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Wednesday, Feb 21, 2024

Activist Investor Targets Tilly’s, BJ’s

An investment firm with headquarters listed as a popular surf town in Puerto Rico is making large bets on two prominent Orange County-based consumer-oriented public companies.

Pleasant Lake Partners LLC in recent weeks revealed it has taken a 9.5% stake in Huntington Beach-based BJ’s Restaurants Inc. (Nasdaq: BJRI) and a 31% stake in Irvine-based Tilly’s Inc. (NYSE: TLYS).

While its plans for Tilly’s haven’t been disclosed, the activist investor is urging BJ’s to sell itself.

BJ’s “would be attractive and highly accretive to multiple viable buyers if the process were well managed,” according to an SEC filing by Pleasant Lake’s Fund 1 Investment.

The activist investor’s interest in the two OC firms comes at a time when each company is faced with either falling or slowing sales and disappointing stock performances.

BJ’s shares are down about 40% in the past three years, while Tilly’s shares have fallen in half since early 2022.

The activist is also taking on companies with directors and executives who have decades of experience at their firms.

The Tilly’s Play

Pleasant Lake was founded in 2013 by Jonathan Lennon, whose résumé includes being an analyst at Goldman Sachs, as well as hedge fund JAT Capital.

While Lennon’s LinkedIn page lists his location as New York, Pleasant Lake’s SEC filings says it’s based in a Puerto Rican town called Rincón, which is known as a surfing beach town with picture-perfect sunsets on the island’s west coast region.

Pleasant Lake, which has $763 million in assets under management on a discretionary basis, is a global long/short equity firm making both public and private investments primarily focused on the consumer, telecom, media, and technology sectors. It generally requires an investor to commit from $2.5 million to $25 million.

Filings for the firm’s Fund 1 Investment were made by Chief Operating Officer Benjamin Cable, who joined in 2022 and has more than 20 years in the industry, including at Precision Path Capital, Prentice Capital and Goldman Sachs. He didn’t return messages to the Business Journal.

CEO Switch

Tilly’s operates 251 stores in 33 states, selling casual apparel, footwear and accessories for young men and women.

Revenue at Tilly’s is expected to fall 7.7% in fiscal 2023 to $620.6 million, which follows a 13% drop in fiscal 2022. Analysts are expecting a loss this year, which follows an 85% decline in operating income to $13.2 million in fiscal 2022.

Ed Thomas, a longtime apparel executive in Orange County who was Tilly’s chief executive since 2015, unexpectedly resigned on Jan. 22.

Executive Chairman Hezy Shaked, who co-founded the company in 1984, took over the CEO role on interim basis.

Pleasant Lake began investing last March when it accumulated a 23% stake of Class A shares, the proxy said. In the past two months, it’s increased its stake to 31%, by buying shares ranging from $7.11 to $7.61 each.

Pleasant Lake’s stake highlights an unusual dynamic where it is by far the largest Class A shareholder in Tilly’s while Shaked controls the voting shares for the company.

Shaked holds a 1% stake of Class A stock and a 100% stake of Class B common stock with 7.3 million shares that represents 77% of the outstanding vote, according to company’s 2023 proxy statement.

Tilly’s expects to report fiscal 2023 results around March 14.

Shares of the youth-focused apparel company at press time traded around $7.38 with a market cap of $221 million.

The BJ’s Play

BJ’s, founded in 1978, currently owns and operates over 200 casual dining restaurants in 30 states.

Chairman Jerry Deitchle has been on the board since 2004 and was CEO from 2005 until he retired in 2013. Current CEO Gregory Levin has been at BJ’s since 2005.

He was chief financial officer for 16 years before rising to become CEO and a director in 2021.

Revenue jumped 18% to $1.3 billion in 2022. Analysts are expecting slowing revenue with a 4.3% growth to $1.34 billion in 2023 and another 4.3% to $1.4 billion this year.

Pleasant Lake’s Fund 1 currently holds 2.2 million shares in BJ’s that it purchased for more than $35 million between Nov. 20 and Jan. 17, with shares trading between $30 to $36 apiece during that time, according to a Jan. 18 SEC filing.

It is now the fourth-largest shareholder, following BlackRock, 18%, T Rowe Price, 16%, and Vanguard, 11%.

Pleasant Lake bought the shares “based on the reporting person’s belief that such securities, when purchased, were trading below the reporting person’s estimate of fair value and represented an attractive investment opportunity,” according to the SEC filing.

The firm proposed that selling the company would be a “strategic alternative” in maximizing stockholder value compared to the chain’s more recent plans.

Shares have risen 12% to $35.53 apiece since Jan. 18, when the information was filed. BJ’s is currently valued at $825 million.

Pleasant Lake said it has had recent conversations with management at BJ’s and “is unconvinced that a stand-alone strategy would product the best results for stockholders generally.”

Cost Initiatives

BJ’s has been focused on executing sales building programs and cost-savings initiatives in the last year. The chain reported $30 million of annualized savings as of October during its third-quarter report. It’s scheduled to report fourth-quarter results this week on Feb. 15.

The company has also been remodeling its restaurant locations and is incorporating a cost-saving prototype for its restaurants in the pipeline. It reported third-quarter revenue of $319 million, up 2.3% compared to a year ago.

“The reporting person also believes that operational challenges, such as bringing the cost structure of the issuer more in line with its casual dining peers, have been inadequately addressed despite years of investor attention,” the Pleasant Lake filing said.

While the investor is capable of developing and proposing plans for BJ’s infrastructure and operations, Pleasant Lake said it “does not have any present plan or proposal” outside the suggestion of a company sale.

Other companies Fund 1 and Pleasant Lake have recently invested in include a 15% stake in Citi Trends Inc. and a 10% stake in Tile Shop Holdings Inc.

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Sonia Chung
Sonia Chung
Sonia Chung joined the Orange County Business Journal in 2021 as their Marketing Creative Director. In her role she creates all visual content as it relates to the marketing needs for the sales and events teams. Her responsibilities include the creation of marketing materials for six annual corporate events, weekly print advertisements, sales flyers in correspondence to the editorial calendar, social media graphics, PowerPoint presentation decks, e-blasts, and maintains the online presence for Orange County Business Journal’s corporate events.

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