DJIA 8416.76 +117.40 (+1.41%) S&P 500 1056.42 +8.92 (+0.85%) Nasdaq 1620.95 +9.94 (+0.62%) Value Line Index 786.20 +14.05 (+1.82%) 30-Year Bond 108 2/32 -5/32 4.98 Yield
Telecommunications equipment maker Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> rang up $6 3/16 to $44 15/16 after reporting its 29th consecutive quarter of year-over-year earnings growth. The company's third quarter saw record top line and bottom line growth, eclipsing the prior record that was set in the second quarter. Third quarter sales were $423.5 million, which was the highest for any quarter in the company's history and up 36.9% from the same quarter a year ago. Net income was $87.7 million, up 36.5% from a year earlier (or $0.49 per fully diluted share excluding the $0.04 per share merger charge, beating the $0.46 estimate) -- and 50% greater than the comparable period net of the charge taken for its merger with Coherent. With these impressive results, worries about Tellabs' failed merger with Ciena <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> and a possible recession dropped out of the firm's current market valuation like a bad habit. For more details, see today's Fool Plate Special.
Offshore oil and gas drilling rigs operator R&B Falcon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLC)") else Response.Write("(NYSE: FLC)") end if %> pumped out a $1 5/8 gain to $11 1/2 after signing a letter of intent with natural gas and hydrocarbons production company Vastar Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VRI)") else Response.Write("(NYSE: VRI)") end if %> to construct an ultra-deepwater semisubmersible drilling rig, which is expected to generate a total of $220 million in revenues for R&B Falcon over three years. Elsewhere in the oil patch, energy services firm Halliburton <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> picked up $4 1/16 to $34 after forming a joint venture to develop oil and gas assets with Russian oil producer Tyumen Oil Co. Other oil drillers and services firms rose as well, as one industry analyst speculated to the Motley Fool that investors may be rotating into the cyclical sector. Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> added $4 7/8 to $52, Transocean Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RIG)") else Response.Write("(NYSE: RIG)") end if %> rose $2 3/8 to $30 7/8, Baker Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> gained $2 11/16 to $21 11/16, Varco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VRC)") else Response.Write("(NYSE: VRC)") end if %> moved up $1 5/8 to $8 5/8, Cooper Cameron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RON)") else Response.Write("(NYSE: RON)") end if %> advanced $5 1/4 to $35, and Noble Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NE)") else Response.Write("(NYSE: NE)") end if %> jumped $2 to $15 1/4.
QUICK TAKES: Several banking stocks were up today following the Federal Reserve's surprise short-term interest rate cut yesterday and today's near-term upgrades to "buy" from "accumulate" by Merrill Lynch. First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> gained $3 1/8 to $57 3/8, Mellon Bank Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> added $1 5/16 to $58 7/8, and Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> tacked on $2 3/32 to $49 3/32... Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> rose $1 9/16 to $72 3/8 on word that the telecommunications equipment company and Philips Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHG)") else Response.Write("(NYSE: PHG)") end if %> are on the verge of disbanding their Philips Consumer Communications cellular phone handset joint venture, according to sources cited by The Wall Street Journal... Delta Air Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> rose $4 1/2 to $98 after PaineWebber upgraded the air carrier to "buy" from "attractive."
American Media Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENQ)") else Response.Write("(NYSE: ENQ)") end if %>, which publishes the National Enquirer and Weekly World News supermarket tabloids, added $3/8 to $5 on published reports that at least two unidentified companies are considering an acquisition of the company. Contrary to recent rumors, the Motley Fool is not one of the possible buyers... Nutritional supplements marketer Twinlab Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWLB)") else Response.Write("(Nasdaq: TWLB)") end if %> was pumped up $2 5/8 to $19 3/4 after dismissing fears yesterday that it would fall short of the Street's fiscal Q3 earnings estimates by saying its earnings excluding charges would actually come in a penny ahead of the First Call mean estimate of $0.33 per share. Rival Nature's Bounty <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NBTY)") else Response.Write("(Nasdaq: NBTY)") end if %> rose $1 to $7 as well... Hot and cold breakfast cereal maker Ralcorp Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAH)") else Response.Write("(NYSE: RAH)") end if %> moved up $1 5/16 to $15 1/4 after announcing a self-tender offer for up to 5 million of its outstanding shares at an undetermined price between $14 and $16 per share.
