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Monday, December 8, 1997


Crown Books Corp.
(Nasdaq: CRWN)
Phone: 301-226-1200
Website: http://www.crownbooks.com
Price (12/5/97): $7 5/32

HOW DID IT FIND TROUBLE?

Who dethroned the Crown? Watching the stocks of fellow booksellers Barnes & Noble (NYSE: BKS) and Borders (NYSE: BGP) soar this year on the heels of the stellar rise of cyber-vendor Amazon.com (Nasdaq: AMZN), one would think that a chain of book superstores would be a can't miss proposition for equity success.

Well, this regal bookseller has not been so fortunate. While the company has focused its expansion efforts away from the smaller units and toward the category killer superstores -- similar to Barnes & Noble and Borders -- the results have not been as productive as those of its larger counterparts.

Same-store sales have been sluggish this year. The previous quarter found the average figures off 8.1%. It was a dramatic plunge resulting from heated competition and customer defection. The sales slump is in sharp contrast to results at Barnes and Borders where average store revenues are up 9.3% and 8.1%, respectively, so far this year. While its peers are crafting an epic, Crown is writing yet another Wall Street short story.

BUSINESS DESCRIPTION

Crown Books owns and operates 168 bookstores, 115 of those being the larger Super Crown Books superstore concept. One of those just happens to be across the street from Fool HQ in Alexandria, Virginia. Dart Group (Nasdaq: DARTA) owns 52.3% of the Maryland-based company.

FINANCIAL FACTS

Income Statement
12-month sales: $292.3 million
12-month income: ($4.4 million)
12-month EPS: ($0.83)
Profit Margin: N/A
Market Cap: $37.9 million

Balance Sheet
Cash: $3.9 million
Current Assets: $131.0 million
Current Liabilities: $69.0 million
Long-term Debt: $18.2 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 0.13

HOW COULD YOU HAVE SEEN IT COMING?

Crown's jewels have been stolen -- and Scotland Yard has no one to throw the book at. At first one might be perplexed at how well Barnes and Borders are faring while Crown has struggled in the same environment. The reality is that the country's two largest bookstore chains are expanding deeper into Crown's turf, which is primarily in the Mid-Atlantic but also with a respectable presence in Texas, California, and the Midwest.

The superstore prototype affords the company the selection and pricing flexibility of its larger peers. But Crown has found it tough to compete as patrons have chosen to shop elsewhere.

The company has also been slow in online commerce. Its website is an innovative use of cyberspace -- complete with an area for kids and message boards (which are being redone). Yet while the site looks to the future and notes that "dynamic, creative, and highly motivated associates... will ensure that Crown Books stays on the leading edge of the industry," it lags the competition in that one cannot order books online.

Online bookselling has turned upstart Amazon.com into a billion dollar company and has given steam to the price action of the larger players. But at Crown the problems remain.

WHERE TO FROM HERE?

Crown customers aren't the only ones heading out the door. Even majority-owner Dart wants out. The company has been in negotiations with third parties to sell its majority stake in the struggling book peddler. The talks have included the possibility of another company acquiring Crown as a whole.

Why is Crown desirable? If one were to superimpose the modest 2-3% net profit margins that Barnes & Borders are reporting to the Crown top line, it would be a company with earnings between $1.10 and $1.65 per share for the year. In that scenario, even a cynic would value Crown substantially higher than where it is today.

Yet Dart -- or Crown -- has not found any takers. Maybe the competition figures that the next chapter in Crown's book will be Chapter 11 -- and the remnants will be had for pennies on the dollar. However, the wait could be of Tolstoy proportions since the company sports a respectable balance sheet even after the last few painful quarters.

As Crown closes the smaller stores in favor of the superstores, the company is also finding that the added shelf space has allowed it to stock higher-margin non-book items. Yet marked up gifts, stationary and greeting card items will not matter much if the store's popularity continues to dwindle -- to the benefit of the larger offline and even online stores.

That will certainly be no easy task and these "dynamic, creative and highly motivated associates" certainly have their work cut out for them. A happy ending is still a few pivotal plot twists away.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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