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Bluefly, Tech-Bust Survivor, Begins to Boom

BOSTON (TheStreet) -- Shares of Bluefly (BFLY) rose 12% intraday yesterday.

Blue who? You may never have heard of the New York-based company, but major shareholders in the designer-apparel discounter include Rho Capital, which recently raised its stake, Soros Fund Management, the hedge fund company of George Soros, and Maverick Capital, run by Lee Ainslie.

The pint-sized Bluefly, which has a market value of only $76 million, was founded shortly before the dot-com bust that throttled stocks in early 2000. Just in the fourth quarter, the struggling company swung to a profit of $270,000, or 1 cent per share, from a loss of $150,000, or 1 cent, a year earlier, and it's finally on the cusp of sustained profitability. Revenue, meanwhile, stretched 17% to $29 million.

Still, profit margins shrank, due to a higher proportion of sales of lower-earning luxury items. The balance sheet, on the other hand, holds more than $10 million of cash and no debt. A recent inventory investment and successful Closet Confessions marketing campaign boosted average order size and customer additions during the fourth quarter. As fashion shoppers find their way to its site, expansion will ramp up.

Management is excited about the recent launch of fragrance and eyewear and the potential offered by the higher-margin contemporary business. Bluefly's stock has surged 294% since the March 2009 market low and 18% in the past 12 months. The company's accumulated GAAP loss has narrowed from 88 cents in fiscal 2008 to 32 cents in fiscal 2009 to 19 cents in fiscal 2010. The latest quarter marked the first profitable period since the recession.

Bluefly's stock, rarely discussed by the media, is an attractive Internet retail play. It trades at a book value multiple of 2.3 and a sales multiple of 0.8, discounts of up to 80% to Internet-retail peers. It has rallied 48% since TheStreet Ratings recommended it on May 26.

Although the economic and market outlook are murky, given crude oil's astronomical rise and uncertainty pertaining to quantitative easing's conclusion, Bluefly is a stock to watch. It is on verge of passing the crucial $3 mark, and despite its small stature and thin trading volume, offers a certain amount of countercyclical appeal, given its off-price fashion strategy.

Bluefly sells designer brands at discounts ranging from 20% to 70%. Bluefly, which caters to women but also sells designer and clothing accessories for men, sells prestigious brands, including Gucci, Burberry and Armani. The biggest obstacle to growth has been name recognition. But now that the equity market is booming and consumer spending is accelerating, retail acquisitions are being announced. Since Bluefly has now recorded a profitable quarter, it may draw attention from larger discounter suitors.

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