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Dreams to grow materially on strong e-commerce platform, expects Merriman Capital

Last updated: 00:51 09 Dec 2010 GMT, First published: 01:51 09 Dec 2010 GMT

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Licensed sports products retailer Dreams (NYSE Amex:DRJ) was today given an initial 'buy' rating from equity research firm Merriman Capital, along with a price target of between $4.50-6.00, based on recent growth in Dreams' e-commerce segment.

Last week, Dreams reported its online revenues for November increased 61% year-over-year, prompting equity analysts to increase their expectations for the company. The boost in online sales to $14.4 million from $8.9 million in November 2009 follows from a more than successful Thanksgiving monday when the company received $2.5 million in online orders - up 78.5% from the same day a year earlier.

For years, Merriman said, the e-commerce division was masked by Dreams' "declining" legacy retail operations, but this is no longer the case.

The company's e-commerce division, which includes FansEdge.com and other websites, has been an increasing focus for the firm.  From 2004 to 2009, the segment's revenues climbed from US$4 million to US$60 million. The division, which manages over 65 online fan shops, sells  licensed sports merchandise from the NFL, NHL, NBA, MLB, and NCAA.  Merriman estimates that in 2010, revenues from e-commerce will grow by 43% from a year earlier to more than $85 million.

This growing success is reflective of the company's web syndication platform, a market which it entered in late 2008 by rolling out "Dreams Retail Solution", a host of e-commerce support services including custom site design, inventory, management and marketing. At third quarter end, 70 companies signed up, including Walmart, JC Penney and Sears, as well as NBC Sports and AOL Sports.

As a result, web syndication revenues have grown from $3 million in 2008 to an estimated $30 million in 2010.

Merriman said the web syndication platform expanded the company's potential share in the sports licensed products category, and should be "a source of material growth" with the addition of new clients.

This could be further compounded, it added, by vertical integration, retail store and kiosk expansion. The company also sells sports memorabilia through its FansEdge and Field of Dreams retail stores.

In July, Dreams raised $6.0 million through a private placement, which has allowed the company to fund its working capital needs, giving "new clients some comfort around the company’s sustainability", Merriman added. Dreams was also able to refinance its line of credit to significantly reduce the interest rate.

Merriman used peer valuation multiples and projected EBITDA growth rates to calculate Dreams' price target of $4.50-$6.00, up from its current share price of $2.73 moments to market close on Wednesday. Dreams' stock price has more than doubled in the past year.

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