Friedman's Dn 12%; Research Firm Raises Cash Flow Worries

May 19, 2003

By Tiffany Kary
DOW JONES NEWSWIRES

NEW YORK -- Jewelery retailer Friedman's Inc. (FRDM) slipped as much as 29% Monday on no news other than a downgrade from research firm StockDiagnostics.com, which questioned the company's cash flow.

StockDiagnostics.com is a private, Sarasota, Fla.-based company that has a software program which searches financial statements for accounting irregularities, and judges a company's health on the basis of its "operational cash flow per share."

According to the downgrade, the company lowered its rating on Friedman's to a 6 from a 3 on the basis of declining operational cash flow. For the second quarter ended March 31, StockDiagnostics said, operational cash flow was negative $2.64 a share, wider than the negative $1.62 in last year's second quarter.

StockDiagnostics wasn't immediately available to comment further on its methodology.

Chief Financial Officer Victor Suglia noted that Friedman's had a $35 million gain from a stock offering in the second quarter of 2002, which likely accounted for the cash flow difference.

"None of the fundamentals of our business have changed," he added. Suglia added that cash flow isn't an indicative measure of Friedman's financial health because it relies heavily on the Christmas sales season, and is therefore very "cyclical."

"The way that company models cash flow, taking things from annual and quarterly filings, it doesn't take the cyclical nature of businesses into account," Chief Financial Officer Victor Suglia said.

Suglia said that after calling several of the firm's institutional investors, he concluded that the Friday downgrade from StockDiagnostics.com was behind the dramatic stock move.

Other analysts came to Friedman's defense.

"Cash isn't a concern in particular," said Sheldon Grodsky, analyst at Grodsky Associates Inc. Grodsky said he was buying shares for clients on the company's dip this morning, and says the stock is cheap relative to book value and earnings. Grodsky own shares, and Grodsky Associates doesn't have an investment banking relationship with Friedman's.

Shares closed at $8.83, down $1.42, or 13.9%, on volume of 582,962 shares. Average daily volume is 52,304 shares.

-Tiffany Kary, Dow Jones Newswires; 201-938-5285; Tiffany.Kary@dowjones.com

Updated May 19, 2003 4:04 p.m.