, because it was up so much over the short term. Guess what, it is up 44% since my buying point

The way to go over the difficulty of buying high, is to study and trust the fundamentals. Who cares if you're buying at $2, up from $1, if the perceived fundamental value is $8?

Trying to save a few ticks makes people lose huge moves. That's why when I want to buy, I make sure I buy, without any care for the short term price I'm paying. Why should I pay attention to short term timing, if that is highly unpredictable and my reasoning is long term?

Anyway, it looks like MSI will face heavy resistance now. I can see it pullback 10% or more from today's close without trembling a bit. Because my bullish case is fundamentally sound, and people selling are weak hands, I guess they don't know what they're doing. Moreover I know of people that are eager for a pullback to load the truck with MSI shares, because they love the story but can't chase the price higher, they prefer to buy on dips.

And what if, instead of pulling back now because of the $2.75 long term resistance level that you see below, MSI continues to run and goes to $4 or more without stopping? Well, that's the trend, and the trend is your friend.

I'll continue holding MSI, I don't care if it does pullback or not, I can't predict that, I just think the stock is worth about $8.

[zibeaster]

David, I agree with your analysis on the online revenue amount. I was wondering how come 175 stores only have up to $50 million revenue. But I just found out that their stores are pretty small. The one I saw only have about 400sqft. A store like that can make money if it can sale 250k a year.

I think the big question mark is the debt situation. how much and what term it is. my guess it is at least managible. otherwise they would use the public money to pay the debt, in stead of openning new stores.

Fredericks of Hollywood was bought for $70 million in 1997. ten years later, it is a much better company and should worth at least $100 million. MSI was about $13 -$16 million before the merger news broke out. that puts the company at $113 and $116 level.  This translates to the price of about 2.40 for MSI. So the downside is limited.

I can think of two things to spoil this valuation, high amount of debt and dilution by the number of convertable shares. I haven't read MSI's 10Q so i don't know if they have any convertable shares. The debt situation is unkown, but by  how the company has opened stores and plan to open them, it shouldn't be an issue.

[David Randolph]

Thanks for your analysis zibeaster

David, I agree with your analysis on the online revenue amount.

So, you agree with $70 M coming from www.fredericks.com.

I was wondering how come 175 stores only have up to $50 million revenue.

The latest store count indicates 130 stores, not 175, as you can read on the merger agreement between Movie Star and Frederick's of Hollywood, published in December 19, 2006:

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

Also, since Frederick's of Hollywood had $139 M in sales for the 12 months through June 2006, and we estimate www.fredericks.com sales at $70 M, the stores sales estimate must be something near $69 M, or do you think the catalog business is worth $19 M? Well, it's possible.

But I just found out that their stores are pretty small. The one I saw only have about 400sqft. A store like that can make money if it can sale 250k a year.

Humm, 400sqft, I wonder how much that is since I use the metric system (sorry). Let me see the conversion on Google ... ok, you're talking about 37.16 square meters. Yes, a small size store to sell sexy lingerie. I wouldn't expect them to be big stores.

$250,000 a year for one store to be profitable?

So, let's see, keeping that interesting number in mind, we have 130 stores selling about $60 M a year, so each store sells $461,538 on average. If these calculus are correct, Frederick's of Hollywood stores are very profitable.

I think the big question mark is the debt situation. how much and what term it is. my guess it is at least managible. otherwise they would use the public money to pay the debt, in stead of openning new stores.

I don't think they're opening new stores zibeaster, since they have just 130 stores now. Their plan is to open 50 new stores over the next 36 months, though. But I also don't think they have much debt, since they recently came out of chapter 11.

Fredericks of Hollywood was bought for $70 million in 1997. ten years later, it is a much better company and should worth at least $100 million.

I think it should be worth much more than $100 M now, because in 1997 www.fredericks.com, a very profitable sales channel, didn't exist, and now it accounts for $70 - $90 M of revenues (I saw your $90 M estimate on Yahoo ).

MSI was about $13 -$16 million before the merger news broke out. that puts the company at $113 and $116 level.  This translates to the price of about 2.40 for MSI. So the downside is limited.

If the value were to be $113 M to $116 M the downside would be limited, but also, where's the upside?

