From shopaholic to star retail analyst

(Fortune Magazine) -- You might think that someone like Dana Telsey, who can't wait to check out the latest line of clothing at Anthropologie and Banana Republic and Burberry, whose idea of a perfect Saturday is a visit to a mall, and who would deem a trip to San Francisco or Denver or Miami incomplete without a tour of the newest emporiums - you'd think someone like that might have an unusually varied wardrobe.

But if you look in Telsey's closets, what you find is a sea of black suits, more than a dozen of them. And that uniform is what she wears, seven days a week, 365 days a year.

Hot lights: Telsey on CNBC the day after Thanksgiving, is financing her firm herself.

Private reflections: Telsey's reports now go only to paying clients.

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Telsey's Shopping List Among the 38 retail stocks that her firm covers, Telsey sees the most near-term promise in these nine picks. Blue Nile ticker: NILE : Current stock price $35 / 12-month price target: $48-$50 An Internet jeweler that revolutionized the market with a high-tech supply chain and lower prices. Telsey says market share growth, margin improvement, and cash flow will continue to sparkle. Chico's CHS $24 / $25-$27 Out-of-favor clothier should recover in 2007, getting back in sync with its captive customer base and beating last year's disappointing sales. Circuit City CC $25 / $30-$32 Flat-panel TVs, laptops, and videogames are a few reasons Telsey sees this efficient operator's earnings growing 20 percent a year. Federated Department Stores FD $41 / $47-$49 The department store is not dead, Telsey insists. Bloomingdale's is kicking into high gear, while better merchandise, service, and sales at converted May stores will boost the Macy's chain. Home Depot HD $39 / $45-$47 Despite a housing slowdown, this industry leader has promise, according to Telsey's analysis, thanks to a strong labor market, robust biz environment, and the possibility of an interest rate cut. J.C. Penney JCP $79 / $84-$86 A better private-label strategy and supply-chain improvements put JCP in the sweet spot with middle-class consumers, Telsey says. Staples SPLS $26 / $31-$33 Robust demand and operational excellence will be driving sales upward 10-15 percent annually and earnings 15-20 percent for at least the next few years. TJX Companies TJX $28 / $31-$33 The return of a strong management team, better product mix and increased ad spending should boost earnings for this multibrand apparel and home-furnishings seller. Urban Outfitters URBN $24 / $24-$26 A year of merchandise mishaps made this hip retailer unpopular with investors, but products, traffic and margins are improving.

Yet when you ask the 44-year-old Telsey about her attire, she talks not about its consistency but about the distinctive character of each garment: one a Dolce & Gabbana cut slim; another a more tailored Brioni, one unique for its stylish three-button jacket, another for its fine wool feel.

Telsey's grandmother worked at Bergdorf Goodman and her mother at Fred the Furrier, so she developed from an early age a "retail is detail" mentality, recognizing the differences between otherwise similar items. Her frequent store visits as an adult are less about shopping than further study: Since graduating from William Smith College in 1984, she has been honing her skills on Wall Street as perhaps the most insightful and dedicated analyst of the retail sector ever - and one of the highest-profile.

Where others might view America's expanse of malls and big-box stores as a barely distinguishable morass, Telsey sees a wealth of differentiation. She seems to thrive on 20-hour days, e-mailing clients and colleagues deep into the wee hours about the latest wrinkle at Coach or Best Buy (Charts) or Wal-Mart (Charts).

"You never get bored," she says in her trademark rapid-fire patter, eyes glinting. "The people are always changing, the stores are always changing, and there are new things every day."

If Telsey's obsession with the shopping scene - her passion mixed with an unflinching discipline and work ethic - seems a bit unconventional, that is only the start of it. Because she has recently taken the plunge on a new adventure: opening her own investment-analysis shop that she hopes can redefine the world of Wall Street research.

A longtime star at Bear Stearns (Charts), top-rated by Institutional Investor for 13 straight years, with a media presence from CNBC to the "Today" show, Telsey is emblematic of a generation of analysts who suddenly found their value questioned in the wake of Eliot Spitzer's Wall Street investigations.

As many big firms de-emphasized research, Telsey chose to invest millions of her own dollars in a new venture called Telsey Advisory Group (or TAG), to deliver data and analysis not only on the retail sector but, eventually, across all parts of the consumer economy.

