Paul Harris: Riding a Roller Coaster

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For the second time in a little more than a month, shares of

Paul Harris


, the go-go growth retailer, lost nearly half their value as investors dumped them amid fears of softening sales at the specialty women's apparel retailer.

But despite the ugly turn of events, the company's largest institutional shareholder,

Neumeier Investment Counsel

of Carmel, Calif. -- which owns 1.2 million shares, according to the latest information available from


-- is shrugging off Paul Harris' recent gyrations.

"A lot of people who jump in and out of this stock based on a month's worth of information are creating a lot of commissions for brokers, and that's about it," says West Whittaker, Neumeier's senior equity analyst. "We are completely behind the company. It's a growth story, not a same-store sales story."

He likes the Indianapolis retailer because it is increasing square footage at a rapid pace. John Boyers, Paul Harris' senior vice president of finance, says the company will add 52 stores next year, bringing its total to 275. Whittaker says that number of stores is just scratching the surface of Paul's potential. "It doesn't even come close to bringing them national."

Whittaker is glad that the company doesn't manage for same-store sales boosts. While large gains in comparable sales excite Wall Street, they can, when driven by heavy markdowns, deteriorate margins. "The company manages for the bottom line," he says. "When analysts have deemed fit to downgrade the company, we've taken advantage and bought at the lows." Whittaker declined to say whether his firm was buying shares today, because company policy requires him to refrain from detailing daily market moves.

Other shareholders, however, were selling Tuesday, with the stock plummeting 22% to 16 1/2. It's likely that

Prudential Securities

analyst John Morris sparked the selling when he revised his same-store sales estimates for November to a single digit decline from an estimate of flat-to-plus-3%. Morris was unavailable for comment, but his assistant said the analyst did not change his buy rating on Paul Harris. (Prudential has performed underwriting services for the company.)

Paul Harris will report its November sales Thursday morning. Although Boyers says he is unable to comment specifically on the company's sales given the imminent report date, he adds that "Thanksgiving weekend was soft for quite a few retailers. Those last two days

Friday and Saturday of November are very significant for the month's sales.

"We do not see a weakening demand for the product," Boyers continues, referring to an earlier report on


that the company had bolstered inventory in anticipation of a strong holiday season. But since Paul Harris is opening new and larger stores at such a rapid pace, inventory in the third quarter on a square footage basis actually decreased from the year-earlier period.

"We aren't at the point where anyone can make a correct judgment about the holiday season," says Whittaker. For instance, last year Black Friday kicked off the holiday season with strong sales, but demand had weakened by Christmas.

The decline Tuesday comes just after the stock rebounded from another pummeling, this time caused by

BancAmerica Robertson Stephens

analyst Janet Kloppenburg in late October. At that time, the stock lost 22% after Kloppenburg lowered her rating to long-term attractive from buy. Kloppenburg was at an off-site meeting and unavailable for comment Tuesday.

Perhaps the major difference between today's decline the previous decimation was the volume of shares traded. Tuesday Paul Harris traded on light volume of 558,000, compared with 3.2 million shares changing hands during the late October collapse.

Some investors say Paul Harris has suffered from wide swings in its stock because of the large number of momentum players attracted to the stock's ten-fold gain in the past two years. Among the notables:

Nicholas Applegate

ranks as the company's third-largest investor, according to Technimetrics, and the fourth-largest holder is

Vinik Asset Management


But longer-term players like Whittaker view the recent turmoil as a bunch of malarkey. "It's a lot of commotion about a little thing."