Bottom of the Barrel: Giddyap With Wilsons - TheStreet

Wilsons The Leather Experts

(WLSN)

is ready to saddle up and move ahead.

Wilsons Leather is the dominant retailer of leather outerwear, apparel, accessories and travel products. The company sells through a variety of venues: 485 mall-based stores, 97 stores in factory outlet centers, 30 airport retail locations and about 150 travel stores under the Bentley's Luggage and El Portel names. Wilsons total sales mix is 30% women's apparel; 29% men's apparel; 24% leather accessories such as bags, attaches and smaller leather goods; and 17% travel-related products.

After the close on Tuesday, Wilsons reported a first-quarter loss of 76 cents a share, in line with First Call estimates. And, while that seems like a lot, and is considerably below the 22-cent a share loss posted in the first quarter last year, there are reasons for hope. "We knew that this would be a challenging quarter for us and these results are in line with our expectations," said Joel Waller, Wilsons chairman and CEO, in the company's earnings release. "More importantly, we are encouraged by the continued signs of improvement in our sales trends and feel we have been successful in positioning the company for success during the remainder of the year."

Rebuilding

2001 was not a good year for specialty retailers. A slowing economy began to affect sales in the second quarter, and the trauma of Sept. 11 just made things worse, especially for mall-based retailers that depend on the fourth quarter for profits. Wilson points to dismal mall traffic and apparel promotions -- during the typically robust holiday season -- for the company's barely break-even performance last year. It had earned $2.45 a share a year earlier.

The only retail genre that felt more pain than mall-based specialty stores was travel-related retailers like luggage stores. Wilsons felt that pain too, acquiring the 107-store chain, Bentley's Luggage in April 2001. The travel business accounted for a loss of 79 cents a share last year.

While results of the first quarter will cause skeptics to question the company's ability to grow, there are signs Wilsons is making progress. The company posted solid April comparable store sales gains of 1.8% in leather goods, the first gains in a year. Same-store sales of travel items were down nearly 23% in April, better than the near 35% declines seen in previous months.

One analyst thinks the worst is behind Wilsons. "If these positive trends continue, we believe fundamentals will accelerate and push the stock higher during the next 12-18 months," SunTrust Robinson Humphrey retail analyst Dennis Van Zelfden noted in a recent report. "On a longer-term basis, we believe the travel acquisitions have the potential to decrease the seasonality and dependence on the fourth quarter." He rates the stock buy with a $20 price target. His firm has not provided banking services to Wilsons.

In its earnings release, Wilsons indicated it was comfortable with annual sales between $775 million and $785 million and earnings between 95 cents and $1.

Retail Risks

Wilsons is not without risk, the biggest of which is the company simply doesn't execute as the economy turns and can't deliver on investor expectations.

However, there are other risks out of the company's control including a slower-than-expected economic recovery and continued weakness in the travel industry. More than other specialty retailers, Wilsons' success is almost entirely dependent on highly discretionary spending. A weak economy or an external event that rattles consumer and traveler confidence would also shake Wilsons.

Finally, the company recently completed a private placement of common stock that raised $11 million. Combined with a new credit facility, the offering bolsters Wilsons liquidity. It also has the potential to dilute existing shareholders, although the company maintained its earnings estimates once the offering was complete.

With investor interest in retailers continuing, Wilsons is an intriguing play among specialty retailers and a nice turnaround story. If management can execute, the stock easily could reach $20 by the end of the year. However, current fundamentals, including the first-quarter loss, cost Wilsons a barrel. Hence, Wilsons earns 2 1/2 barrels and has an above-average outlook.

(For an explanation of our barrel rating system, see our

description.)

Barrelology

Speaking of retailers, last week was a good week for retailers in the portfolio as

Cost Plus

(CPWM)

gained more than 6% and

Hibbett Sporting Goods

(HIBB) - Get Report

more than 5%. Although I continue to like Cost Plus' growth prospects, both stocks are close to current fair value and I expect them to continue to track the broader market.

On the downside,

Endocare

(ENDO)

lost more than 15% of its value in the week on news that 1.8 million Endocare shares held by former owners of companies acquired by Endocare could be sold as early as June. The stock represents 8% of the shares outstanding. While the stock is likely to remain volatile until the lockup expires, Endocare's long-term prospects remain intriguing. In addition, there is currently a 5 million-share short position in the stock.

Aquila's

(ILA)

decision to abandon its proxy battle for control of

Quanta Services

(PWR) - Get Report

should not surprise readers of this column. We have noted that possibility since Aquila announced financial troubles in April, and we reduced our outlook on the stock last week. Quanta lost 12% on Tuesday. While the stock looks cheap, the lack of a catalyst and the possibility Aquila could sell all or a portion of its 38% stake in Quanta will continue to weigh on Quanta's share price.

Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a

TSC

gift to commemorate your pick.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.