Many other independent research houses have popped up in recent years, but to equate Telsey's effort - and her ambition - with theirs is a little like seeing all black suits as the same. "I don't know how many sure bets there are," says CEO Michael Gould of Federated's Bloomingdale's chain, "but if there is anyone who is going to be enormously successful doing this, it is going to be Dana Telsey."

I first met Dana Telsey in 2003 at Bear Stearns. She was head of a 13-member team covering 42 stocks, and I was trying to persuade her to hire me as an associate. (She didn't, but I was hired elsewhere at Bear Stearns later.) Telsey talked excitedly about how retail was different every day, how there were a million data points to juggle, how shopping was both her hobby and her career. "Do you love retail?" she asked.

Fast-forward three years, and I am sitting with Telsey at TAG's headquarters on Fifth Avenue in Manhattan. The space is modern and sleek, the former home of a branding company and the offices all have plexiglass garage doors. She has just fired off phone messages to ten different executives at specialty retailers from Urban Outfitters to Ann Taylor to American Eagle and is now waiting at her desk for callbacks. Her feet are propped up on a wastebasket as she sips a can of Pepsi through a straw - one of five or six cans she drinks in a typical day, often as a substitute for breakfast and lunch.

She looks much younger than her 44 years, and as we wait for the phone to ring she chats amiably about her personal shopping habits. Though only 5-foot-1, she explains that she avoids "petite" departments because their suits are usually cut more boxy and that she favors Prada shoes for both height and comfort.

But Telsey is not in this game for the personal grooming. Over the next two hours every single message she's left is returned. ("She has a lot of respect and power," says Laura Weil, former CFO of American Eagle.) And with each callback, she slips into sleuth mode, gently grilling the executives about their preholiday marketing programs. It is all fodder for a report she will issue about how their plans differ from previous years and how that may affect earnings. ("The quantity of paper that she puts out would defoliate a small country," quips one portfolio manager.)

Telsey talks with me about the "large growing brain" of her firm. Since officially opening TAG in August, she has hired 29 employees, including ten Bear Stearns alums. TAG has built Web-based financial models that customers can access on 38 bellwether retailers, featuring ten years of data, four stock-price valuation methodologies and company stats broken down into what Telsey refers to as a "comp sheet on steroids."

Then there's the intelligence gathering: Her team is always out visiting stores (Telsey spends 40 percent of her time on the road), often BlackBerrying cross-country to do real-time comparisons of a retail chain.

Today, though, four of her senior analysts are in town. After Telsey's phone-a-thon, she gets them together for brainstorming. "When was the last time you shopped at a Wal-Mart?" she asks. The day before, Telsey was in New Jersey at Wal-Mart's annual analysts' day and was struck by the company's assertion that 84 percent of all households have shopped at a Wal-Mart in the past 12 months.

That only reinforces, she says, how important Wal-Mart is for understanding not only Target (Charts) but also Abercrombie (Charts), American Eagle (Charts), and even luxury brands like Gucci. If 400-thread-count sheets or a high-end fragrance show up in Wal-Mart's product mix, says James Hurley, TAG's luxury-sector expert, who previously worked for Telsey at Bear, "it changes the rules of the game."

Telsey's command of retailing arcana and history seems supernatural. She rattles off information from memory at an incredible pace - same-store sales comparisons of this year, last year and five years ago; which product decisions worked and which didn't; changes in supply-chain technology; innovations in customer service.

One client remembers calling her in 2002 when gift cards were somewhat below the radar and asking how they might affect January sales numbers. "Immediately, unscripted, she said, 'Here's what we know,'" this client recalls. "Five minutes later she hadn't stopped talking. Every time you pick up the phone, you learn something new."

This fall Telsey predicted that women's clothing chain Chico's was facing shrinking sales and margins. Soon after, Chico's reduced its earnings guidance for the quarter. How did Telsey know? During a ten-city tour of malls, she and her team repeatedly saw racks of clothes marked down. "We stood outside stores and talked to customers about why they weren't buying," she recalls, "and we thought, 'Wow, something is going on here.'"

On that same tour Telsey also noticed that J. Crew's shops were packed - not only in the Northeast, where its preppy look would be expected to thrive, but even in Austin. She shared that observation with her clients. On Nov. 21, J. Crew announced quarterly earnings that were nearly double what Wall Street expected. The stock jumped 15 percent the next day.

Telsey's mother helped her land her first analyst position by approaching a former neighbor, Ron Baron, now CEO of the $17 billion Baron Capital, on the street: "Can you give Dana a job?" Actually, it didn't start as an analyst position: Telsey was hired as Baron's secretary. But she moved up quickly.

