Tween Brands Speeds Buybacks

The apparel retailer for young girls steps up its share repurchases, but could be missing out on more lucrative market opporunities

After a disappointing second quarter, Tween Brands (TWB) hopes to jumpstart investor enthusiasm with a $143.3 million accelerated share repurchase deal. However, pros think investing in new stores might be a smarter use of resources.

After the market close on Sept. 13, the specialty apparel retailer, which caters to fashion-conscious girls between 7 and 14 years old, said its board had authorized it to buy up to $175 million of its outstanding common shares. The company said it expected to buy 5.2 million shares from Bank of America (BAC) on Sept. 14 at an initial price of $27.55 a share, for a total cost of $143.3 million. The repurchased shares will be held as Treasury shares.

Tween Brands boosted its earnings forecasts for the third and fourth quarters and for fiscal 2007 based on the anticipated benefit of the accelerated share repurchase. That helped push shares up 8.5% to $29.90 on Sept. 14.

Bank of America plans to replenish the stock it's selling with purchases on the open market within the next five months. Tween Brands may have to pay a price adjustment based on the average market price of the shares during that period.

Besides the accelerated buyback transaction, the New Albany, Ohio, company also has $148.3 million remaining on its current share repurchase program, which its board approved in May, 2007.

The retailer plans to finance the buyback and any open market purchases under the regular buyback program with a new $175 million term loan, which, together with a new $100 million revolving credit line, will replace a $100 million credit line established in October, 2005.

Citing improved quarter-to-date operating results and an expected 1¢ contribution from the buyback, the company raised its third-quarter estimate to between 43¢ and 47¢ from a prior range of 40¢ to 45¢ a share.

But a larger 9¢ increase to a projected profit of $1.03 to $1.13 for the fourth quarter and a 3¢ to 4¢ boost in fiscal 2007 earnings to between $1.84 and $1.98 a share appear to be based exclusively on the impact of the buyback plan.

In the near term, the share repurchase is positive in that it shows the company's commitment to the business and its willingness to take on more debt to step up its share buybacks, says Howard Tubin, an equities analyst at RBC Capital Markets. But he wonders why the company doesn't use the money to invest in its business instead.

"In the long run, I question whether a growth company like Tween Brands should be leveraging up its balance sheet to buy back stock when I think the best use of cash would be to continue to invest in new stores and new concepts," he says.

Weak sales at the Limited Too stores were largely responsible for the 61% drop in earnings per share to 7¢ that Tween Brands reported for the second quarter (BusinessWeek, 8/22/07) before the market opened on Aug. 22. The results were much lower than analysts' EPS estimate of around 16¢ and caused the stock price to fall 28.5% to $27.59 that day. At the market close on Sept. 13, the stock was trading 40% below a recent high of $46 on July 5.

An over-assortment and weakness in casual bottoms and denims may have contributed to what Citigroup Investment Research analyst Kimberly Greenberger believes will be a combined 30¢ decline in earnings for the second and third quarters. In a Sept. 14 research note, she said the bad merchandise choices are being compounded by the disadvantage of the company's high prices at a time when shoppers are trying to save money.

Nevertheless, Greenberger upgraded the stock to hold from sell, pointing to a partial offset from the more aggressive share buyback program and a more attractive valuation relative to the three-year average. She also raised her target price to $31 from $24 a share. (Citigroup does investment banking with the company and makes a market in its stock.)

But the weak demand that Tween Brands is seeing in bottoms is no different from any other fashion-oriented retailer, as there's very little that's new out there, says Tubin at RBC Capital Markets, who rates the stock sector perform.

Tubin cites pieces of the company's assortment that are very strong such as dresses, which have been selling well all year. Other differentiated offerings include nonapparel items such as merchandise based on the Disney film High School Musical and webkins, little stuffed animals that come with code that gives girls access to a virtual world on related Web site.

The Justice stores are benefiting from the perception among girls and their parents that they are new and exciting. "You can hold kids’ birthday parties in Justice stores. That does a lot to boost the brand," Tubin says.

One way the retailer could better use its cash is to develop a third concept that it has talked about opening -- off-the-mall stores that would cater to a more price-sensitive customer than the Too and Justice stores, Tubin says. The company also has an opportunity to expand beyond "tween-age" girls – a category it pretty much owns – to boys of that same age range, although the market isn't as clear-cut for boys as for girls, he adds.

Standard & Poor’s Equity Research reaffirmed its hold rating on the stock, citing concerns about how the company will handle its merchandising this fall, particularly at its Limited Too stores, which are more oriented to the latest fashion trends than the Justice chain. S&P raised its fiscal 2008 earnings forecast by 12¢ to $1.92 a share, mostly due to the anticipated impact of the accelerated buyback program and left its 12-month target price at $33 a share. (S&P, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP).)

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