It was a banner day for Internet advertising firm DoubleClick <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCLK)") else Response.Write("(Nasdaq: DCLK)") end if %>, which tacked on $1 13/16 to $20 after reporting a fiscal Q3 loss of $0.28 per share, wider than the $0.19 per share loss reported a year ago but not quite as bad as the $0.29 per share loss expected by analysts... IBP Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBP)") else Response.Write("(NYSE: IBP)") end if %> moo-ved up $2 1/4 to $23 1/16 after Goldman Sachs replaced the beef and pork producer's "market outperform" rating in favor of a much snazzier "recommended list" rating. Goldman also boosted its fiscal 1998 earnings estimate for IBP to $1.75 per share from $1.46 per share... Life sciences company Monsanto <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> gained $2 1/2 to $39 1/2 after reporting fiscal Q3 EPS of $0.13 (excluding charges) last night, beating the Street's mean estimate by a penny.
Utility and network security software firm Symantec Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> climbed $2 to $11 1/16 after announcing plans to acquire PC helpware maker and former Fool Port short Quarterdeck Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDEK)") else Response.Write("(Nasdaq: QDEK)") end if %> for $0.52 per share in cash, or roughly $65 million including assumed debt... Digital wireless communications network operator Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> moved up $1 7/16 to $18 3/4 after Wheat First Union started coverage with a "buy" rating... Tools maker Black & Decker Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDK)") else Response.Write("(NYSE: BDK)") end if %> advanced $3 1/16 to $53 1/16 after setting a 1 million share stock buyback... Information security software provider Memco Software Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEMCF)") else Response.Write("(Nasdaq: MEMCF)") end if %> rose $3 1/8 to $11 1/2 after saying its Q3 earnings will be "at or above" the Street's mean estimate of $0.11 per share... Computing products distributor CHS Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> tacked on $2 1/8 to $10 1/8 after calling off its previously announced $355.3 million purchase of the Vobis Group from Germany's Metro AG.
Earnings Movers
Coachmen Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COA)") else Response.Write("(NYSE: COA)") end if %> up $2 to $18 7/16; Q3 EPS: $0.59 vs. $0.44 last year; Estimate: $0.55
Cree Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREE)") else Response.Write("(Nasdaq: CREE)") end if %> up $3 1/4 to $19 3/4; Q1 EPS: $0.18 vs. $0.09 last year; Estimate: $0.14
Genesys Telecommunications Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTI)") else Response.Write("(Nasdaq: GCTI)") end if %> up $4 1/2 to $19 11/16; Q1 EPS: $0.15 vs. $0.05 last year; Estimate: $0.12
Pinnacle Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCLE)") else Response.Write("(Nasdaq: PCLE)") end if %> up $5 5/16 to $28 1/2; Q1 EPS: $0.36 vs. $0.13 last year; Estimate: $0.32
Platinum Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAT)") else Response.Write("(Nasdaq: PLAT)") end if %> up $2 7/8 to $15; Q3 EPS: $0.23 (excluding charges) vs. $0.17 last year; Estimate: $0.21
PMC-Sierra Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMCS)") else Response.Write("(Nasdaq: PMCS)") end if %> up $5 1/4 to $39 7/8; Q3 EPS: $0.29 vs. $0.22 last year; Estimate: $0.28
Progressive Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %> up $19 3/16 to $127 3/4; Q3 EPS: $1.80 (excluding gains) vs. $1.18 last year; Estimate: $1.36
QLogic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QLGC)") else Response.Write("(Nasdaq: QLGC)") end if %> up $10 3/16 to $78 15/16; Q2 EPS: $0.68 (excluding charges) vs. $0.39 last year; Estimate: $0.54
Sapient Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAPE)") else Response.Write("(Nasdaq: SAPE)") end if %> up $4 1/8 to $40; Q3 EPS: $0.19 (excluding charges and benefits) vs. $0.14 loss last year; Estimate: $0.18
Veritas Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRTS)") else Response.Write("(Nasdaq: VRTS)") end if %> up $2 3/4 to $39 3/4; Q3 EPS: $0.24 vs. $0.13 last year; Estimate: $0.18
Vitesse Semiconductor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VTSS)") else Response.Write("(Nasdaq: VTSS)") end if %> up $4 to $28 7/16; Q4 EPS: $0.21 vs. $0.13 last year; Estimate: $0.20
Applied Graphics Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AGTX)") else Response.Write("(Nasdaq: AGTX)") end if %>, which provides digital pre-press services to magazine publishers, plummeted $6 7/8, or 46.6%, to $7 7/8 after warning it is experiencing "growing pains" and "will not achieve in the near future the same high rate of growth" it has had over the last two years. Applied Graphics expects Q3 EPS of $0.14 to $0.16, about 65% below analysts' expectations of $0.43, and Q4 EPS between $0.20 and $0.24 (before charges), roughly half of analysts' mean estimate of $0.44. It gets worse: The company forecasts EPS of $1.10 to $1.15 for next year compared with current estimates around $2.27. The company has yet to sign a single major facilities management contract this year. To address the slowdown in growth, Chairman and CEO Fred Drasner, who is also co-publisher of the New York Daily News, said he will take on the additional duties of chief operating officer and institute an "aggressive" cost-reduction program to improve margins.
