The Deal: dELiA*s Wins Over Investors With Turnaround Plan

Tickers in this article: DLIA

NEW YORK (The Deal) -- Teenage girls' clothing retailer dELiA*s is greasing the wheels of its turnaround effort with a two-part capital raise that brought in a total of $37.6 million, an amount that is higher than the company's shareholders had expected.

The company's second largest shareholder Whitney Tilson of T2 Partners LLC was initially befuddled when he got wind of dELiA*s plans.

"The real question was, why were they raising so much money?" Tilson asked himself when he saw the two-part raise's total price. "It was obviously highly dilutive. They didn't need that much money -- they probably could have raised half as much," he said.

However, after a one-on-one meeting about the capital raise with dELiA*s' new CEO Tracy Gardner, Tilson was sold on the offering and purchased 2.2 million shares at $1.05 each.

Tilson pledged his continued faith by participating in the latest common stock offering, which raised $15.8 million when it closed on Wednesday, July 31 -- higher than the anticipated $13.7 million.

Last week, dELiA*s announced that it raised $21.8 million in 7.25% convertible notes, which the investors plan to convert into 20.7 million shares of common stock upon shareholder approval.

Tilson explained that the note offering was simply a way for Gardner, board chairman Michael Zimmerman, and Zimmerman's investment firm Prentice Capital LP, to participate in the capital raise without causing compliance problems for the insider-buyers. Prentice is dELiA*s' largest shareholder.

"Effectively, they're just buying the stock on the same terms I was -- I think it was fair," Tilson said, adding that he doesn't anticipate any issues securing shareholder approval for the conversion of notes to stock. "While it was highly dilutive, the fact that the stock didn't go down very much says that the market is correctly assessing a dramatic reduction in the risk of this company."

The New York-based teenage girls' clothing retailer reported disappointing results for the quarter ended May 4, with revenues down by nearly 15% after years of consistent losses, but Tilson believes Gardner has what it takes to effect a turnaround.