FLEMING SOUNDS UNUSUAL WARNING ON 'SHORT SELLERS'

DAVID GHITELMAN

DALLAS -- Fleming here has sent letters to some of its institutional investors urging them to take action to keep their shares of the company out of the hands of "short sellers."

Securities analysts told SN Fleming's letter urging investors to take action against short sellers was a highly unusual -- perhaps even unprecedented -- move.

Short sellers are investors who essentially bet that certain stocks will decline in value.

According to published reports, 8.4 million shares of Fleming were held by short sellers in October, compared with only 1.2 million in January.

The company's Nov. 6 letter -- signed by Carlos M. Hernandez, Fleming's senior vice president, general counsel and secretary -- argues that short sellers have been driving down the price of company stock despite the company's recent strong performance.

However, analysts disagreed on whether the effort would help shore up the price of Fleming's stock.

Debra Levin, an equity analyst at Morgan Stanley, New York, praised the letter as "a very creative move."

In contrast, Ted Bernstein, a high-yield analyst at Dresdner Kleinwort Wasserstein-Grantchester, said it was "like spitting in the wind." He said what is bringing down Fleming's stock isn't short selling, but concern about recent events at Fleming's largest customer, Kmart, Troy, Mich., including the news last week that the discounter's chief financial officer had resigned after only six months at the company. (See Page 6 for more on the personnel change at Kmart.)

Fleming's letter began by saying the company has just completed a successful third quarter. "Importantly, we exceeded analyst expectations and continued to make progress on our many initiatives and strategies," the letter noted.

However, the letter continued, the company's stock price has not reflected this. "In spite of these results," it said, "Fleming's stock has traded down in recent months. "Management believes that the decline in stock price is attributable, in part, to heavy pressure from 'short selling' in the marketplace."

The letter went on to note, "Short sellers may have a direct financial incentive to promote or deliberately place misinformation, rumors and innuendos into the marketplace."

It then encouraged institutional investors to contact their brokers. "We urge you to call your broker or custodian immediately and determine whether your shares have been loaned to short sellers. We do not believe that it is in your best interest as a stockholder to facilitate the actions of the shorts."

Fleming said it "intends to pursue all available legal recourse to protect the integrity of the market for our stock."

The letter also said the company will continue its emphasis on performance. "Consistent, above-expectation operating results are the surest means of driving away those traders who would profit from a declining stock price."

A Fleming spokesman declined to elaborate on the letter. "The letter speaks for itself," he told SN.

How the letter spoke to analysts varied with their views on the company. Levin told SN, "I think the company is worth more than its stock is currently worth. Kmart is Fleming's largest customer but not its only customer. My belief is that the relationship between the two companies is working out well, and Fleming will get a good return on its investment."

She added that short interest in Fleming is "at an all-time high."

"That's a significant jump," she said. "This is the first time I've seen a company address an avalanche of short sellers by arguing the supply of stock available to them should be restrained. It's a very creative move."

On the other hand, Bernstein said he did not think the letter would be an effective tactic.

"To send out a letter like this doesn't do much for you," he told SN. "If Fleming has solid evidence people are stretching the truth in a malicious way to bring the stock down, it should go to the SEC."

He acknowledged that Fleming's current "management team has done an excellent job," but that the company's stock has been declining because of investor uncertainty about Kmart.

Bernstein pointed out that it was the news in February that Fleming would become Kmart's sole supplier of consumables that lifted the wholesaler's stock price from a low of $10.31 in December to a high of $37.89 in July.

Late last week, the stock was trading at $21.90.

"They have hitched their wagon to Kmart's star and will rise or fall according to Kmart's fate," he said, "and it has yet to be seen whether Kmart is fully on the road to recovery."