Just considering www.fredericks.com and using your $90 M revenue estimate for the website, the company should be worth $90 M*1.96 (BFLY's revenue multiple) = $176.4 M. Now add Frederick's stores & catalog business (worth $69 M) and MSI (worth $14.5 M) and get a company worth $260 M, which translates into a share price of $6.08.

(the calculus uses 39.5 million shares outstanding - 15.8 million from MSI + 23.7 million to be issued to Frederick's shareholders and $20 M of a rights offering)

I can think of two things to spoil this valuation, high amount of debt and dilution by the number of convertable shares. I haven't read MSI's 10Q so i don't know if they have any convertable shares.

I've read MSI's Q3 10-Q and found nothing related to convertible debentures or convertible notes. But for the following updates I'll read the 10-K, which usually has more information about risk factors. 

The debt situation is unkown, but by  how the company has opened stores and plan to open them, it shouldn't be an issue.

Yes, the debt situation is unknown, but I believe they closed stores over the last few years, where did you get the 175 store count? I see 130 stores over the latest press release on the profile of Frederick's of Hollywood on the bottom of the page:

«About Frederick's of Hollywood

FREDERICK'S OF HOLLYWOOD has been recognized as one of the world's most well-known brands, with more than 130 specialty retail stores nationwide, a world-famous catalog and online shop at www.fredericks.com.»

(well, now I see they say "more than 130", but certainly not 175)

Debt is important, but my play here is www.fredericks.com can continue to grow 30% for the next 10 years, especially if they start operations internationally. If this happens, www.fredericks.com will be selling $1.24 B in 2016, apply a revenue multiple of 2 and get a $2.48 B company (just considering www.fredericks.com).

Since the current share price of $2.7 implies a $126.5 M value, MSI share price can grow 34.64% a year for the next 10 years, which is quite compelling.

Of course, if the market gives me $6 - $8 a share between now and mid Q2, I'll take it, but I'll be buying on dips (given that nothing fundamentally changes), because I'm a believer in joining a well known brand, an exotic and glamorous product and e-commerce.

Zibeaster, if you have the time and the willing, please keep up contributing to 3 Stocks on this and other threads of your interest (as you've been doing lately, thanks ), I feel your participations enrich the website's content.

I'll keep on holding MSI.

[zibeaster]

David, I have not done nearly enough homework on MSI so my numbers are just rough guesses. I like to post here and hopfuly not to make too much fool of myself:)

As for store number, I remeber I read somewhere but I think you are right. they probably just have 130+ now. In this link (http://www.usatoday.com/money/industries/retail/2006-12-19-fredericks_x.htm?csp=34), it  does say they will open 50 new stores in next 3 years. it also said they seek to refinance Fredericks' term debt.

The 400 sqft store I saw is in an upscale mall. it is small but very well presented. Today however, I went to see the other store in my area (Washington DC), this one is also in a shopping mall. But it is bigger, about 800-1000 sqft selling space, this store seems to be older and presented differently, may be because of space shape difference. In both stores, they have 2 sales associates. This is on the weekend so they may have extra help. This is probably the typical of their stores. But I think they have some bigger ones. The orginal store in Hollywood might be a big one.

In terms of store sales and profitbility. My guess is the rent/tax/insurance/water/electricity cost about 20k to 30k a year if the lease is signed recently in my area. The labor cost may be 40k to 60k. A 50% gross (they probably can do 60% gross) means the annual sale of 180K to break even. That means $490 a day, which they should be able to do.

I agree that they have 10 years to close non profitable stores, I think they also found the profitable store formats, otherwise they won't have the confidence to open new ones.

I agree with you that they will grow and they are ready to grow. while their online revenue is growing, my guess is they were also shrinking the store size to make it profitable in the past 10 years. They are now ready to get some public money to help them grow faster.

[David Randolph]

Thanks for the great info zibeaster

Since I live in Portugal (actually, I've never been in the United States, what a shame - I'm planning to go there, but my children are still so small that I'm afraid they won't deal well with the plane. Over the next 12 months I'll make a trip to the US for sure), I find in locco information very useful.

Yesterday was a perfect washout day, with the stock reacting to the fact that it wasn't able to breakout above the $2.75 resistance level right away. Volume picked up and, after touching the 10 days simple moving average, the stock rebounded, leaving what I perceive to be a bullish candlestick on the chart.

