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FOOL PLATE SPECIAL
An Investment Opinion by Louis Corrigan
Raising the Shades at Sunglass Hut
Shades can be spirits of the dead. They're also the inventories that piled up at once hot retailer Sunglass Hut <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %>, which had rocketed to $37 a share by March 1996 before then plunging into the mid-single-digit darkness last summer. While previous reports of the company's resurrection were greatly exaggerated, investors had their spirits raised this morning as new management decided to close the casket on an era of overexpansion and exhume a more moderate growth strategy. The stock rose another $1 1/16 to $10 7/8 in morning trading today after rising 7% yesterday.
Last night, Sunglass Hut announced a $79.1 million fourth quarter loss, or a loss of $1.45 per share versus a year-ago loss of $24.4 million or $0.45 per share. The bulk of that resulted from $102.6 million in restructuring-related charges, good for $75.8 million in after-tax losses, or $1.39 per share. The retailer, which had expanded rapidly thanks partly to the May 1995 acquisition of its 345-store competitor Sunsation, has decided to close 250 marginal or unprofitable stores, leading to a $23.5 million charge to write off fixed assets and the costs of exiting leases. It's also writing off another $31.1 million associated with long-lived and intangible assets related partly to international operations. Add another $13.3 million to discontinue its Eye-X prescription optical stores, a potential growth vehicle that stalled. Then there's $13 million to dispose of excess inventories, and add another $21.7 million for moving to a new accounting standard, reorganizing international operations, and paying off longtime CEO Jack Chadsey, who departed last summer.
With 2,111 Sunglass Hut locations today, it's not immediately clear how this massive housecleaning will affect future revenues, which totaled $573.8 million for FY97, up 9% on the year despite flat same-store sales. But the company said pre-tax earnings could improve by up to $10 million by next year, when these moves are completely enacted. Ubiquitous in America's malls, this retailer plans to beef up its marketing efforts to take advantage of its position as the dominant U.S. retailer of fancy sunglasses. Yet with its growing 78 store Watch Station segment, the company is not just sticking to sunglasses.
The firm didn't issue an up-to-date balance sheet, but the charges appear to leave the company with more debt than equity. Still, Sunglass Hut is now trading at about one times sales, which the board deems cheap enough to authorize the buyback of 7.5 million of the firm's 54.7 million shares. And that may make sense. The company reported last week that February same-store sales increased 7.8%, thanks to its international sales and its Watch Station segment. A bit of growth added to the cold rationalization of a half-billion dollar retail franchise could finally make this an interesting turnaround prospect.
Spain's telecommunications company Telefonica de Espana <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEF)") else Response.Write("(NYSE: TEF)") end if %> rang up $5 7/8 to $122 5/16 after announcing its alliance with Portugal Telecom SA, whose alliance with Brazilian state telephone holding Telebras SA should facilitate Telefonica and Portugal Telecom's investments in Brazil, which represents 40% of the Latin American telecommunications market.
Digital networking products manufacturer Newbridge Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NN)") else Response.Write("(NYSE: NN)") end if %> jumped $1 1/2 to $27 after two of its affiliates, Telexis Corp. and Televitesse Systems Inc., announced that they have agreed to combine their businesses, benefiting Newbridge's venture capital arm. Telexis and Televitesse, which both produce network video products, plan to combine their R&D efforts and operate under the Telexis name.
FIRSTPLUS Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FP)") else Response.Write("(NYSE: FP)") end if %> moved up $1 5/8 to $40 3/4 after the consumer finance company announced it will acquire lender LIFE Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LFCO)") else Response.Write("(Nasdaq: LFCO)") end if %> in a stock-for-stock merger valued at approximately $138 million. LIFE Financial shareholders will receive about $20 in FIRSTPLUS stock for each share of LIFE Financial stock, provided that FIRSTPLUS trades between $30 and $40 per share. LIFE Financial gained $1 3/4 to $19 3/4 on the news.
Food and drug retailer Fred Meyer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMY)") else Response.Write("(NYSE: FMY)") end if %> rose $1 5/16 to $48 3/16 after reporting fourth quarter earnings of $0.56 compared with $0.52 for the same prior-year period. The First Call mean estimate was $0.51.
Williams-Sonoma Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSGC)") else Response.Write("(Nasdaq: WSGC)") end if %> tacked on $2 3/8 to $58 3/8 after the kitchenware retailer reported earnings of $1.21 per share versus $0.92 for the same year-earlier period. The First Call mean estimate was $1.11. The company also announced a 2-for-1 stock split that will take effect May 4.
