Fool.com: Potential Internet Partnership (Evening News) November 18, 1998

<THE EVENING NEWS>
Wednesday, November 18, 1998
MARKET CLOSE

<% ' AvantGo:MarketClose %>DJIA             9041.11     +54.83      (+0.61%)
S&P 500          1144.48      +5.16      (+0.45%)
Nasdaq           1897.44     +18.92      (+1.01%)
Value Line ndx    882.30      +1.60      (+0.18%)
30-Year Bond    99 30/32     +22/32  5.25% Yield<% ' AvantGo:End %>

HEROES

<% ' AvantGo:Heroes %>Reports of a potentially powerful Internet partnership sent shares of Web browser and enterprise software company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> skyward today. Netscape stock shot up $10, or 34.2%, to $39 1/4 after The Wall Street Journal reported it is in talks with online services provider America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> regarding "a wide range of new partnerships," including a potential deal to embed Netscape's browser into AOL software "alongside or in place of" Microsoft's Internet Explorer. AOL's exclusive browser contract with Microsoft allows AOL to cancel the agreement at the end of this year -- AOL executive David Colburn said in the ongoing antitrust trial against Microsoft that AOL signed the deal only because the software giant agreed to promote AOL on Windows 95 and 98. According to the Journal, AOL, which moved ahead $7 7/8 to $83 1/4 today after a 2-for-1 stock split, may even make an equity investment in Netscape, possibly earning a board seat in the process. Separately, Netscape also announced the acquisition of privately held NewHoo! Community Directory Project search service for an undisclosed sum.

Looking to increase the clarity of its vision, eyewear maker Bausch & Lomb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOL)") else Response.Write("(NYSE: BOL)") end if %> brought in some outside help today, and investors liked the look of things. The company's stock rose $2 1/2 to $50 3/8 after it said it hired Warburg Dillon Read to help examine options for its eyewear division -- which includes the popular Ray-Ban, Killer Loop, and Revo lines -- as the company looks to grow its eye-care business, where revenues are improving in the face of sagging sunglasses sales. "We have been making good progress against our strategic objectives for our eyewear business," CEO William Carpenter said in a statement, but "Bausch & Lomb's greatest potential for accelerated growth in the future lies in our healthcare businesses." Among the potential fates for the sunglasses division are possible joint ventures, a sale, and spin-offs. Merrill Lynch upgraded the company's short-term rating to "accumulate" from "neutral" today.

QUICK TAKES: Asynchronous transfer mode (ATM) switching products maker FORE Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORE)") else Response.Write("(Nasdaq: FORE)") end if %> jumped $3 3/8 to $16 13/16 on rumors that it might be a takeover target. Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: INTC)") else Response.Write("(NYSE: INTC)") end if %>, up $1 3/8 to $109 7/8 today, was one rumored suitor after CEO Craig Barrett said yesterday that his company plans to buy more networking companies... National Information Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NAIG)") else Response.Write("(Nasdaq: NAIG)") end if %>, which provides information services to financial institutions, leapt $7 1/4 to $18 7/8 after it agreed to be acquired by First American Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FAF)") else Response.Write("(NYSE: FAF)") end if %> in a stock swap valued at approximately $111 million. First American fell $1 9/16 to $33 1/4... Network storage device maker Network Appliance <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTAP)") else Response.Write("(Nasdaq: NTAP)") end if %> gained $3 3/8 to $73 5/8 today after it reported fiscal Q2 EPS of $0.22, beating both Wall Street's $0.20 estimate and last year's $0.14 figure. For more info on the company's earnings, check out today's Lunchtime News.

Times Mirror Co. PEPS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TME)") else Response.Write("(NYSE: TME)") end if %> grabbed $8 1/2 to $37 1/2 off Netscape's rise, as the securities are yield-bearing derivatives linked to the value of Netscape's common stock... Audio books director marketer Audio Book Club <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: KLB)") else Response.Write("(AMEX: KLB)") end if %> flipped up $1 9/16 to $9 15/16 after it announced an agreement with RealNetworks Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> to sponsor Rolling Stone Radio, an Internet music service. RealNetworks worked its way up $1 5/8 to $42 7/8... Web portal company Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> traveled up $1 1/4 to $37 after Bell Atlantic Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %> Bell Atlantic Electronic Commerce Services Inc. unit reported plans to sell 85% of its stake in Infoseek, which is 43% owned by Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>. Infoseek, the subject of a summer StockTalk interview, also announced its UltraSeek Service 3.0, its newest web browser.

