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Knobias ClipReportBIDZ: Diamonds Maybe Aren't ForeverTuesday’s session saw investors cheer for the first time in a while as the market rallied on the heels of a major cash influx for Citigroup from an Abu Dhabi investment firm. The move gave many a warm and fuzzy feeling for investors in the financial group and extended to the overall market. Bears still warned that the largest dollar gainer on the Dow was Altria Group which has long been grouped into the defensive play category. Never the less, Bulls were abound as all three indices gained on the day.
In the small cap space, one name was under increased scrutiny following a report by the internet blog Citron Research. The site, formerly known as StockLemon.com, has been known as having short positions in stocks it highlights and has amassed a fairly accurate and profitable track record.
In its latest post on November 26th, the operator names Bidz.com (BIDZ) as a suspicious company that warrants increased due diligence before investing. The Company is an online auctioneer of jewelry. Bidz offers its products through a live auction format requiring only a $1 minimum opening bid. The auctions are unlike any others on the Web with starting bids at $1 and have an extended auction time that resets if bids are placed during the last 15 seconds.
On Tuesday, the Company reaffirmed its outlook following sales over the Thanksgiving holiday weekend which was noted as being 78% higher compared to last year’s holiday weekend. Guidance for the fourth quarter was projected to be in the $56-$58 million range and expectations were for pre-tax income of $5.6-$6 million. For the year, expectations were for $180-$182 million with gross margins of 27-28% and pre-tax income of $18-$18.5 million. Analysts were expecting revenue for the fourth quarter of $57 million, 2007 revenue of $181 million
2008 full year revenue guidance was to be in the range of $225-$230 million, pre-tax income of approximately $23.5-$25.5 million and gross margin of approximately 27-28%. Earnings per share for the year were expected to be in the 47 cents to 51 cents a share range. Analysts expect a fiscal 2008 profit of 50 cents a share and revenue of $230 million.
In Citron’s report, the appreciation in the stock was due to the sympathy type buying action which caused a name like Medifast to grow in market capitalization because of the growth in Nutrisystems. Citron contended that Blue Nile is the names causing the sympathy players to pile into BIDZ.
Citron also noted that the Company’s inventory numbers are somewhat alarming when comparing to other online liquidators. Cash balances were also something investors should focus on when comparing this name to others such as Overstock.com and Blue Nile. Finally, Citron points to some related party transactions, which in fundamental analysis causes many red flags to appear because of their disingenuous nature. The related party transactions are with a fairly large shareholder who also happens to be BIDZ’s largest creditor and also a convicted felon according to Citron.
Following the report, shares plunged from over $22 on Monday to close at $11.89 on Tuesday, almost cutting the market cap in half. In response, the Company called a conference call after the close to discuss with investors what it labeled as “innuendo and inaccurate information” about the Company.
In the conference call, the Company said that they felt obligated to respond to the report and noted that inventory and cash levels don’t necessarily compare to Blue Nile and Overstock since they have different business models. With inventory, the Company noted that the increase had to happen to increase revenues. On cash, the Company noted a large line of credit to fall back on if cash was needed.
On the CEO’s salary payment, Citron alluded to the Company paying 30,000 shares a month to its top executive. But the Company noted that the selling of the stock was due to a 10b5 trading plan. The Company noted that since that time, it reduced the plan from 30,000 a month to only 10,000 a month.
On Citron’s alluding to the Better Business Bureau’s rating of F due to poor customer service, the Company noted that it was true and that the growth in the business from the early years outgrew their ability to offer quality service. But they noted that since that time, only 7 total complaints were still unresolved.
In the question and answer session, management took a barrage of questions from analysts who questioned everything from the presence of televisions on the site to the ‘shill bidding’ accusations. Overall, management attempted to defend each and every aspect which is commendable, but in reality might have only opened the door even further to scrutiny and speculation as the stock dropped another $2.50 in after hours trade. With Citron Research expecting to release additional information in a follow-up report, the name is certainly loaded with shorts and will certainly be a closely followed name over the coming days. Investors would be wise to watch.
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Labels: BIDZ, Knobias, small cap stocks
