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The Deal: dELiA*s Wins Over Investors With Turnaround Plan

Gardner's track record at Gap Inc. and J. Crew Group Inc. is stellar, and she has already laid out concrete plans for much-needed improvements to dELiA*s' operations and sales margins, Tilson said.

Tilson is dELiA*s' largest outside shareholder, and dELiA*s is the third-largest position in his portfolio at 8.9%, after AIG Inc., which accounts for 11.1%, and Howard Hughes Corp., which is at 9.3%. dELiA*s just barely edges out Warren Buffet's Berkshire Hathaway, which comes in fourth at 8.1%.

After his meeting with Gardner, Tilson was comfortable with the logic of doing a larger-than-expected capital raise. "The reason they raised money is that they've lost money consistently for the last four to five years and burned through the cash on their balance sheet," Tilson said, describing dELiA*s as a "money-losing company with a perilously weak balance sheet."

In its latest quarterly financial report, filed on June 18, the retailer listed only $3.64 million in cash on its balance sheet as of May 4. dELiA*s reported a $9.22 million net loss for the quarter ended May 4 on net revenues of $35.17 million, down 14.6% from the previous year's quarter. The report listed the company's assets at $82.05 million and its liabilities at $49.85 million.

"It's not like they were going to file for bankruptcy next week, but they clearly need to fix the balance sheet and give Tracy Gardner some flexibility," Tilson said, adding, "In one or two quarters, this company could have been in real distress...now, there's plenty of liquidity no matter what happens."

Another reason dELiA*s raised more money than expected was to minimize the legal and banking fees associated with raising capital. For a small company, it makes more sense to do one large raise rather than undertaking a few small raises and having fees taken out each time, Tilson said.

Besides Gardner's track record, the market segment dELiA*s is targeting with its direct-mail catalogs, Web site and retail stores gives Tilson confidence in its growth prospects.

"Apparel retailing is a ridiculously competitive business, but the particular niche that dELiA*s is in is less competitive," Tilson said, adding, "there's still a lot of low-hanging fruit."

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