Digital semiconductor devices maker Galileo Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GALTF)") else Response.Write("(Nasdaq: GALTF)") end if %> telescoped $3 1/16 to $16 1/2 after Merrill Lynch boosted its short-term rating on the company to "accumulate" from "neutral"... Drugstore chain Rite-Aid Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %> rode up $2 3/8 to $46 after Lehman Brothers boosted its fiscal 2000 EPS estimate to $1.84 from $1.82 and its target price to $56 from $50 per share... Online retailer Amazon.com Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> swung up $15 1/2 to $164 following yesterday's $22 1/4 rise on news of its opening two new stores on its website that sell videos, digital video disks (DVDs), and holiday gifts... Professional staffing services company Interim Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IS)") else Response.Write("(NYSE: IS)") end if %> clocked in gains of $1 1/4 to $21 5/8 after it said it bought a Dutch technology consulting firm for an undisclosed sum.

Networking software provider Novell Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> rose $1 1/4 to $16 5/16 after it demonstrated new Internet management technology at the COMDEX trade show and said Novell Directory Services will be compatible with Cisco Systems' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> routers and switches. Cisco, which Salomon Smith Barney started with a "buy" rating, gained $4 1/8 to $72 7/8... Cancer drug developer Cell Pathways <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLPA)") else Response.Write("(Nasdaq: CLPA)") end if %> was up $2 1/4 to $12 1/8 today. The company issued a statement saying its development efforts are "on track" and it does not have an explanation for its stock's recent fall from Friday's $14 1/8 close to as low as $8 1/8 per share yesterday... Office superstore retailer Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %> tacked on $1 13/16 to $31 after Merrill Lynch started coverage of the company with short- and long-term "buy" ratings. Monday the company bought the remaining 50% interest in its French joint venture that it didn't own.

Cellular and paging system operator Cellular Communications of Puerto Rico <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLRP)") else Response.Write("(Nasdaq: CLRP)") end if %> dialed gains of $1 to $14 1/4 on yesterday afternoon's news that it raised the trigger for its "poison pill" shareholder rights plan to 18% from 15%... PC retailer Gateway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> advanced $2 3/16 to $57 5/16 following Prudential Securities' upgrade of the company to "strong buy" from "accumulate"... Computer hardware and software direct marketer Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MALL)") else Response.Write("(Nasdaq: MALL)") end if %> jumped $11 7/8 to $29 3/4 after it filed an initial prospectus to sell as much as $22 million in shares of its uBid auction subsidiary. It postponed the offering in September amid falling stock prices... Drug developer Commonwealth Biotechnologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBTE)") else Response.Write("(Nasdaq: CBTE)") end if %> went up $1 3/4 to $8 7/8 after it said New York-based consultant Mattson Jack Group reported that the company's HepArrest cardiovascular surgery aid has market potential of $250 million annually. HepArrest does not currently have FDA approval.

Clinical and management information systems company Cerner Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERN)") else Response.Write("(Nasdaq: CERN)") end if %> improved $3 to $25 7/8 on yesterday's news that General Electric Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> agreed to buy 670,000 shares of Cerner common stock for $22.20 each... Heavy vehicle parts maker Excel Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EXC)") else Response.Write("(NYSE: EXC)") end if %> drove up $3 1/8 to $17 13/16 on reports that it retained Morgan Stanley Dean Witter to help examine strategic alternatives... Canadian broadband datacom products company Newbridge Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NN)") else Response.Write("(NYSE: NN)") end if %> rose $1 13/16 to $23 1/2 after it said Colombian telecommunications carrier Teletulua Telecom selected its advanced multi-services platform for its expansion into video and data services... Storage systems maker Storage Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STK)") else Response.Write("(NYSE: STK)") end if %> locked up $3 1/2 to $35 7/16 after Goldman Sachs started covering the company at "market outperform."

