Description

This is a short idea that plays into PARL, which was written up recently. ECMV is a very thin stock so one should be careful; however, when it goes it will likely go very far very quickly.

ECMV runs the chain of Perfumania stores (as well as Perfumania.com). They are a retailer of mass market perfumes.

The reasons to short ECMV are as follows:

1.) Sales are flat but inventories are up sharply. The most recently reported quarter is for July 31, during which sales were down about 4% year/year. Inventories, however, were up 21% yr/yr.

2.) The quarter ended October 31 has not been reported yet but the monthly retail store figures have been reported allowing one to accurately predict the quarterly revenues. Retail sales, which make up about 85% of total revenues, will be down slightly for the October quarter.

3.) As of July 31, the company was suffering from a potential liquidity crisis. At that balance sheet date, the company had $1.6 million of cash versus $40 million of short term borrowings. The company had about $7mm of room on its credit line. In a certain sign of a potential liquidity crisis, the owners of the company have advanced the company $5mm under a subordinated line of credit.

4.) In a further sign of a pending liquidity crisis, as of July 31, the company's accounts payable were quite stretched. The company purchased $32mm of inventory during the quarter, yet payables were $45mm implying about 135 days of A/P.


If the Christmas selling season does not come through for them, the company could have a liquidity crisis. Recent sales reports are not encouraging.

A visit to the company's store next to Macy's (NYC) showed a very run down store with very little traffic.

Catalyst

Watch the 10Q to be released in the next few days. Company liquidity is very tight. Inventory is up sharply and sales are struggling.