Tiger Global Management founder Charles (Chase) Coleman III made his name by betting on technology, but recently he’s made a big move into textiles.
Coleman, one of several former Julian Robertson Jr. protégés known as Tiger Cubs, disclosed in a 13G filing with the Securities and Exchange Commission on Halloween that his firm had upped its stake in children’s-apparel maker Carter’s to about 5.65 million shares, or 10.4 percent of the company. Tiger Global is the second-largest investor in the Atlanta-based company after Morgan Stanley.
The Tiger Global fund, which Coleman runs with portfolio manager Feroz Dewan, has built up its position in Carter’s over the past year, initially disclosing a 2.94 million-share stake worth $168 million, or 2.61 percent of its total portfolio, in a filing following the first quarter. As of June 30, Coleman’s firm had tacked on an additional 1 million shares, nearly doubling the position’s share of the portfolio. Tiger Global’s third-quarter 13F filing revealed a 100,000-share increase on the previous quarter, but the late-October additions really vaulted the position forward. At a November 20 price of $70 a share, Tiger Global’s stake in Carter’s was worth nearly $400 million. Coleman, who ranked No. 12 on Institutional Investor’s Alpha’s most recent Rich List after earning $350 million in 2012, worked as a tech stock analyst at Robertson’s Tiger Management before starting Tiger Global (then Tiger Technology Management) in 2001 with $25 million in seed money from his former boss. Since then Coleman has profited from investments including some high-profile and well-timed tech plays. So what lured him to a consumer company like Carter’s?
The seasoned tech investor may be attracted at least in part to the company’s recent growth: Net sales rose 14 percent in the third quarter compared with the same period in 2012, to $760 million, with international sales increasing by 21 percent, to $84 million. Despite the increase in sales, earnings per share fell by 2 percent for the quarter, though adjusted EPS climbed 10 percent. In a conference call with analysts, Carter’s CEO Michael Casey pointed to the company’s burgeoning online presence and international expansion. Thanks to a revamped online shopping experience, e-commerce sales are expected to surpass $200 million in 2013, he said.
Still, the company’s growth potential may well be priced in, and then some: Carter’s price-to-earnings multiple of nearly 25 is almost 50 percent higher than the average equity in the S&P 500 index. A high P/E ratio can indicate that investors see potential for growth in a company. But for Piper Jaffray senior research analyst Stephanie Wissink, who began covering Carter’s in May and is neutral on the stock, the company’s P/E ratio is a little too frothy.
Carter’s has something besides growth in common with the fund's past tech investments, such as its former holding Apple: Tiger Global likes to choose the dominant player in a given sector. “Once you know Carter’s, you know the industry,” says Wissink. “They are the largest player, and in most cases they are estimated to have 30 percent-plus market share.” The company also owns the OshKosh B’gosh children’s brand.
Although growth may be Carter’s most appealing factor for Coleman and Dewan, the company also paid out quarterly dividends twice this year, in June and September, and announced a third payment in December for an equal sum of 16 cents per share. The June payment marked the first time Carter’s had issued a dividend to shareholders since the company went public ten years ago. Additionally, the board authorized share repurchase programs.
One thing is for sure: When it comes to Carter’s, Coleman’s got company. The Tiger Cubs are known to travel in packs, often piling into the same stocks at about the same time. Carter’s is no exception; other Tiger-affiliated funds holding sizable positions in the company, filings show, include Andreas Halvorsen’s Viking Global Investors, Jonathan Auerbach’s Hound Partners, John Lykouretzos’s Hoplite Capital Management and Matthew Iorio’s White Elm Capital.
|| Starboard Value founder Jeffrey Smith|
You could argue that Jeffrey Smith, the founder, chief executive officer and chief investment officer of New York–based activist hedge fund firm Starboard Value, is the Carl Icahn of small-cap shareholder activist campaigns. But unlike Icahn, who has experienced a few high-profile failures in recent years, Smith is on a hot streak.
Smith — who created Starboard in March 2011 through a spin-off from Ramius, the investment management subsidiary of the Cowen Group — has scored big successes in his activist campaigns, adding or replacing some 100 corporate directors at 35 companies since 2004. Lately, Smith has notched victories against three targets: DSP Group, a maker of wireless chipsets; Quantum Corp., a small data management company; and Tessera Technologies, which makes imaging systems for smartphones. But Smith faces an even bigger battle with Office Depot, the struggling office products retailer that has agreed to merge with rival OfficeMax.