Despite reporting what it called a "record-breaking revenue quarter" -- which seemed true, at least at first blush -- enterprise software company BMC Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BMCS)") else Response.Write("(Nasdaq: BMCS)") end if %> tumbled $6 3/4 to $42 1/8 after announcing fiscal Q2 EPS of $0.33, up from $0.22 a year ago and slightly ahead of analysts' $0.31 consensus estimate. However, concerns about the quality of BMC's earnings were broadcast loudly by analysts, as the company reported a surprising $27 million drop in deferred revenues after a $124 million jump the previous quarter. ABN Amro analyst Robert Johnson told Reuters the deferred revenue number indicated BMC might be "dipping into the cookie jar, that it's potentially indicating the company has dipped into stockpiled revenues.'' BMC's desire not to report even a hint of a topline decrease is understandable, as it wants desperately to maintain a positive impression in investors' minds by putting as much distance as possible between its growth prospects and those of recently troubled rival Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>.
QUICK CUTS: Cereal giant Kellogg Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %> lost $3 9/16 to $34 1/16 after revising its full-year EPS projection for the second time this year. Kellogg expects EPS to drop some 20% from the $1.70 it earned last year thanks to fluctuating currency exchange rates, weakness in overseas markets, and soft demand in the U.S. and U.K., its two largest markets...
Pharmaceutical giant Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> slipped $2 1/4 to $135 1/2 after reporting Q3 earnings of $1.12 per share, which was 15% higher than last year's $0.97 and in line with the Street's mean estimate. For more details, see today's Breakfast With the Fool... Heavy equipment maker Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> crawled down $1 to $47 after its Q3 EPS of $0.92 per share fell $0.09 behind last year's figure and $0.08 below analysts' projections. The company expects 1999 sales to resemble 1998 levels and said its board authorized a new stock buyback program that would cut the number of Caterpillar shares outstanding by more than 38 million, or about 11% of the total outstanding, within five years.
Car battery maker Excide Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EX)") else Response.Write("(NYSE: EX)") end if %> ran down $4 1/16 to $6 15/16 after yesterday's late announcement that it plans to report Q2 earnings between a $0.05 per share loss and a $0.10 per share profit, in part because of increased operating and manufacturing expenses. Wall Street had projected EPS of $0.56 for the quarter... Uranium fuel enrichment services company USEC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USU)") else Response.Write("(NYSE: USU)") end if %> was burned $1 1/4 to $14 1/4 after announcing that its fiscal 1999 EPS could fall as much as 25% below analysts' estimates of $1.60. Merrill Lynch cut its short-term rating on USEC to "accumulate" from "buy" on the news, maintaining its long-term "buy" rating... Allmerica Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFC)") else Response.Write("(NYSE: AFC)") end if %> fell $2 1/16 to $41 1/2 after the company reported it expects larger-than-expected catastrophe losses and decreased investment income to pull Q3 EPS down by between $0.25 and $0.30, well below last year's $0.90 figure the Street's projected EPS of $1.01 for the period.
