The potential liabilities and claims, if any, that the company might have to cover because of problems at SCA, create uncertainty about XL's potential earnings.
We maintain our Hold recommendation prior to the release of XL's 1Q08. Our new six-month price target of $33.00 per share, down from $45.00 per share, incorporates a multiple of 0.6x (down from 0.8x previously) to our estimated book value of $55.00 per share at June 31, 2008, and implies a total annualized return of 12.7% (10.2% price appreciation + 5.1% annualized dividend).
In addition,the Zacks rank for XL is 4 (down from 3), indicating slight downward directional pressure on the shares over the near term. Short interest ratio is 3.8 days versus 2.2 days previously.
Pre-Results, Hold Charlotte Russe
Charlotte Russe (CHIC) recently updated its outlook for the second and third quarters. Management reaffirmed its second quarter EPS guidance of $0.12-$0.15, but the company also announced that it will get a tax benefit of $0.03. However, management issued disappointing guidance for the third quarter. It expects to earn $0.27-$0.30 compared to the prior consensus of $0.41.
Given the difficult spending environment, we think the best course of action is to remain neutral on CHIC shares until consumer spending stabilizes. The stock is reasonably priced, but there are still too many headwinds (housing, mortgages and gas prices) that will negatively impact consumer spending for the next few quarters. We maintain our Hold rating on the stock.
The company is scheduled to report second quarter results on April 23. Charlotte Russe shares are currently trading at 11.7x our fiscal year 2008 EPS estimate and 9.3x our fiscal year 2009 EPS estimate. Given the difficult environment for consumer discretionary retailers, we think it is prudent to remain neutral on Charlotte Russe shares at this time.
We maintain our Hold rating on the stock. Our target price of $16.50 assumes CHIC shares will track the performance of the overall market for the next six months.
Downgrade for CROX on News
On April 14, Crocs (CROX) stunned investors by announcing that its results for 2008 would fall well short of its previously issued guidance. The company now expects first quarter revenue of $195-$200 million and EPS of $0.08-$0.13, excluding a one-time charge. For the full year, Crocs expects sales revenues to increase between 15% and 20% over 2007 with EPS of $1.70-$1.80, excluding one-time charges. On February 19, management's guidance called for revenues of $1.16 billion (37% annual growth) and EPS of $2.70.
Given the size of this earnings miss, management's credibility will be called into question. That, combined with the company's operational issues, will continue to pressure the stock. As a result, we are downgrading the stock from Buy to Hold. The company is holding a conference call to discuss its revised outlook. The company is scheduled to report first quarter results on May 1.
At $13 per share, CROX is currently trading at 8.0x our 2008 EPS estimate and 8.0x our 2009 EPS estimate. Crocs growth rate is slowing faster than we expected, and that should pressure the company's share price.
