At Bargain-Basement Prices, Loehmann's Getting Some Looks

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By Suzanne Kapner
Staff Reporter

Like so many of its loyal customers who dig through racks of clothing to find that special deal, bargain hunters are eyeing

Loehmann's

(LOEH)

stock.

Despite a putrid first quarter -- the company missed initial earnings projections by 90% -- at least one money manager is buying stock and several analysts have maintained their buy ratings. They all warn, however, that Loehmann's will remain damaged goods at least until the second half of the year.

"The news gets worse before it gets better," says

Paul Farrell, portfolio manager of the

Goldman Sachs Small Cap Equity

fund

(GSSMX) - Get Report

. "They'll break even at best in the second quarter. But I think the stock reflects that."

On Monday shares closed at 7 3/16, a 75% decline from Loehmann's initial public offering price of 28 3/4 in October.

Still, Farrell says he has bought all the Loehmann's shares he owns, more than 500,000, in the past 30 days -- after the company warned of a soft first quarter. And the warning was ugly. In April Loehmann's told the Street that it would earn 14 cents to 20 cents per share, though analysts had been expecting 32 cents, according to data tracker

Baseline

.

Yet it failed to meet even those lower projections. For the quarter ended May 3, the company earned a mere $200,000, or 3 cents per share, compared with $2.5 million, or 27 cents a share, last year. Sales were $112.6 million, compared with $104.1 million a year ago. But comparable-store sales sank 6.2%.

In the midst of that news, some money managers have been unloading stock. Since March 31, Boston-based

Putnam Investments

has sold 970,000 shares, according to documents filed with the

Securities and Exchange Commission

. As of May 8, Putnam owned 84,000 shares, or 0.9% of Loehmann's, down from 11.1%.

Still, Farrell isn't the only Wall Streeter remaining loyal to the franchise. Of the seven analysts who follow the company, according to Baseline, four rate it a buy, while the other three consider Loehmann's a hold.

Even Kelly Armstrong, an analyst with

Wheat First Butcher Singer

in Richmond, Va., who downgraded Loehmann's to a hold from a buy after the company warned of a soft quarter, says the company will turn the corner by year-end. Her firm has not performed underwriting for Loehmann's.

She says comparable-store sales will turn positive in the fourth quarter, mainly because the company is up against easier comparisons from the prior year.

"I really like the fundamentals of this company," she says, explaining that with the $36 million Loehmann's generated in cash flow last year, it can grow the business without borrowing for the immediate future. Loehmann's plans to open eight stores this year, five of which are already operating.

Before Loehmann's begins beefing up its earnings, the Bronx, N.Y.-based retailer with 76 stores has several challenges ahead.

The company was overly optimistic about sales projections for its three new downtown locations in New York, Seattle and Boston and is now facing a $19 million shortfall for the year.

Although Loehmann's did not return repeated phone calls, during a conference call with analysts after it announced earnings on May 22 it said it will take longer than expected to build a reliable customer base at those stores.

Controlling inventory will prove another challenge in coming months. While sales rose 8.2% in the most recent quarter, inventory soared 29% to $72.5 million.

The all-women's retailer also is planning to offer limited men's items in a 25-store rollout. Farrell says he expects the move to add at least 5 cents a share to earnings in the first 12 months.

The company is projected to earn 60 cents a share this year, and Farrell says in two years it will earn at least $1.10. "If it gets there," he says, "there's tremendous upside."

Perhaps Loehmann's best allies are its customers. Armstrong says the veteran executive team has ingrained the franchise in their customers' lives. The customers "don't care if the company went public," she says. "They just continue to shop there week after week."

If the views of Amy Wistreich, a 27-year-old New York City insurance executive, are any reflection of consumer sentiment, Loehmann's has more than a fighting chance: "It's someplace my mother took me when I was little," she says. "I feel total loyalty to the store."