Fredericks was sold for $70 M in 1997, when www.fredericks.com didn't exist. I believe Frederick's of Hollywood is worth at least triple that now, ten years after, because www.fredericks.com is certainly a very profitable sales channel.

I was a bit nervous by them not changing the website so often, but look at the new and refreshing lady on the homepage: http://www.fredericks.com/

The website is still not selling internationally, but that's just a matter of time in my opinion.

Despite yesterday's fall, my confidence is higher than ever on MSI.

[David Randolph]

Some people like to compare Frederick's of Hollywood and Victoria's Secret. Well, they're certainly competitors. I like this comparison, because Limited Brands (LTD), the owner of Victoria's Secret, is a $11 B company, and Frederick's of Hollywood is currently valued by the market at roughly $0.1 B.

Check both websites:

www.fredericks.com
www.victoriassecret.com

I hope that some of you that didn't have the chance to buy when I initially recommended MSI have bought on this dip, because MSI is getting ready to take off again:

[David Randolph]

I see MSI's chart as building the base for a strong upward move. If the stock is able to close above $2.75 there's no telling to how high it can go.

Fundamentally, at least for the part of fundamentals that I know of, I really like it, as you can read on the rest of this thread.

I'll keep holding, expecting a new bullish leg to unfold anytime soon.

[David Randolph]

I wasn't expecting MSI to be down 4.4% on Friday, but that's life. There wasn't any technical damage to the chart.

At $2.39, MSI is worth:

- 15.8 million MSI shares outstanding*$2.39 = $37.7 M;
- 23.7 million new shares to be issued to Fredericks*$2.39 = $56.64 M;
- $20 M of rights

So, at $2.39 Movie Start + Frederick's of Hollywood is worth $114 M.

Frederick's of Hollywood was taken private in 1997 for $70 M. Back then the company had big financial problems and www.fredericks.com didn't exist. Now it probably represents more than half of the company's sales.

Perhaps we'll need more news on the MSI + FOH merger to put the stock rockin again. But I can't, and I won't sell for a 23% profit when I see at least 100% profit. If I were to sell, and the stock to rally, where would I be then? Lost in the market ...

I'll continue holding MSI.

[buddjas1]

I like this pick as well, David.  Just waiting for my entry point.  The trading range is tightening, so I think MSI is just about ready to restart the treck above $3.

[David Randolph]

I like this pick as well, David.  Just waiting for my entry point.  The trading range is tightening, so I think MSI is just about ready to restart the treck above $3.

I hope you got your entry on MSI buddjas1, because this stock should stop falling right now ! (it should, since I'm holding it )

This is strange, on my chart and other websites I have MSI's close at $2.30, but on the Main Portfolio it shows $2.28 as close. I'll talk to Ramsburg about this.

With the stock closing at $2.30 we have a doji on volume above average, which might be indicative of a short term trend change, from bearish to bullish.

The medium term trend is absolutely bullish as we know.

We'll see about the short term developments, but whatever happens, I'll keep holding MSI, as I see Frederick's of Hollywood underlying valuation as ridiculous. Look at their website again: www.fredericks.com. Once they start shipping internationally it can't fail.

[buddjas1]

"I hope you got your entry on MSI buddjas1, because this stock should stop falling right now !"

I took my first position at 2.34, this morning.

[Buyhigh?]

Thanks David...I buy enough Fredricks apparel for my wife I should be a major stockholder 

[David Randolph]

"I hope you got your entry on MSI buddjas1, because this stock should stop falling right now !"

I took my first position at 2.34, this morning.

Cool, you're already in the green buddjas1

Thanks David...I buy enough Fredricks apparel for my wife I should be a major stockholder 

Yes, according to Peter Lynch (author of "One up on Wall Street"), you should pay attention to stocks of companies which products you usually buy. If you buy the product, why not at least consider buying the stock?

Well, MSI isn't Frederick's of Hollywood, at least not yet, but if everything goes well with the merger between the two companies, it will be.

The transaction is expected to close on the second quarter of 2007. When we approach that date I expect to get more and more details about Frederick's of Hollywood and I'll study every news release very closely.

In the meantime, unless the market gives me something north of $6 a share, I'll hold.