PepsiCo Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> gained $2 3/4 to $43 after Merrill Lynch raised its near-term rating on the company to "buy" from "neutral" while maintaining its "long-term buy" rating. Merrill Lynch also increased its 1999 earnings estimate for the company to a range of $1.55 to $1.60 per share, up from a projected $1.35 in 1998.
Furniture retailer The Bombay Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBA)") else Response.Write("(NYSE: BBA)") end if %> added $3/16 to $5 3/16 after reporting fourth quarter earnings of $0.31 per share compared with $0.23 for the same period last year. The First Call mean estimate was $0.32.
Biotechnology giant Amgen Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> rose $3 7/16 to $58 7/16 after the Clinton administration eased Medicare reimbursement guidelines for the company's anti-anemia drug Epogen. Under the old policy implemented last September, Medicare would not pay for Epogen if the patient's blood cell count exceeded a certain level during a 90-day period. Now, Medicare will reimburse for Epogen if the individual doctor provides medical justification. Absent that justification, Medicare will no longer deny payment but just reduce the amount.
Automotive parts and accessories retailer CSK Auto Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAO)") else Response.Write("(NYSE: CAO)") end if %> sped ahead $3 5/8 to $23 5/8 from its initial public offering price of $20 on 7.5 million shares.
Healthcare and hospital management company Columbia/HCA Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> rose $1 1/16 to $30 9/16 after Salomon Smith Barney raised its rating on the company to "outperform" from "underperform."
Federal Signal Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSS)") else Response.Write("(NYSE: FSS)") end if %>, a maker of emergency vehicles and other products, lost $1 1/16 to $22 3/4 after saying that it expects fiscal Q1 earnings of about $0.24 per share, below the First Call mean estimate of $0.30 per share. The company said chassis and major component suppliers are not delivering their products to the company fast enough, causing sales and earnings weakness.
The American depositary shares of German chemical giant Hoechst AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOE)") else Response.Write("(NYSE: HOE)") end if %> tanked $2 1/16 to $38 13/16 after its CEO warned that fiscal 1998 will be "difficult" because of the Asian financial crisis and an expected fall in petrochemical prices. The company expects sales will be down 15% to 30% from their levels a year ago.
Manufacturing and product data software developer Engineering Animation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EAII)") else Response.Write("(Nasdaq: EAII)") end if %> slipped $2 1/2 to $43 1/4. The company said it filed with the SEC to sell 1.1 million shares, including some held by officers and directors, in a secondary offering.
Internet search software provider Verity Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRTY)") else Response.Write("(Nasdaq: VRTY)") end if %> dropped $1/2 to $6 3/8 after announcing yesterday that it would sue IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> unit Lotus Development for copyright infringement, misappropriation of trade secrets, and other charges.
The American depositary shares of Nissan Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSANY)") else Response.Write("(Nasdaq: NSANY)") end if %> skidded $7/16 to $7 11/16 after the Japanese carmaker warned that its fiscal 1997 earnings will fall short of expectations of about $775 million due to slower sales in its domestic market and higher costs for sales incentives in the U.S.
Loehmann's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LOEH)") else Response.Write("(Nasdaq: LOEH)") end if %> was lowered $5/16 to $4 5/16 after the fashion apparel retailer reported a Q4 loss (before charges) of $0.40 per share, which was in line with the First Call mean estimate. Same-stores sales were down 5.9% in the quarter from their level a year ago. Also, the company said it will close ten of its older stores and scale back the number of new stores to open in 1998 to three.
Banana and pineapple producer Dole Food Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOL)") else Response.Write("(NYSE: DOL)") end if %> was canned for $6 9/16 to $50 9/16 after the company said its fiscal Q1 earnings would be roughly half of the $0.70 per share earned a year ago. The firm blamed the lower earnings on an oversupply of bananas caused by unusual El Nino-related weather in Central America. The street was expecting earnings of $0.80 per share for the quarter. Goldman Sachs removed the stock from its "recommended list" and rated it "market perform."
Internet search engine Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> dropped $7/8 to $18 5/8 after the Justice Department indicated that it would allow Netscape archnemesis Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> to include its Internet Explorer Web browser with its upcoming Windows 98 software.
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Louis Corrigan (TMF Seymor), Fool
Dale Wettlaufer (TMF Ralegh), Fool
Alex Schay (TMF Nexus6), Fool
Yi-Hsin Chang (TMF Puck), Fool
Brian Graney (TMF Panic), Fool
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