Macellum Advisors own 5.1% of Christopher & Banks, having been active since April. The stock is off 25% since then. The fund sent a letter to the apparel retailer today, outlining the fact that the board is a bunch of fools, being asleep at the wheel while running this primer retailer into the ground.
The board has let down Macellum, its shareholders and Christopher & Banks CEO LuAnn Via. Macellum wants board representation, which it’s been denied. Thus, Macellum has no choice but to vote against each and every board member for re-election at the upcoming annual meeting.
The West Coast port strike is no longer a usable excuse for the company’s poor performance. It needs to get itself sold. Macellum wants to open up the company to strategic alternatives.
June 18, 2015
The Board of Directors
Christopher & Banks Corporation
2400 Xenium Lane North
Plymouth, Minnesota, 55441
As you are aware, Macellum Advisors GP, LLC and its affiliated funds (“we” or “Macellum”) own approximately 5.1% of the outstanding shares of Christopher & Banks Corporation (the “Company”). We and our partners have substantial experience investing in consumer and retail companies and helping companies improve their long-term financial and share price performance. Macellum’s historical investments include The Children’s Place, Collective Brands, GIII Apparel Group, Hot Topic, Charming Shoppes and Warnaco.
We are writing to express our extreme disappointment with the first quarter results and yet another reduction of guidance. We had hoped that the Company’s recently lowered expectations would be sufficient to account for any lingering weakness related to the West Coast port strike. Unfortunately, that was not the case. Instead many of the concerns we raised in our April 1st letter (and reasons why we sought Board representation at that time) are being confirmed.
After the Company rejected our initial requests to fortify the Board in March of this year, we determined to let Management attempt to execute their existing plan based in large part on their strong conviction that the Company’s problems were under control. With the first quarter disappointment squarely in focus, along with other reasons set forth below, we are convinced that the Company is in need of additional oversite. Over the past two weeks, we have had several discussions with Management and the Company’s Chairman, and we have offered the assistance of several well-qualified potential directors, including the former CEO, Mr. Joel Waller, who we believe could be helpful in getting the Company on the right track. Again, we were summarily dismissed. Unfortunately, given the Board’s decision to reject our proposal, the only tool we possess as means to effect change at the upcoming annual meeting is withholding our votes for the existing Board. As a result, we will be voting AGAINST each Director at the Company’s upcoming annual meeting.
I.Poor results and missed execution
We believe the MPW conversions are a good strategy for the Company, but the execution is not living up to the potential. Specifically, the Company has failed to deliver the targeted productivity and profitability gains. We remain convinced that the goals can be realized but not without more disciplined execution.
We are equally concerned that customers are not responding to the Company’s merchandise. The approximately 60% of stores in the Company’s same store sales base had the worst same store sales results of any specialty apparel retailer in the sector.1 The Company’s revised guidance would suggest a similar outcome for the second quarter. As we feared, these results can no longer be blamed on external variables like the West Coast port strike and the Company must look inward for solutions. It appears to us that many of the changes made to the merchandise strategy are failing to resonate with customers, who are voicing their negative reaction through decreased purchases.
With sales down (11)% in Q1 and inventories up 1%, the Company’s inventory turns are slowing. In fact, since the end of 2012 sales have diminished by (16)% while inventories are up 18%. In the first quarter of April 2013 the Company began with $42mm of inventory. During the quarter they were able to generate $108mm in sales, a 24% same store sales gain and $1mm of EBIT. This year the Company began the quarter with $45mm of inventory and during the quarter generated sales of $91.6mm, a same store sales decline of (11)% and a $(2.5)mm EBIT loss. Unlike Management’s characterization that inventory levels was one of the primary culprits for the deteriorating results these facts suggest to us that some other changes within the merchandise strategy must be driving this negative customer response.
The Company’s outlook is troubling as well. With the port strike behind us we don’t understand how guidance could be so weak. The Company’s peer group and a broader peer group of missy and specialty apparel retailers all guided to much stronger trends than the Company’s implied same store sales guidance of a decline of mid to high single digits.2
II.Issues in planning and allocation
While we believe changes to the merchandise strategy to be the primary driver for deteriorating sales results, the failure to effectively execute in planning and allocation was also an issue. We also believe the planning and allocation function is one of the most critical at any specialty retailer. In our recent meetings with the Company, we struggled to understand the magnitude of the sales decline. One of the reasons offered was poor execution in planning and allocation. According to CEO LuAnn Via, the lead role within planning and allocation was separated into two. As a result of a lack of communication and poor systems, an error was made whereby high volume stores did not receive enough inventory and low volume stores received too much. This resulted in high volume stores, such as the Internet (considered the Company’s largest “store”), having material out-of-stocks. The converse, however, did not prove to be true, low volume stores, with additional inventory did not experience meaningful sales increases. Again, to our minds a more likely explanation is that the merchandise is not resonating with customers. As for laying the blame with systems we do not doubt that better systems could help and that the MPW conversions have complicated matters. However, we would point out that these same systems were in place while the Company generated sales trends were at least as good as the sector and in some periods much higher than industry averages prior to Q3 of last year. To us, this is just one more example of the Board that is not asking the right questions of their executives. Simply put, if Christopher & Banks’ largest “store”, the internet, was planned to grow “X”% then it needed “X”% more inventory to achieve those results. No complex systems are required to determine this, just proper oversight and common sense.
III.Material insider sales in the face of significantly lowered expectation
We remain troubled by the timing and magnitude of the insider sales, and believe they are too coincidental with major negative earnings revisions not to require further investigation. This type of behavior, if validated, could constitute a significant breach of fiduciary responsibility and might indicate that many on the Board are more concerned with their own self-interest than properly discharging their fiduciary obligations. The optics of these