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Takeaway: RH prices convertible notes, de-risks growth strategy. TGT CEO search. APP terminates Charney.

COMPANY NEWS

RH - RESTORATION HARDWARE HOLDINGS, INC. ANNOUNCES PRICING OF $300 MILLION CONVERTIBLE NOTES OFFERING

(http://ir.restorationhardware.com/phoenix.zhtml?c=79100&p=irol-newsArticle&ID=1940976&highlight=)

  • "Restoration Hardware Holdings, Inc. today announced the pricing of $300 million of 0% convertible senior notes due 2019 at a 35% conversion premium to today’s closing stock price of $85.99. Restoration Hardware also granted the initial purchasers of the notes a 13-day option to purchase up to an additional $50 million of the notes on the same terms and conditions, for a total potential offering size of up to $350 million. Additionally, the Company entered into convertible note hedge and warrant transactions in order to prevent dilution up to a 100% premium to today’s closing stock price. Under the terms of these transactions, the Company’s shareholders are not expected to experience dilution until the Company’s stock price is above approximately $172…"
  • "The immediate use of proceeds from the offering will be to pay the net cost of the convertible note hedge transactions and general corporate purposes, including repayment of all of the outstanding indebtedness under the Company’s credit facility. The sale of the notes to the initial purchasers is expected to settle on June 24, 2014, subject to customary closing conditions."

Takeaway: The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock. If there’s any bad news, it’s that that there will be dilution at some point over the next few years – because we think that RH trades through $170.

 

TGT - Target Faces Difficult CEO Search

(http://www.wwd.com/retail-news/mass-off-price/target-faces-difficult-ceo-search-7744971?src=rss/recentstories/20140619)

  • "Target is reportedly speaking to traditional retail leaders such as Roger Farah, former vice chairman of Ralph Lauren Corp.; Ken Hicks, chairman, president and ceo of Foot Locker Inc.; Matt Rubel, a senior adviser at TPG Capital; Sharen Jester Turney, president and ceo of Victoria’s Secret, and Sharon McCollam, cfo of Best Buy Co. Inc."
  • "Target’s short list also is said to include Rosalind Brewer, president and ceo of Sam’s Club; Glenn Murphy, chairman and ceo of Gap Inc., Angela Ahrendts, senior vice president of retail and online stores at Apple Inc., and Mindy Grossman, ceo of HSN Inc. But Ahrendts just joined Apple, so she’s unlikely to leave; Grossman is said not to be interested, and Murphy probably wouldn’t want to leave Gap Inc., still in the midst of a turnaround, to go to another turnaround situation."

Takeaway: Farah, Murphy, or an Amazon exec make the most sense to us. This company needs a ‘rock-star’ CEO who is properly incentivized to make big changes in the organization. It’ll be tough for the company to attract that type of candidate unless they know that they have both the capital and board’s authority to make the changes necessary to fix what’s broken. That likely won’t be a quick process. And, it won’ t be cheap.

APP - American Apparel Board Suspends Dov Charney as CEO and Declares Intent to Terminate Him for Cause; Names John Luttrell as Interim CEO

(http://investors.americanapparel.net/releasedetail.cfm?ReleaseID=855505)

  • "The Board of Directors of American Apparel, Inc. today voted to replace Dov Charney as Chairman and notified him of its intent to terminate his employment as President and CEO for cause. It is expected that the termination will be effective following a 30-day cure period required under the terms of Mr. Charney's employment agreement."
  • "'We take no joy in this, but the Board felt it was the right thing to do,' Mr. Mayer said. 'Dov Charney created American Apparel, but the Company has grown much larger than any one individual and we are confident that its greatest days are still ahead.'"

Takeaway: While it comes as no surprise that Charney was pushed out due to issues with his personal conduct and poor judgment, we find it hard to believe that this had absolutely nothing to do with the company’s performance. If this was a $100 stock, or even a $10 stock, and probably even a $5 stock, the Board would tolerate a lot more than if it were trading at $0.64. The key takeaway from where we sit is that Charney owns 27% of this company and the board, acting in the best interest of its shareholders, made the decision to disconnect the founder from the company. One other situation comes to mind. Chip Wilson at LULU who also owns 27%.

OTHER NEWS

MW, JOSB - Men's Wearhouse, Jos. A. Bank Merger Complete

(http://www.wwd.com/business-news/mergers-acquisitions/mens-wearhouse-completes-acquisition-of-jos-a-bank-7743274?module=hp-topstories)

  • "On the day of The Men’s Wearhouse Inc.’s annual meeting at the Fairmont Hotel here Wednesday morning, the company completed the long-awaited acquisition of its competitor, Jos. A. Bank Clothiers Inc."

AMZN - Amazon.com unveils the Fire Phone, its first smartphone

(http://www.latimes.com/business/technology/la-fi-tn-amazon-smartphone-20140618-story.html)

 

  • "Amazon.com has officially launched the Fire Phone, its first smartphone, after years of rumors.
  • Chief Executive Jeff Bezos took to the stage in Seattle shortly after 10:30 a.m. PDT to unveil the smartphone, which boasts a 4.7-inch screen, 13-megapixel rear-facing camera and five front-facing cameras."
  • "The smartphone costs $200 for a 32-gigabyte version and $300 for a 64GB version, both with a two-year contract -- a higher-than-expected price tag given Amazon's history of pricing its hardware relatively cheap. AT&T will be the exclusive carrier for the phone."