<FOOLISH WORKSHOP>
More Margins Maybes

by Louis Corrigan (TMF Seymor)

Atlanta, GA (November 17, 1998) -- The most compelling value I've found over the last few weeks of mining the Rising Margins screen has been shoe manufacturer K-Swiss <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KSWS)") else Response.Write("(Nasdaq: KSWS)") end if %>. Not to be confused with K-tel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %>, K-Swiss is up 25% in the two weeks since I opined that it definitely deserved more research because it looked "dirt cheap." It still looks like a potential bargain around $30. Net of cash, it trades at 10.5 times this year's estimates and 7.5 times next year's projections. But do your own research.

Last week's screen gave us two model favorites, Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> and The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>. The latter reported EPS up 50% to $0.60 per share on a 36% sales increase. Looks great. My unbacktested margins theorem would say hold. Meanwhile, Dell reported a 65% jump in EPS to $0.28 on 51% higher sales. Again, that passes the theorem's CNBC-ish Buy-Sell-or-Hold test with flying colors.

Since I'm mentioning some model stocks, it's worth noting that while Whole Food's Market <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %> didn't make our margins screen last week, it technically should have. Sales rose 20.6% while reported EPS increased 21.2%. A close call, but enough to hold on for the 26% recovery rally that ensued following a week of turmoil among vitamin makers and related retailers.

Lots of other retailers reported last week. The Buckle <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKE)") else Response.Write("(NYSE: BKE)") end if %> is one trendsetting apparel retailer for young men and women that's attracted Foolish interest of late. There was nothing threadbare about a 28% increase in EPS on 22% higher sales. Same-store sales for the quarter rose 11.7% (11.4% in October) bringing year-to-date comp-store gains to 17.6%. Considering how warm weather disturbed back-to-school sales and how the market meltdown sent some jitters through retail, the Q3 same-store sales still look awfully good (for comparison, the Gap reported a 13% comp-store sales boost).

The snapshot shows The Buckle to be a well-managed and highly profitable business with operating margins of 15.1%, return on equity of 28.6%, and no debt. Plus, when the stock got caught in the market downdraft and plunged (all the way to $12 1/4), the board authorized a 200,000 share buyback -- and actually bought 120,600 shares as of November 2. Backing out cash at the end of July, it's trading at 16 times earnings of $1.37 per share and 13.2 times projected earnings for the year ending January 2000. Wall Street is looking for long-term growth of 20%. Though The Buckle isn't the bargain it was in October (hey, it's rallied 100% from its low), the stock is definitely worth further research.

Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> is a similar retailer that's been knocking the cover off the ball. Its stock is up 67% on the year. Q3 earnings crushed estimates by soaring 140% to $0.48 per share on a 55% jump in sales and an astonishing 35% vault in comp-store sales. Year to date, same-store sales are up 41%.

The snapshot reveals a business on steroids, with 9.8% net margins and a triple-digit return on equity (need to check that, looks a little improbable). Though the company trades at 35 times current earnings, analysts have been tripping over themselves to boost estimates, with the current high-side earnings projections at $1.75 for the fiscal year ending in January and $2.31 for next year. Long-term growth is put at 29%, meaning the stock trades around presumed fair value. Still, at $52 1/2, it's selling for just 22.7 times forward estimates.

After a year of such stellar same-store sales growth, Abercrombie may have some troubles wowing investors next year. On the other hand, the company's got the kind of momentum that should interest investors looking for a good growth story. Another to research further.

Finally, IMAX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMAXF)") else Response.Write("(Nasdaq: IMAXF)") end if %>, the company behind those incredibly cool giant movies, said Q3 EPS rose 27% on a revenue gain of 22%. The company continues to expand internationally and now has 170 theaters in 24 countries. The sales backlog rose 3% during the quarter to $195.6 million (versus nine month year-to-date sales of $122.8 million). That covers about 71 theater systems it will build for others. IMAX also plans to launch 13 systems in which it will hold an equity stake.

With most of the firm's revenues coming from the sale of systems, other revenues coming from film distribution, and apparently still other revenues projected from its equity interest in new theaters, one would need to look a little closer at the business model to get a better feel for the firm's growth prospects. The analysts, at least, are projecting 31% long-term growth. It now trades at 22 times next year's earnings estimate of $1.16.

I love the IMAX experience and definitely can imagine a growing interest in such mega-films as the number of theaters increases. But a glance at the profile shows that the company's nearly 30% return on equity has come thanks to a debt to equity ratio of 1.76. That's a little scary, especially since a serious world recession could push out the rollout for many of the projects in the company's backlog. Still, IMAX would seem to have a proprietary hold on an interesting niche. I'd put this in the "maybe" camp. If I had time, I might look a little closer.

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