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  For Bombay, no CEO is a good CEO

BENJ GALLANDER and BEN STADELMANN

Friday, January 31, 2003

One old doggy stock that finally perked up and started to herd sheep last year was Bombay Co. We first purchased the Houston-based furniture and home fashions retailer back in May 1998 at $4.50 (U.S.). A few years earlier it seemed that consumers couldn't get enough of the faux old-world-and-mahogany charm of the company's products. Bombay stores sprouted up across North America and the stock zoomed to over $30 a share.

But as is so often the case with these growth darlings, Bombay hit the wall as it became clearly overextended and customers gravitated towards "big-box" alternatives. By the time we acquired it, the company had gone through a painful restructuring and closed many underperforming stores. We were attracted by the clean balance sheet and management appeared to have been strengthened with the addition of new face, Carmie Mehrlander.

In March 2000, with the tech mania at its zenith, we bought more, knocking our average cost down to $4.13 and trimming our initial sell target from $8.75 to $7.69. Ms. Mehrlander had just been promoted to CEO and we felt she had done a good job on making the company leaner and more resilient to adverse conditions.

Ms. Mehrlander shifted Bombay away from a dependence on furniture sales to more home accessories with higher margins and faster turnover. There were also initiatives to start selling merchandise on the Internet, a move to larger stores with more floor space and the new concept "Bombay Kids." Results were lacklustre and the stock went from bad to worse, hitting a low of $1.50.

Finally, in August last year, with the stock still in the cellar at $2.60 and revenue stubbornly flat, Bombay's impatient board forced out Ms. Mehrlander, who by then had collected a full slate of titles: chairman, president, CEO and director. The company signalled that these positions would be broken up, and while the job search went on, a six-member committee took over Bombay's operations.

Some believe that a committee can never get anything right, but how does that square with what happened next? September same store sales rocketed 15 percent and total revenue by 25 percent. Of course, one month can be a fluke, especially when compared with the depressed activity surrounding the events that transpired a year earlier. But October came in even better, up 17 and 24 percent respectively. At the next quarterly conference call, Bombay's "farm team" giddily tried to explain how the company had managed to generate the first third-quarter profit in over a decade.

With no new senior management in sight, November turned in similar numbers. In December, the majority of retailers were crying the blues over the miserable holiday season, but Bombay's same-store sales rose 18 percent and total revenue jumped 23 percent.

Based on Bombay's resurgent stock price of $5.36, we now reckon the stock is a Hold. We're also a little nervous, as the company has finally added a new Non-Executive Chairman, James Carreker, to the board. We mean no offence to Mr. Carreker, but the "nobodies" were doing just fine.


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