Earnings Movers

Inference Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INFR)") else Response.Write("(Nasdaq: INFR)") end if %> up $1 to $6 9/32; Q3 EPS: $0.06 vs. $0.29 last year; Estimate: $0.02

Maximus Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMS)") else Response.Write("(NYSE: MMS)") end if %> up $11/16 to $29 7/16; fiscal Q4 EPS: $0.30 vs. $0.18 (both before charges); Estimate: $0.29

Medtronic Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDT)") else Response.Write("(NYSE: MDT)") end if %> up $2 7/16 to $68 3/16; fiscal Q2 EPS: $0.33 (before charges) vs. $0.30 last year; Estimate: $0.33

Software Spectrum <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSPE)") else Response.Write("(Nasdaq: SSPE)") end if %> up $1 3/16 to $16 7/16; fiscal Q2 EPS: $0.30 vs. $0.14 last year; Estimate: $0.27

Zale Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZLC)") else Response.Write("(NYSE: ZLC)") end if %> up $1 7/16 to $28 13/16; fiscal Q1 operating EPS $0.06 vs. $0.00 (before item) last year; Estimate: $0.04<% ' AvantGo:End %>

GOATS

<% ' AvantGo:Goats %>Women's apparel catalog retailer Brylane Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BYL)") else Response.Write("(NYSE: BYL)") end if %> was shredded $3 3/8 to $11 1/8 after reporting Q3 EPS of $0.05 (excluding charges), far below the $0.85 earned last year and well short of the First Call mean estimate of $0.18. The company said "weak response" to some of its offerings and higher expenses were behind the shortfall and will also result in Q4 sales "slightly" lower than the $345.8 million posted last year. Lower sales forecasts are nothing new for Brylane. In August, the firm guided analysts to expect 7.5% revenue growth in the second half instead of the 10% growth originally expected. Considering Brylane's net sales declined 5% in Q3 and are now expected to slide again in Q4, it appears the company was a tad too optimistic during the summer about the number of Lerner and Lane Bryant velvet and sequined tops it could sell during the important holiday season.

Competitive local exchange carrier (CLEC) IXC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIXC)") else Response.Write("(Nasdaq: IIXC)") end if %> tanked $9 to $26 3/4 after warning that its fourth quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) will fall short of analysts' expectations, although the figure should still top the $35.2 million posted in Q3. The company blamed the shortfall on an unforeseen $3 million increase in selling, general, and administrative (SG&A) expenses related to the expansion of its Internet and retail telecom service businesses, a $6 million increase in its provision for bad debts, and an accounting change for an existing private line contract. In a move that no-doubt endeared the firm to its shareholders, IXC tipped off analysts to the bad news in a conference call this morning, prompting downgrades from Goldman Sachs and Robinson-Humphrey before the official press release from the company hit the wires this afternoon.

QUICK CUTS: Enterprise resource planning (ERP) software firm Baan Co. NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> fell $2 3/8 to $11 5/16 as a Dutch newspaper article reportedly cast doubts about the company's ability to recover from its third quarter loss last month. Additionally, rumors have surfaced suggesting the company will delay or cancel a planned shareholders' meeting... Knoxville, Tennessee-based apparel retailer Goody's Family Clothing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GDYS)") else Response.Write("(Nasdaq: GDYS)") end if %> was ripped $5/8 to $11 1/2 after reporting Q3 EPS of $0.10, short of the Street's mean estimate of $0.13 per share. Negative sales trends have prompted the company to be "cautious" about its prospects during the upcoming Christmas season... Food containers and aerospace technologies firm Ball Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLL)") else Response.Write("(NYSE: BLL)") end if %> was thrown for a $1 3/4 loss to $42 5/8 after BT Alex. Brown lowered its rating to "market underperform" from "market perform."