A look at Starboard’s recent wins shows how effective Smith can be at agitating for change. At the June 10 annual meeting of DSP, shareholders elected four new board members, and two of those directors were nominated by Starboard. The hedge fund is DSP’s second-largest shareholder. In May, Tessera agreed to appoint six of Starboard’s nominees to its board of directors and expanded its board from eight to 12 members.
Also in May, Starboard settled with Quantum, which named Smith to its board of directors and expanded the size of its board from eight to nine members. Quantum also agreed to nominate two additional Starboard-recommended directors for election at the 2013 annual meeting in place of two incumbent directors.
But when it comes to Office Depot, Smith will have his work cut out for him. The struggling retailer’s revenues are falling; its 2012 revenues of $10.7 billion are down 26 percent from 2008. It also posted a loss of $0.39 per share for all of 2012.
And things are not improving. In the first quarter, Office Depot’s sales dropped 5.4 percent from the same period a year earlier, while ongoing earnings came in flat, below consensus forecasts of $0.05 per share.
That’s in large part because North American same-store sales dropped by 5 percent. S&P Capital IQ forecasts a further 5 percent decline in sales for this year, while Barclays recently lowered its 2013 earnings forecast from a $0.07 per share profit to a $0.03 per share loss based on a 3.4 percent sales decline estimate. Starboard owns 14.8 percent of the stock.
Analysts argue that Office Depot will be better off if the merger with OfficeMax goes through, because the two struggling companies will be stronger combined. (The deal is being reviewed by antitrust experts at the Justice Department, and Office Depot said it expects the deal to be completed by the end of the year.)
But Smith likes the stock regardless of whether the merger happens. “We believe Office Depot is cheap, whether it is as a stand-alone company or combined,” Smith said at the April 22 Active-Passive Investor Summit in New York, in a rare on-the-record comment.
Smith thinks the company needs a new chief executive officer and new board members. He is also trying to unseat three directors at Office Depot and nominate four of his own directors. Starboard called on the company to hold an annual meeting to discuss these proposals prior to the closing of the merger; Smith accused the company of delaying the meeting and urged the Delaware court to force Office Depot’s hand. The company finally announced on Monday that it will hold the meeting on August 21.
Office Depot and OfficeMax each announced they will hold special shareholder meetings on July 10 to vote on their proposed merger. And last week Office Depot said it agreed to sell its half of its Latin American joint venture with Mexican retailer Grupo Gigante back to that company for about $690 million in cash. This transaction was a big priority for Starboard.
Shortly before that deal was announced, Starboard told shareholders in a letter that it is important to get its nominees on the board before the merger is completed. “There is always a chance that the OfficeMax merger may not be consummated, and Office Depot should not wait to plan and build a strategy for a far improved company,” it stated. “Despite the Board’s continued indications that it wishes to work with us to address our concerns, there has been little to no progress in our discussions to date.”
Sell-side analysts who are eager to see the deal completed as soon as possible do not seem happy with Smith’s intrusion. Bradley Thomas, who follows Office Depot for KeyBanc Capital Markets and has a buy recommendation on the stock, declines to comment on Smith or discuss his strategy. However, he makes it clear that uncertainty surrounding the fate of the merger deal and the potential for a change in the directors has caused the stock to trade at a lower price than he thinks it should. “There is a lot of confusion and uncertainty for investors,” he says. “They are not sure what they are getting from an event standpoint. The stocks will be higher when the deal goes through.”
Ian Gordon, an analyst with S&P Capital IQ, is more directly critical of Smith. “He is probably causing more of a distraction than the management team needs at this time,” Gordon says. “The distraction outweighs other things the activist may bring to the company.”
For his part, Smith says Office Depot must address secular changes — such as that people are printing less, resulting in lower consumption of paper and ink — and boost its online business, regardless of what happens with the merger.
“We want to strengthen the board now,” Smith told the audience at the investment conference in April. “If it remains a stand-alone company, we don’t want to find a problem later.”