<FOOLISH WORKSHOP>

Rising Margins

by Louis Corrigan (TMF Seymor)

Atlanta, GA (December 1, 1998) -- Slim pickins this week from our Rising Margins screen, now that we've moved out of the prime earnings season.

First up, Childtime Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTIM)") else Response.Write("(Nasdaq: CTIM)") end if %>, a thinly traded small cap that's the nation's fifth largest child care provider, employing 5,000 professional educators and child care providers and serving 27,000 children in 17 states and Washington, D.C. Second quarter revenue jumped 18% to $25.3 million while EPS rose 21% to $0.17 from $0.14 a year ago. Year-to-date numbers are comparable, with EPS up to $0.47 from $0.39.

While for-profit child care is necessary and welcome, it seems like a tough, labor-intensive business. The snapshot shows the company has a ho-hum return on equity (ROE) of 11.7%. Curiously, the stock soared into the July market top to a high of $25. It's now back at $14 1/4. Don't see anything in our Fool archives that would immediately explain that.

The analysts are looking for FY99 (ends in March) earnings of $0.94 and long-term growth of 19%. A YPEG fair value for that would be $18, so there might be some upside to the stock. Given the nature of its business, though, I don't see how the company can leverage its assets to become more profitable, and it's not profitable enough at the moment to look that appealing.

Next, Just For Feet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEET)") else Response.Write("(Nasdaq: FEET)") end if %>, a company that doubled from its low in the summer of 1997 (as our own Rick Aristotle Munarriz had predicted it might when the company made our Daily Trouble feature) and then doubled from that same low in the last two months after getting stomped on during the recent market troubles.

The company is a leading athletic shoe retailer operating 94 company-owned stores, 12 franchised stores, and 39 recently acquired Sneaker Stadium superstores, most of which have recently or are now getting a Just for Feet makeover. It has a presence in 27 states and Puerto Rico. It's also grown quickly, partly via acquisitions.

Third quarter EPS rose 77.8% to $0.32 from $0.18 as sales increased 72.5% to $226 million. Those are some pretty fat numbers! While the snapshot shows an ROE of 10.7%, that's not surprising given that the whole athletic shoe market has been lame over the last two years. So the financials look surprisingly OK. Consensus earnings estimates call for $1.01 per share for the fiscal year ending in January and $1.39 for the next year. Long-term growth is put at 32%. So the YPEG fair value would be $44 1/2, or twice the current price.

Given Trans World Entertainment's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWMC)") else Response.Write("(Nasdaq: TWMC)") end if %> successful consolidation of the once sick mall-based music retail biz -- and its stellar stock performance -- I've learned to respect the ability of strong companies to make a killing in what looks like a weak retailing niche. So I'd be inclined to look at Just for Feet in more detail.

The other stock I wanted to look at this week is PETsMART <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PETM)") else Response.Write("(Nasdaq: PETM)") end if %>, which reported a 400% EPS jump on 18% higher sales. My guess is that the company isn't threatening to stage a real turnaround. The snapshot continues to highlight a leveraged retailer with poor profit margins and doggy ROE. The stock has continued to fade even after making our Daily Trouble last year. But alas, I'm off to jury duty and don't have more time to give it.

But the screen has given us Just For Feet to research. Not bad.

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