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Insiders Say Join the Party With Potential Take Out Candidate

By Michael Brush
Exclusively for InvestorIdeas.com
April 12, 2007

Celebrate Express (BDAY) has been a real party pooper. Shares of this online store that sells goodies for children’s parties have fallen 35% to $9 since a year ago. Ouch.

Back then, many observers thought the stock was a buy because value-oriented activist investors were accumulating at around $14. So much for following the activist investors with a value slant.

But now, the true world-class value investors are stepping up to buy. That would be the insiders. So I think its time to get a position in this little turnaround play.

It would be easy to write off the recent flurry of buying by a director -- $2.2 million worth during the first ten days of April -- as a special dividend grab. After all, anyone who owned shares by April 10 gets $1.25 per share in a one-time dividend. So that director who was just snapping up shares, Stephen Roseman, is about to pocket $2.75 million for his efforts.

But I think there is more to the story.

This little party company has been beset by many problems in the past year. In the coming quarters, however, a turnaround may reward shareholders.
The company still has around $23 million in cash, despite the recent $10 million giveaway that was most likely a ploy to ward off activists who wanted a bigger shake up. That $23 million is a lot of cash on hand for a small company like this with a market cap of just $71 million. It works out to around $2.70 per share. It’s certainly enough to see the company through the coming turnaround.
If the turnaround works out fast enough, a lot of that cash could be “distributed” to shareholders in the form of an accretive share buy back – which the company hasn’t ruled out.
I also wouldn’t rule out a takeover. Celebrate Express recently announced it had finished “exploring strategic alternatives” – code words for seeking a suitor -- without finding any. Yet at the same time, it announced plans to loosen takeover provisions by doing things like making it possible to change the whole board at once or fire board members without cause. Read into that what you will but one thing is clear: All that cash still makes it an attractive take out candidate. So the courtship may not really be over.

The Troubles

Celebrate Express, which operates two brands called Birthday Express and Costume Express, sells all the basics you need for a kids’ party – hats, costumes, plates, balloons and party favors. Parents can buy everything from an American Idol Deluxe Pack for $39.99 plus shipping, to a Finding Nemo Deluxe Pack or Dog Deluxe Pack for the same price. These theme packages include invitations, place settings, balloons and other basics for eight party goers.

Despite being in the fiesta business, most of the past year was no party for shareholders. Celebrate Express had problems with distribution. It had to spend as much as 29% more in marketing for an increase in sales that didn’t keep up. Sales in the most recent quarter were off 11% mainly because it was phasing out one of its brands, Storybook Heirlooms. But sales at a main brand, Birthday Express, slipped 1.7%. Labor costs at its two distribution centers in Kirkland, WA and Greensboro, NC were up. Overhead was up last year too, mainly because of stock options expensing.

The turnaround

All of this has had investors throwing in the towel. But the stock may be bottoming in here, and a turnaround on the horizon could reward anyone who buys now along with the insiders.

There are three main components to this turnaround.

Improving customer service while reducing distribution costs. The company plans to do this by using better technology and upgrading outdated enterprise software which hasn’t been changed in seven years. Celebrate Express is adding an information technology boss to manage the job.
Moving beyond birthdays. Let’s face it you don’t need a birthday to throw a party. Families also get in the festive spirit for major holidays like Christmas or Halloween. Celebrate Express can use its huge database of 3.3 million affluent families with children to sell party goodies for other holidays throughout the year. What’s more, as a virtual store Celebrate Express can offer a broader product line than brick and mortar stores, possibly stealing their business. “I happen to believe that as we square our ship… we will able to take market share away from the brick-and-mortar stores,” chief executive Kevin Green said in the most recent conference call at the end of March.
Broadening the customer base. The company may also be able to expand its customer base by reaching out to less affluent consumers.

The bottom line: Turnaround plays can be risky and they often seem to take longer than expected. But this company has the cash and financial strength to see it through – and a plausible plan. I’d buy shares right here.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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