Aspect Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASPT)") else Response.Write("(Nasdaq: ASPT)") end if %>, which makes call center management software, slid $5 31/32 to $12 1/8 after reporting Q3 EPS of $0.25 last night, missing analysts' consensus projections by $0.01. Aspect, which also announced a broad management restructuring that includes the addition of former Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> manager Beatriz Infante as its new executive vice president of products, was downgraded to "buy" from "strong buy" by Piper Jaffray today... Coronary stent and balloon angioplasty systems maker Arterial Vascular Engineering <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVEI)") else Response.Write("(Nasdaq: AVEI)") end if %> lost $3 1/4 to $30 1/8 after reporting fiscal Q1 EPS of $0.80, up from $0.09 a year ago and topping the range of analysts' expectations of $0.54 to $0.80 (according to IBES). Still, the firm received downgrades from Adams, Harkness and Hill and Hambrecht & Quist.
Computer disk drive maker Quantum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %> fell $1 1/4 to $14 7/8 after reporting fiscal Q2 EPS of $0.11, up from $0.02 in the same prior-year period and in line with analysts' mean estimate... Network processors maker MMC Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MMCN)") else Response.Write("(Nasdaq: MMCN)") end if %> shed $5 3/8 to $9 1/2 after reporting Q3 EPS of $0.09 versus breakeven last year and a penny ahead of analysts' expectations... Retailer Stage Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGE)") else Response.Write("(NYSE: SGE)") end if %> was cut $2 1/2 to $10 after it said it was encouraged by sales trends but was cautious in its outlook for the remainder of the third quarter and fiscal year. However, the company said it was comfortable with Wall Street's projection of $0.06 EPS for Q3.
Power conversion product manufacturer Artesyn Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATSN)") else Response.Write("(Nasdaq: ATSN)") end if %> was shocked for $5 to $12 1/8 after BT Alex. Brown downgraded the company to "buy" from "strong buy" a day after the company reported Q3 EPS in line with Wall Street's $0.20 estimate but $0.05 behind last year's mark... Semiconductor test handling equipment maker Cohu Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COHU)") else Response.Write("(Nasdaq: COHU)") end if %> gave back $1 13/16 to $13 1/2 after saying yesterday it expects to report a loss for the fourth quarter because of global weakness in the semiconductor industry. Analysts surveyed by First Call predicted EPS of $0.06 for the period... Ameritech Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %> fell $1 7/8 to $50 1/4 and SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %> dropped $1 11/16 to $42 7/8 after opponents of the proposed $61 billion merger between the two Baby Bells filed statements yesterday with the FCC alleging that the combined company would be a danger to competition, particularly to local carriers.
Earnings Movers
Catalina Marketing Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: POS)") else Response.Write("(NYSE: POS)") end if %> down $5 to $46; fiscal Q2 EPS: $0.50 (excluding charges) vs. $0.43 last year; Estimate: $0.51
CORT Business Services Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBZ)") else Response.Write("(NYSE: CBZ)") end if %> down $4 3/4 to $16 1/8; Q3 EPS: $0.50 (before one-time loss) vs. $0.44 last year; Estimate: $0.50
Dialogic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLGC)") else Response.Write("(Nasdaq: DLGC)") end if %> down $5 15/32 to $19 23/32; fiscal Q3 EPS $0.43 vs. $0.38 last year; Estimate: $0.42
FOOL
ON THE HILL
An Investment Opinion
by
Warren Gump
Buckled Up for a Downturn
Is Chicken Little lurking on Wall Street? As pundits and speculators have been fretting about the impending recession, they have taken many retail stocks out to the barnyard for a true thrashing. This concern was the primary reason that some of the better know names such as Wal-Mart, Costco, Sears, and May Department Stores fell between 25% and 35% from their summer highs to their early October lows (most have rebounded somewhat over the past week or so).
If we want to find some really poor performing stocks, Fools need to look no further than small-cap retailers, which have been hit with the double whammy of being in the retail sector and falling into the currently abhorred small-cap universe. Here we find stocks such as Pier One, Gadzooks, Ross Stores, and The Buckle, which have been down between 53%-77% from their summer highs. Are there any interesting stories behind this carnage?