Restaurant operator Cracker Barrel Old Country Store <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBRL)") else Response.Write("(Nasdaq: CBRL)") end if %> dropped $7/8 to $22 7/8 after reporting fiscal Q1 EPS of $0.42 versus $0.38 last year, which was in line with the Street's expectations. However, the company guided analysts' earnings expectations for Q2 and fiscal 1999 lower due to slower sales... Industrial fluid handling devices maker Robbins & Myers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBN)") else Response.Write("(NYSE: RBN)") end if %> slid $2 1/8 to $20 7/8 after saying its fiscal Q1 EPS will be about 25% below analysts' estimates of $0.43 due to lower capital spending from its oil and gas industry clients, severance charges, and shipment delays... Anatomic pathology physicians practice management firm AmeriPath <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PATH)") else Response.Write("(Nasdaq: PATH)") end if %> was knocked down $1 5/8 to $10 3/8 after Piper Jaffray lowered its rating to "buy" from "strong buy."

Online entertainment products retailer and direct marketer K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> was knocked down another $2 to $10 on news yesterday that Nasdaq has told the company that it may be delisted because it does not meet the $4 million requirement for net tangible assets... Several other recent Internet-related high-flyers lost ground today. Why? Maybe because it's Wednesday. Whatever the reason, EarthWeb <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EWBX)") else Response.Write("(Nasdaq: EWBX)") end if %> was scorched $11 7/8 to $39 1/8, go2net <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNET)") else Response.Write("(Nasdaq: GNET)") end if %> dropped $4 3/4 to $33 5/8, theglobe.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGLO)") else Response.Write("(Nasdaq: TGLO)") end if %> was spun $8 3/8 to $32 1/16, and online auction newcomer Greg Manning Auctions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GMAI)") else Response.Write("(Nasdaq: GMAI)") end if %> lost $1 7/8 to $13... Titanium mill and sponge products supplier Titanium Metals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIE)") else Response.Write("(NYSE: TIE)") end if %> slid $15/16 to $10 5/8 after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate" and cut its long-term rating to "accumulate" from "buy."

Industrial robots maker Adept Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADTK)") else Response.Write("(Nasdaq: ADTK)") end if %> dropped $7/8 to $6 3/4 after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate"... Daktronics Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAKT)") else Response.Write("(Nasdaq: DAKT)") end if %> fell $2 to $13 3/8 after the maker of electronic voting and scoring systems reported fiscal Q2 EPS of $0.19, which was flat with last year's results... Apparel maker Phillips-Van Heusen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVH)") else Response.Write("(NYSE: PVH)") end if %> moved down $13/16 to $8 1/4 after reporting Q3 EPS of $0.57 yesterday, matching the Street's expectations. However, Chairman and CEO Bruce Klatsky said he is "cautious" about the company's prospects for the rest of the year, given the current "erratic retail environment."<% ' AvantGo:End %>

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

Same-Store Sales

<% ' AvantGo:FOTH %>At first glance, children's apparel retailer Gymboree <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %> appeared to have a blowout last June. Revenues for the month rose 97% versus June 1997 while same-store sales shot up 65%. Clearly, this retailer had resolved the troubles that had sliced its stock in half. The turnaround was in full swing, right?

Nope. In fact, since the June numbers were announced, the stock has lost another 50% of its value as the descent that started last December has continued. What gives? For starters, consider these numbers:

Month   Same-Store Sales   Total Sales

June           65%             97%

July          -31%            -13%

August          4%             24%

September     -18%              1%

October        -7%              7%

While store expansion has kept overall revenue rising every month this year except July, same-store sales have been choppy and largely negative of late. June's astonishing gain was a complete anomaly. In fact, any investor following the company would have recognized that the June results were actually a sign of how bad Gymboree's business was and that the retailer was only beginning to confront its problems with real gusto.

Investors must always determine the most useful metrics for tracking a company's progress. For most retailers, "same-store sales" (SSS) is one of the basic tools. Also called "comparable store sales" or simply "comps," this metric typically compares sales at stores open for at least a year. In the above example, the metric offered an apples to apples comparison between revenue generated by the Gymboree stores open in June 1997 and the same stores a year later, backing out some stores that had been expanded significantly in the meantime.

Many retailers voluntarily release such comp store information on a monthly basis. Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> and a few others even offer weekly updates. These SSS numbers provide investors a frequent snapshot of the business, and by extension, the health of a particular sector. The Fool publishes the monthly "Retail Sales" figures. Click here for the latest update.

