Weakness

On Fantastic Holdings recent half-yearly conference call, management was nothing if not candid. The problem is that finance director Peter Brennan and chief operating officer Mark Garwood painted a picture of a retailer that hasnt ever grown up.

Brennan and Garwood detailed the companys numerous problems over the past few years, including poor inventory systems, significant staff turnover, product quality, supply shortages, poor cost control, lack of sufficient scale in Dare Gallery and Fantastics Western Australian business and poor merchandising. The list goes on.

Some of these issues are being addressed. An inventory management system has been introduced, resulting in inventory levels falling significantly during the half. A review of the Dare and Le Cornu brands is also underway, while more Western Australian stores are being opened to add scale. But the fact that these problems have been allowed to get out of control isnt reassuring, and they help explain why the company has produced the mediocre performance we referred to in Fantastic doubles but goes nowhere on 8 Sep 10 (Hold $2.00) The stock is up 16% since then on expectations that the 2011 result should be good. While interim profit fell 24% to $9.8m on revenues that rose 3% to $220.6m, the second half should be much better. Fantastic expects to benefit from Aussie dollar hedging, re-negotiated leases, fewer staff and the disarray of its main competitor Super A-Mart following the Queensland floods. We said on 8 Sep 10 that the stock doesnt look expensive anddespite the share price risewe maintain that view.

Nevertheless, were about to cease coverage. In line with the 50/50 strategy we introduced last December, Fantastic no longer makes the cut. Stock liquidity is very poor, so its difficult to buy (and sell) shares in the company. Were reluctant to recommend the stock again in any case. The current management team doesnt appear to have adequate control of the business despite signs that some problems are being fixed. Our hoped-for takeover might realise value, but the timing depends on when managing director Julian Tertini decides to sell. And with his shareholding producing about $4m in dividends a year, he doesnt need to. If you still own shares in Fantastic, despite the liquidity issues weve previously mentioned, then you can choose to sell or hang on. If you choose to hang on, our recommendation guide shows that a spike in the share price above $3.00 should be used to sell. If the value becomes too attractive to ignore, we might ignore the poor liquidity and initiate coverage again, but for now were CEASING COVERAGE and focusing on better opportunities.