<FOOLISH WORKSHOP>

Many Margins

by Louis Corrigan (TMF Seymor)

Atlanta, GA. (Jan. 26, 1999) -- A whole lot to choose from in this week's Rising Margins screen. One that I won't cover but that is worth a look is PC maker Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %>, which reported as 38% EPS gain on 17% better sales. For more, see Dale Wettlaufer's recent Lunchtime News report.

First up, the newly public Bebe Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEBE)") else Response.Write("(Nasdaq: BEBE)") end if %>, which designs and sells contemporary women's apparel and accessories to 18 to 35 year-old women, mostly hip urban types. The company operates 91 specialty retail stores in 22 states.

The subject of a recent Daily Double, Bebe delivered exceptional holiday period results. Sales increased 37% to $59.5 million on an astonishing 27.7% increase in same-store sales. That bumped EPS up 65% to $0.38. The company has a low-inventory, quick-turnover strategy based on domestic sourcing. That allows the firm to quickly reorder products that are selling well.

After running up 44% to $44 1/2 in the three weeks before the earnings release, Bebe has given back most of those gains, selling off to $33 1/2 in the last week. With a consensus earnings estimate of $0.94 for the year ending in June, the shares still trade at 36 times forward estimates. That's rich for a company projected to deliver 20% long-term growth, even when you consider the $2 per share in cash and otherwise solid balance sheet.

Still, Bebe has tremendous momentum. Gross margins increased 280 basis points to 54.3% as the store expansion is creating some operating leverage and more women paid full price for Bebe's sexy suits. Such profitability is tops in the industry, according to BancBoston Robertson Stephens. Investors interested in an apparel retailer should take a look.

Next, Craftmade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRFT)") else Response.Write("(Nasdaq: CRFT)") end if %>, a marketer of ceiling fans and light kits sold through 1,500 retail outlets and outdoor lighting sold through Lowe's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %>, Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>, and Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> stores. This is the kind of boring company I love, since its business is easy to understand. It's also benefited greatly from the housing boom. Since showing up as a Daily Double a year ago, the stock has more than doubled to $16 3/8, figuring in a 3-for-2 stock split.

Last week, Craftmade reported that revenue and net income for the first six months of FY99 has exceeded the totals for all of FY98, partly due to the acquisition of TSI Lighting, which makes outdoor lighting. For Q2, sales rose 96% to $17.6 million, pumping EPS up to $0.17 from $0.08 on a 150% jump in net income. Fan sales rose 21.6% in the quarter. Great weather and low interest rates also helped the construction/home-buying market.

CEO James Ridings expressed confidence that the firm would meet or beat the FY99 estimates of $0.90 per share. Better yet, "We will begin to see the real synergies of the two companies during the third quarter of this year as we initiate our cross-marketing strategy." For instance, TSI's outdoor lighting was a hit with customers at the recent Dallas Lighting Market. "With the initiation of these synergies, we should have several years of substantial growth," Ridings said.

The Fool Snapshot reveals a company with a 32% return on equity on a small amount of debt. Yet the real story is improved profitability. Trailing 12-month net margins are 9.4% versus just 6.5% for the year-ago period. Craftmade trades at 18.2 times forward estimates, but only 13.6 times the $1.20 per share expected for FY00. While the company's results are sensitive to economic conditions, it appears poised to craft a solid future performance.

Finally, we're going to revisit MapInfo <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAPS)") else Response.Write("(Nasdaq: MAPS)") end if %>, a company that provides Internet-enabled business intelligence applications that help clients discover unseen patterns and trends in their databases. We looked at the company November 10, after Q4 EPS doubled to $0.22 on a 33% jump in sales.

Last week, MapInfo reported that Q1 EPS doubled to $0.10 as revenue rose 23% to $16.1 million. European sales shot up 55%, thanks to sales to major utilities such as Berlin Water and BEB, a large German gas distributor. U.S. sales increased 21% while Asia-Pacific was off 16%. Other MapInfo enterprise-wide customers, including AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, broadened their deployment of MapInfo's products.

The company has trailing 12-month sales of $63.6 million and net income of $3.5 million or $0.59 per share. One analyst's estimate calls for $0.64 per share for FY99 ending in September and $1.00 for FY00. With the stock at $16, it carries a PE of 27. But back out the $4.44 per share in cash and it trades at just 18 times the forward estimate.

With an enterprise value around $68 million, the company is trading at about 1 times sales despite 5.5% net margins and healthy double-digit sales and triple-digit earnings growth of late. So mapping out this company's prospects might be smart move.

That's all for today. Go Dirty Birds!

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