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Hedge Fund Manager Tilson Asks Almost Every Question On Delia's Earnings Call

Whitney Tilson, the founder and manager of Kase Capital, peppered Delia's management with questions about the teen retailer's turnaround today. Tilson was looking for reassurance that Delia's new CEO will bring some of the magic she worked on J. Crew to Delia's.

Posted on August 27, 2013, at 4:15 p.m. ET

Most of the questions posed to executives of teen retailer Delia's on today's earnings call came from hedge fund manager Whitney Tilson — and with good reason.

The well-respected founder of Kase Capital (formerly of T2 Partners), has seen his investment in the teen retailer shrink by more than 15% this year alone since buying a nearly 10% stake in Delia's at about $2 per share five years ago. Small wonder, then, that Tilson was looking for reassurance.

Among the topics on Tilson's mind: Could new CEO Tracy Gardner, a J.Crew and Gap alum, describe the key managers she hired since joining Delia's in June? What are some reasons to be optimistic about the business, which just reported "ugly numbers"? How does this compare with Gardner's experience working with J.Crew CEO Mickey Drexler to revive that business in the early 2000s? And does the retailer now have the balance sheet necessary to get investors to "the promised land"?

The ugly numbers Tilson referenced include a 16.7% sales decline to $33.2 million for the quarter, and a wider loss from continuing operations to $11.1 million from $5.4 million. The results led to a 7.2% drop in its stock to $1.16 in afternoon trading Tuesday.

Despite losing 15.4% on Delia's this year, according to a July 1 letter to investors, Tilson is newly optimistic about the company and Gardner's ability to turn the business around. His optimism is especially hinged to her experience working alongside J.Crew's Drexler to build a tremendously profitable powerhouse out of that retailer. Gardner retired from J.Crew as head of retail and direct divisions in 2010 after spending about a dozen years working alongside Drexler at both that retailer and the Gap.

"She sees parallels to J.Crew: a strong brand with great potential to dominate its niche that has been managed very poorly," Tilson wrote in his letter to investors, citing Drexler and Gardner's savvy in boosting J.Crew's sales from $400 million to $1.8 billion and returning it to profitability. "If she can deliver even a tiny fraction of what she did at J.Crew, this stock will be a multi-bagger."

Delia's, which makes about $220 million a year in annual revenue and is known for its popular '90s catalogs, recently sold its Alloy business and raised $37.6 million through stock and debt sales. Gardner noted in today's earnings call that she's brought on three executives with backgrounds at Coach and J.Crew and that material improvements in the business may surface in the back half of the fourth quarter.

Tilson, who tactfully said he was "not trying to hog the conversation," was pointed in his questions about what similarities Gardner saw between the Delia's turnaround attempt and J.Crew's.

"It got a lot worse before it got better," Gardner responded. "I came to this company because I see a great brand connection with our customer. And I see white space and I see a customer that needs and wants us."

Delia's sales decline is not unusual — it has been a rough quarter for teen retailers across the board. And Gardner only just started, and has years and years of experience helping lead retailers making billions in annual sales. The executive temporarily worked as a creative advisor for Gap's namesake brand in the past year.

Despite the dismal quarterly numbers, Tilson seemed sated by Gardner's responses on what she's doing to fix things at Delia's. "Keep up good work," he said, once he was finished asking questions.

Whitney Tilson. Kase Capital was named using the initials of his daughters and wife.
T2 Partners via The Reformed Broker / Via

Whitney Tilson. Kase Capital was named using the initials of his daughters and wife.