<FOOLISH WORKSHOP>

Four on the Rising Margins Screen

by Louis Corrigan (TMF Seymor)

Atlanta, GA. (Jan. 12, 1999) -- We'll tackle all four candidates this week on our Rising Margins screen. So let's get to it.

Family Dollar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDO)") else Response.Write("(NYSE: FDO)") end if %> operates 3,111 discount variety stores, mainly in small towns in a 38-state area. It competes with the likes of Dollar General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DG)") else Response.Write("(NYSE: DG)") end if %> but generally carries more brand name products and a broader line of softline items (about 33% of sales), such as apparel. Both operate in a niche left open by Wal-Mart's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> ever-increasing megastore dominance.

Q1 sales (period ending November 28) rose 15.7% to $628 million; EPS increased 21.4% to $0.17 from $0.14 a year ago. Same-store sales (SSS) for the period rocketed 8.2%. More recent holiday period results showed sales up 15.6% with SSS up 7.2% (compared to a 1.1% SSS decrease in December for Dollar General).

Family Dollar has been a consistent 10% per annum store grower, opening a net 80 new stores during the quarter on the road to 300 net new stores for FY99. The SSS increases point to the firm's successful everyday low prices strategy, which will allow the retailer to cut back to 6 ad circulars this year from 9 last year. That should help margins.

Checking out the Fool Snapshot, you see a retailer with no debt, a solid 20% ROE, and relatively high P/E. At $19 3/4, the stock trades at 27 times earnings estimates for the year ending in August. Still, Family Dollar is one of several discounters that are worth taking a look at because it stands to benefit from a continued move by consumers to discount retailers. Those interested in more of an overview should check out the Industry Focus, where I cover these companies.

Next up, Walgreen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAG)") else Response.Write("(NYSE: WAG)") end if %>, the largest U.S. drugstore chain by sales. The company operates over 2,626 stores in 36 states and plans to open one a day for the rest of FY99. Walgreen reported that Q1 sales shot up 15.2% to $4 billion on SSS growth of 10.4%.

The real juice came from prescription sales, which soared 22.8% and now account for 52.6% of total sales. Comp-store prescription sales were a very healthy 18.9%. As a result, margins increased, as EPS rose 16.7% to $0.21 per share versus $0.18 last year, excluding a one-time charge in the year-ago period.

Walgreen is well-positioned to benefit from continued growth in pharmaceutical sales as medical breakthroughs meet up with an aging America. The Fool Snapshot reveals a company with a solid 21% ROE with no debt. Of course, Walgreen is hardly an undiscovered story. At $54, the stock is 9% off its 52-week high, but still trades at 45 times projected earnings for FY99 (ending in August). Yet, that may be a well-deserved premium. For more, see Warren Gump's column in a recent Lunchtime News.

TSR Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSRI)") else Response.Write("(Nasdaq: TSRI)") end if %> provides information technology professionals to major corporations and state and local governments. Its stock has enjoyed periodic spikes into the mid-$20s because it provides service to take care of Y2K problems (11% of Q1 revenue). For Q2 (ended November 30), sales jumped 24% to $21.7 million, boosting EPS to 47% to $0.22 from $0.15 a year ago. Year-to-date, sales are up 27% to $42.1 million; EPS are up 74% to $0.40 from $0.23.

While demand for IT professionals remains strong, those workers are also commanding higher wages. The real question mark here is how the whole Y2K issue will affect business for a company like TSR. Chair/CEO Joe Hughes said in the earnings release that "the anticipated reduction in business activity from this area will be more than offset by solid revenue and earnings growth from our main business." Maybe, but that's one huge variable to get your mind around.

Checking the company's profile, we see it's generating a 30% ROE on no debt and with about $1 per share in cash. One analyst's estimates calls for $0.64 for FY99 ending in May and $0.72 for next year. (Either these numbers are way low, or business will slow dramatically.) So at around $13, the stock trades at 20 times forward estimates.

Worth noting, CEO Hughes cashed out a bunch of his stock at $16 a year ago, suggesting that was a rich price. On October 28, with the stock below $8 a share, the board approved the repurchase of 600,000 shares (10% of the total outstanding). Yet, the company apparently didn't buy back any shares, judging by the press release. There have also been no insider purchases.

In my view, these are more negatives. If I'm Chair/CEO and I see my stock trading at 50% below what I sold it for a year earlier and I have confidence in the firm, then I'm tempted -- both as the head of the company and as an individual investor -- to buy as much as I can afford. Since Hughes didn't do that, I personally wouldn't bother looking further at this one.

Finally, we have Charles River Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRAI)") else Response.Write("(Nasdaq: CRAI)") end if %>, an economic, financial, and business strategy consulting firm that went public last April. Q4 results (ended November 28) showed revenue up 20% to $11.5 million; pro forma EPS increased 83% to $0.22 from $0.12 a year ago. For the year, revenues jumped 18% to $53 million while pro forma EPS increased 69% to $0.84 from $0.49.

The growth came from opening new offices in Toronto and Los Angeles. In mid-December, the company also acquired The Tilden Group, a privately held consulting firm founded by University of California-Berkeley professors Michael Katz and Carl Shapiro, guys that add expertise in antitrust litigation, business strategy development, and telecommunications. The future probably includes more acquisitions.

The Fool Snapshot reveals a company with no debt, almost $4 a share in cash, and a 34% ROE (though that probably needs adjusting for the IPO). At around $27, the stock trades at 29 times earnings estimates for FY99. Buying into a consulting firm is tricky because you're basically investing directly in people. But the numbers alone suggest this Charles River crew is worth a closer look.

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