"I've never seen anyone with more desire," Baron recalls. He brought her along to company meetings and included her on conference calls. She'd type up notes at night and quiz Baron in the morning, on why he asked the questions he did and what he was trying to learn. Meanwhile she got an MBA at night at Fordham. She moved over to brokerage firm C.J. Lawrence in 1991 and jumped to Bear Stearns three years later.

Telsey's Rolodex filled up with CEOs, CFOs, merchandisers, trade association reps, salespeople, buyers, store managers, sourcing agents, mall developers, recruiters, private-equity players, venture capitalists - more than 3,000 retail sources that she learned to draw information from.

As the bull market took off she also became a media darling, popping up in the Wall Street Journal, Barron's and II, and as a telegenic semiregular on CNBC.

She was making millions of dollars a year, but challenges began brewing. First, the Securities and Exchange Commission adopted Regulation FD, a rule that dictated companies make equal "fair disclosure" to all investors. Reg FD made it harder for Wall Street analysts to develop an edge - they were all getting the same information at the same time.

Then star analysts Jack Grubman at Salomon Smith Barney and Henry Blodget at Merrill Lynch were implicated in scandals over investment-banking deals influencing research calls. Across Wall Street, budgets for research (and bonuses for analysts) shrank. Many veteran analysts relocated to hedge funds, where they could earn more money with less hassle.

"There was a view that the rise of hedge funds would be the demise of [Wall Street] research," says Sallie Krawcheck, today chief financial officer of Citigroup and formerly head of research outfit Sanford Bernstein. But it didn't work out that way. "In fact, the rise of hedge funds has been the renewal of research," Krawcheck explains. Independent firms sprang up to service the hedgies.

By 2006, indie research was a $1.8 billion business, according to Integrity Research, an industry tracker; it is projected to grow to more than $3 billion by 2009. Today the business is split among some 430 shops, from solo operators to mainstay Argus Research, which rates 500 companies across 60 industries.

It is into this competitive set that Telsey chose to throw her hat. She won't divulge how many clients she has signed up so far but insists she is on track to break even in 2007. Some clients pay less than $100,000 a year for base-level service - access to written reports, online computer models and news e-mails - while others pay several times that for direct access to Telsey and her team and customized services like mall tours. As an independent analyst, Telsey can give clients opinionated critiques of companies in a way her Wall Street brethren can't: She doesn't have to worry that publicly released reports will get back to management and impair her future access.

Skeptics say that Telsey's strength has never been as a stock picker and that what she is selling is a conventional research model at a premium price. "Why would you pay for something that you were getting free six months ago?" asks one buy-sider. Telsey needs to prove to naysayers that what she is doing now is different both from her past work and from that of other sell-side analysts, and that it will provide an edge that is worth paying for.

"It's the buy side's responsibility to pick stocks," Telsey says. "My job is to provide insights." Past and present clients say that what she brings is an instinct about which of the retail industry's multiple data points and trends really matter.

"It is stuff beyond the basic drivers - traffic, demand, sales," says one hedgie. "It's also how fashion companies are satisfying customers or how the general merchandisers are competing with one another, and more specialized things like what's going on within IT, what's going on within the real estate industry - the stuff that is a layer or two down."

The day after Thanksgiving is known in retail as Black Friday, the lore being that holiday shopping that day propels retailers into profitability. Many stores open before dawn, and this year, as always, Telsey was up early too. She began by guest-hosting CNBC's Squawk Box from 6 a.m. to 9 a.m. and then headed out to walk store aisles, first at a couple of malls in New Jersey (where CNBC is based), then along Manhattan's Madison Avenue, lower Fifth Avenue and in SoHo. Another 17 members of the TAG team were fanned out assessing sales activity across the country.

"The morning was hot," says Telsey of conditions on the East Coast. Warm weather is usually a plus for crowds, and this year was no aberration. But Telsey, naturally in one of her black suits, had her eyes on not just the number of bodies but what they were buying.

High temperatures, she surmised, might dampen winter-clothes buying. Sure enough, Telsey saw sweaters piled untouched in store after store. She made a mental note: Odds were good for markdowns ahead. Just one more salient data point to add to her models.

"Black Friday is such a long day," one of her clients remarked to her. "After a while it gets to you." Telsey, though, didn't see walking through stores for hours on end as a chore. "It doesn't get to me," she replied. "I love it."

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Tiffany profit glistens