One that looks worthy of further investigation is The Buckle Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKE)") else Response.Write("(NYSE: BKE)") end if %>. This retailer sells teen apparel through 209 "The Buckle" and "Brass Buckle" stores located in 28 states throughout the central, northwestern, and southern regions of the U.S. Almost 80% of sales come from tops (shirts, sweaters, blouses, etc), denims, and shoes. While the teen apparel market is extraordinarily fickle, The Buckle management has shown over the past few years an adept ability to meet the needs of its clientele. In addition, it has grown the company without using any debt and has maintained a cash and short-term investment balance that stood at about $64 million (a little less than $3 per share) at the end of its second quarter. This strong balance sheet should help the company to continue growing throughout any period of "economic turbulence".
Since January 1997, the company has reported double-digit same-store (10.2%-37.7%) sales gains every month except for two (in February 1997 and last month, when results were only up 7%-8%). These kinds of results are extremely impressive, particularly considering that most retailers are content with 5% growth. Why are same-store sales so important to a retailer? Many expenses that a retailer pays are relatively fixed (rent, utilities, and labor) and do not change significantly based on the actual sales experienced by the company.
For example, say "Politicos 'R' Us" (SCUM) opened in 1997, and sold $20,000 worth of merchandise, generating gross profit (sales minus cost of goods sold) of $8,000. The company paid rent and labor expense of $6,000, leading to a net profit for the year of $2,000. In 1998, the store reaped the benefit of hot selling Clinton-scandal paraphernalia (not to mention the new, glittery "Nuke Newt" bumper sticker) and saw sales and gross profit increase 50% to $30,000 and $12,000, respectively. Despite the dramatic sales increase, rent and labor costs only increased 10% to $6,600, leading to an annual profit of $5,400, up 170%.
That little example brings up another important point. While same-store sales are important, the company needs to be maintaining or increasing gross margins (gross profit divided by sales). In our above example, SCUM maintained its margins at 40% ($8,000/$20,000 and $16,000/$40,000). If margins had fallen, the results could have been quite different. For example, if margins had fallen to 30% in 1998, the company would have had gross profit of $9,000 (30% of $30,000 in sales), and an annual profit of $2,400 ($9,000 gross profit - $6,600 expenses). This 20% earnings growth is a far cry from the 170% we calculated in the original example. Looking at our real company, The Buckle, we are comforted to see that gross margins have increased from 31.6% in Q2 1997 to 34.4% in Q2 1998, continuing the positive trend of Q1.
There are, of course, risks to investing in companies like The Buckle. The foremost problem is fashion trends. At some point (hopefully sooner rather than later), the wide-legged jeans that have become so popular will likely go out of fashion. If management incorrectly projects that the trend will continue, they will be stuck with merchandise that no one will buy. The only way for them to get rid of the inventory will be to have dramatic clearance sales that reduce profitability. In addition, if a new trend emerges without the knowledge of a store's buyers, shoppers will go to another store that offers the "latest and greatest." This year, Gadzooks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GADZ)") else Response.Write("(Nasdaq: GADZ)") end if %> and Wet Seal <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTSLA)") else Response.Write("(Nasdaq: WTSLA)") end if %>, both youth-oriented retailers, have run into merchandising problems and seen their stock prices drop abruptly.
Paradoxically, another short-term obstacle for The Buckle is the company's tremendous success over the past year. Since the retailer did so well at the end of last year (same-store sales were up 22%-28% during the last three months of 1997), it will be harder for the company to show growth from those high sales levels. This issue is a likely reason that same-store sales were "only" 7% in September and will probably continue at more moderate levels going forward.
Compounding the worry over same-store sales trends is investor concern that consumers will slow their spending in a recession. Risk that consumers will pull back on spending if the economy starts to sputter is certainly present, but I would speculate that Mom and Dad are going to be much more willing to buy a new pair of pants or shoes for Junior than for themselves. In addition, to the extent that Junior earns spending money from his part-time job (where he just received a raise because of the tight labor markets for entry-level jobs), world-wide economic turmoil is of virtually no consequence. Analysts' estimates have The Buckle's earnings growing 17% from $1.43 per share in the year ending January 1999 to $1.67 per share in the following year, a solid showing (although it is below the 62%-109% gains over the past six quarters). Trading at a Price/Earnings ratio of slightly over 11x current year estimates and less than 10x next year's estimates, investors may want to consider hooking up with The Buckle.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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