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Charlotte Russe Board Opponent Withdraws His Slate of Directors

What had been shaping up as a major showdown between Charlotte Russe Holding, the young women’s retail chain, and its biggest shareholder has turned out to be a dud.

Following two reports from independent proxy advisory firms advocating support for the company’s slate of directors, KarpReilly, which owns 8.9 percent of Charlotte Russe, withdrew its slate of three directors April 16.

For months leading up to the annual meeting, set for April 28, Charlotte Russe’s management team has been trading broadsides with Allan Karp, a former director and principal of KarpReilly, about how the $800 million company is run.

Observers of publicly traded companies say the fight was rare because most businesses try to project of veneer of unanimity when it comes to corporate governance.

“It’s pretty unusual. You don’t see this sort of thing too often, but this is a company that has had difficulty the last three to four years, trying to get focused, profitable and viable,” said George Whalin, president of Retail Management Consultants in Carlsbad.

In November, KarpReilly Capital Partners and another private equity firm made a bid to purchase Charlotte Russe for about $200 million.

At the time, the bid represented a 38 premium over the firm’s stock price of nearly $7. Management spurned the offer, saying the bid wasn’t serious because Karp later amended terms and then withdrew it.

“While we believe (Karp) left the public impression that there was a real bid, in fact there was never a firm bid that the board could evaluate,” wrote Jennifer Salopek, Charlotte Russe’s chairwoman, in a letter to shareholders this month.

Salopek’s letter was one of two asking shareholders to reject Karp’s slate and support the company’s nominees, including herself, Emilia Fabricant and Leonard Mogil.


Stock Price In Good Shape

In January, the company hired Cowen & Co. to help it in its sale. The move boosted the stock price from around $6.50 as of Dec. 31 to $12.16 as of April 15.

Several stock analysts noticed the changes Charlotte’s new management team had installed, and decided to back the retailer, which may have also given the stock, traded on Nasdaq under CHIC, some lift.

“As I look at their operations, I feel that the company has made tremendous strides,” said Liz Pierce of Roth Capital Partners, who upgraded her recommendation from hold to buy this month. “The management team has proven they can effect change and effect change pretty quickly.”

Karp, who served on Charlotte’s board from 1999 to 2007, said in a March 31 letter to shareholders that the new management team has caused “a dramatic deterioration” of the company’s value.

He called the team’s approach to decision-making “absurd and haphazard,” and that it was selling the company at one of the lowest valuations in its history after passing up an offer by his firm at a substantial premium to the trading price.

Karp cited the ouster of the former chief executive and several other top executives in July, who were replaced with people with limited experience and inflated salaries. He also criticized the board’s high compensation.

In March, after management released its proxy statement with its three board nominees, Karp responded with an opposition slate, asking shareholders to vote him and his two nominees to the board: Hezy Shaked, co-founder and chairman of Tilly’s sports apparel, and Gabriel Bitton, president of Buffalo, a Canadian retailer.

Charlotte’s management said Shaked and Bitton are direct competitors.

The selection demonstrates Karp’s intention to seize control for his own purposes, according to the company.

In her letter to shareholders this month, Salopek said Karp attempted to buy the company twice before, in 2007 and last year, and that his presence on the board (if he wins) “could dissuade other potential acquirers from participating in the current sale process.”


‘Don’t Have A Clue’

Whalin said he’s leery of KarpReilly and most private equity firms that acquire retail chains because most “don’t have a clue on how to run a retail chain.”

“I’ve seen a substantial number of retail stores that have been acquired by private equity firms that go out of business,” Whalin said.

Perhaps the most persuasive argument for retaining the current directors came when the company released its preliminary financial results for the quarter that ended March 31.

The company said sales grew 3.3 percent to $185 million during the three months. And while Charlotte was taking a net loss of 3 to 6 cents per diluted share, its operating earnings would be 2 to 5 cents per share. Operating profits did not include an impairment charge of $800,000, the firm said.

While actual results were reported April 16, the preliminary report on April 8 caused CHIC shares to gain 14.6 percent to reach $10.50. Since then, the stock has continued to climb. Its 52-week range was $3.98 to $19.06 as of April 16.

Ultimately, the momentum should help the current board keep its jobs, says longtime San Diego analyst Bud Leedom, who also publishes the California Stock Report.

While the company hasn’t fared all that well in the past year, neither has practically every other retailer out there in this deteriorating economy. Plus, Karp would have a tough time persuading shareholders that they would be better with him on the board, Leedom said.

“He needs institutional support to get anywhere,” he said. “Management has probably retained enough institutional support to shake this off.”

Apparently, the institutional backing never materialized, and when reports from RiskMetrics Group and Glass Lewis & Co. were released last week, Karp decided to withdraw his slate, conceding that supporting the company’s nominees “are in the best interests of all shareholders.”

Charlotte Russe trumpeted the victory in a news release, stating, Karp’s withdrawal will allow “the board and management to fully concentrate our efforts on transforming the company while carrying out a competitive sale process.”

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