Comp store sales matter because they can say a lot about a company's appeal to consumers. That's because a good business should see sales gradually increase over time as its stores mature and the communities it serves become more dependent on it.

If you run a burger joint, for example, you would like to see happy customers coming by for lunch more often and maybe bringing their friends along, too. You would also like to add new products, say curly French fries or milkshakes, to get current customers to buy more on each visit. It's even better if you've got such great food that you can convince customers to pay a little more each year for the same stuff. The same-store sales metric alone doesn't capture which of these components is increasing store-level sales, but it suggests one or all of these factors are at work.

Sure, outside of just raising prices, boosting store-level revenue involves some incremental costs. You may need to add more teenagers to flip burgers, bring in some French fry machines, or beef up supplies. But you're really working with some fairly fixed costs for basics like rent, management talent, getting the supplies delivered, and so on. If you can generate more sales off the expenses you're already committed to paying, then, other things being equal, you've boosted your profit margins.

Retail chains, of course, can grow overall revenue by opening new stores. Every growing retailer depends on such expansion to increase not just profits but profitability. That's because a large retailer usually can negotiate better deals from distributors, or it can source products direct from manufacturers and employ its own distribution facilities. These economies of scale can boost gross profit margins or at least position a retailer to remain competitive on price. The company can also boost overall operating margins by leveraging other relatively fixed costs such as marketing or administrative expenses over a larger revenue base.

Still, selling more stuff at existing stores is a key driver of profits, and that's why same-store sales spark such interest. They simply offer a good, simple means for projecting a retailer's short-term performance. However, investors also need to recognize the limitations of the metric.

In short, context matters. Numerous temporary factors can affect same-store sales in a given month, including unusual weather, the timing of a holiday like Thanksgiving, unusual strength during the year-ago period, or other matters that may sound like excuses but could be perfectly legit and nothing to worry about. The comp-store trend is usually far more important that any single month.

For example, American Eagle Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEOS)") else Response.Write("(Nasdaq: AEOS)") end if %>, a retailer of basic apparel for the college crowd, turned in just a 1.9% same-store sales gain last January. One might say this was in spite of double-digit SSS increases in November and December, yet the January dip was actually a direct result of selling so many products during the core holiday season. American Eagle just didn't have much left come clearance time. The weak January, then, actually confirmed how great business was for this highflying retailer, which went on to deliver comp-store growth in the 40%-plus range over the ensuing four months.

Conversely, a choppy same-store sales trend can point to serious problems with a company's merchandise mix or overall competitive position. Spikes in same-store sales after several down months may point to huge price cuts or special promotions to clear out inventory. That's the story behind Gymboree's ostensibly terrific June sales.

When the stock hit its 52-week high last December, same-store sales for the first nine months of FY97 had inched up just 1% even as inventories rose much faster than overall sales and gross margins were deteriorating. The picture kept getting worse as same-store sales fell 15% in January and 2% in February before bouncing up 6% in March and then falling 2% in April. By the end of April, inventories were up 104% year-over-year despite overall sales growth of just 21%.

By June, the company finally threw in the one-sies and slashed prices. Though overall sales shot up 39.2% in Q2, gross margins plunged to 33.4% from 42.5%, and Gymboree reported a loss of $0.03 per share versus a gain of $0.19 in Q2 1997. In this case, the same-store sales trend alone would have suggested the retailer was having trouble, but the financial statements considerably fleshed out the story.

Trends, though, come and go, even at the best companies. Recipes go stale, this year's fashion is next year's joke. Last year's highflyer may run into turbulence when it comes up against one or even two years of huge same-store sales gains. Alternatively, turnaround stories can take hold after a retailer faced with serious problems and a year or more of declining same-store sales spruces up its merchandise or image. This year's modest recovery can translate into terrific comp-store sales gains that should attract investors' attention.

Surely, American Eagle continues to soar for good reason while Gymboree continues to tumble for equally good reason. But the same-store sales figures are one of the easiest ways for investors to monitor the changing fortunes in the retail sector.

For more, see Same Store Sales in the Fool FAQ area.<% ' AvantGo:End %>

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