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iTurf and dELiA*s tout financial synergies

Teen-oriented Web site iTurf Inc. (Nasdaq: TURF) went running back to parent dELiA*s Inc. (Nasdaq: DLIA), which announced Wednesday an $86 million deal to merge with its 54-percent owned subsidiary.

dELiA*s, which targets "Generation Y" -- youth between 12 and 24 years, spun off iTurf in April 1999.

Now that times have become tough for "dot-coms," spin-offs designed to recognize hidden value have become obsolete. Could dELiA*'s change of heart be a sign of things to come for other separated "clicks and bricks" teams like barnesandnoble.com (Nasdaq: BNBN) and parent Barnes and Noble?

In a conference call with analysts, the company said that the division of businesses was actually hampering shareholder value and inhibiting the company's growth. Though the initial spin-off was necessary to build the company's online audience, technological infrastructure, and have a currency to attract employees, but the division of the companies is now holding business back, officials said.

"With $35 million in sales, (iTurf) is a good business, but it will scale better with dELiA*s," said Stephen Kahn, who is chairman and CEO of both companies.

``Simplifying the relationship between the entities will enhance shareholder value by eliminating the confusion in the capital markets that has resulted from our structural complexity and has contributed to a severe under-valuation of both business,'' Kahn said in a statement.

"We're vastly ahead of our online competitors in traffic," said iTurf Chief Financial Officer Dennis Goldstein on the call, citing closest competitor as Bolt.com. "Now that growth milestones have been reached, we're singularly focused on building revenue."

The combined company intends to be cash-flow positive in the fourth quarter and to generate positive earnings on an ongoing basis beginning in the second half. This is not including the planned divestitures later this year.

The company said positive EBITDA will come from improved gross margins and reduced advertising expenses, and it sees EBITDA improvements in the 10 to 12 percent range over the next 2 to 3 years. Revenue for 2001 is expected to be about 200 million, with 5 percent of that coming from advertising sales.

As the company's profits grow, it plans to ramp up in its roll-out of dELiA*'s stores nationwide from a current target of 15 to 20 this year to eventually reach 300 stores.

The companies said they have over 30 million of cash on hand, in excess of their needs. Both will reports results separately for the second and third quarters, and report combined results for the fourth quarter, when the merger is expected to close.