Thursday, July 1, 1999
DJIA           11066.42   +95.62   (+0.87%)
S&P 500         1380.96    +8.30   (+0.60%)
Nasdaq          2706.18   +20.06   (+0.75%)
Russell 2000     454.42    -3.26   (-0.71%)
30-Year Bond   89 17/32   -17/32  6.01 Yield


While today's deal between mega-retailer Wal-Mart (NYSE: WMT) and in-and-out-of-favor Books-A-Million (Nasdaq: BAMM) was received well by the bookseller's shareholders, the bigger picture out of Bentonville, Arkansas, is a bit murky. Books-A-Million shares jumped $6 11/32, or 84.2%, to $13 7/8 after Wal-Mart named Books-A-Million the exclusive provider of books and related products to its Internet customers. With many observers believing Wal-Mart's distribution network already boasts the power and precision to create an e-commerce powerhouse to make Amazon.com (Nasdaq: AMZN) gape, the enlistment of other companies -- it contracted Federated Department Stores' (NYSE: FD) Fingerhut direct mail unit for Internet order fulfillment earlier this month -- is a curious step. It may be that Wal-Mart is simply bringing in help as a temporary measure -- but it may also indicate that Sam Walton's retail empire is considering a different direction altogether for its virtual shopping operation. Either way, Books-A-Million still stands to benefit from its association with the extremely well-regarded company. For more perspective on the deal, head back to today's Lunchtime News.

Shares of online stamp purchasing and printing software company Stamps.com (Nasdaq: STMP) affixed $4 3/4 to yesterday's closing price, ending at $22 1/4 -- more than twice its $11 per share IPO price of late last week. Stamps.com today announced that MySoftware Co. (Nasdaq: MYSW), which provides productivity software and Internet services for small- and mid-sized businesses, will integrate Stamps.com's Internet postage service with its direct marketing software products. The idea is to offer small business customers a means to order postage online and print out digital stamps on inkjet or laser printers. With 24-hour access to postage purchasing, secure cost tracking and the backing of the Postal Service, which hopes the added convenience will help draw customers from shipping enterprises like employee-owned UPS and FDX Corp.'s (NYSE: FDX) Federal Express, the opportunity to cash in on clicking instead of licking seems very real.

QUICK TAKES: 3D graphics accelerator chipset maker S3 Inc. (Nasdaq: SIII) jumped $2 5/32 to $11 1/4 on news that it expects to report Q2 EPS $0.15 to $0.20 better than First Call's estimated $0.20 per share loss... Hearst Corp. will invest $100 million in Hearst-Argyle Television (NYSE: HTV), which owns and operates network-affiliated TV stations. The investment raises Hearst's stake in the company to about 52.3 million shares, or 56.3% of total shares outstanding. Hearst-Argyle stock grabbed $1 5/16 to $25 5/16... Telecommunications billing and customer service software maker LHS Group (Nasdaq: LHSG) gained $3 1/4 to $36 3/8 after last night reporting a strategic partnership with Germany's Siemens Business Services through which Siemens will market and distribute LHS' customer care and billing software to telecommunications customers worldwide.

Electronic communication network equipment supplier C-COR Electronics (Nasdaq: CCBL), which told investors fiscal Q4 EPS was expected to come in ahead of Wall Street's $0.36 consensus estimate, got $1 3/4 to $29 3/4. The company expects record revenues and income from continuing operations; results will be reported Aug. 18... Generic drug maker Watson Pharmaceuticals (NYSE: WPI) improved $2 1/4 to $37 5/16 after it said Q2 EPS is seen in line with market expectations. IBES' analyst survey has a $0.43 consensus projection. The company said it issued its statement in response to "misinformation in the marketplace"... Analog and mixed-signal integrated circuits maker Exar Corp. (Nasdaq: EXAR) climbed up $1 5/16 to $26 1/16 after Prudential Securities upgraded the stock to "strong buy" from "accumulate," setting a 12-month share price target of $35.

Media streaming technologies developer RealNetworks (Nasdaq: RNWK) tuned in $9 to $77 7/8. The company said it will make its latest RealAudio format compatible with Microsoft's (Nasdaq: MSFT) WebTV products, also agreeing to develop a new RealPlayer G2 for the software company's Windows CE operating system platform... Office-furniture maker Herman Miller (Nasdaq: MLHR), which reported fiscal Q4 EPS of $0.48 -- beating both last year's $0.40 mark and Wall Street's $0.38 consensus -- hammered out gains of $1 1/2 to $22 1/2... Aircraft engines precision metal components maker Kreisler Manufacturing (Nasdaq: KRSL) soared $5 21/32 to $10 5/32 after agreeing to be bought by Wood Group Gas Turbine Holdings for $12.25 per share, a more than 170% premium to yesterday's close.

Internet brokerage onlinetradinginc.com (Nasdaq: LINE) rose $2 3/8 to $15 7/8 today. The early June IPO's underwriters exercised their overallotment option, buying a further 337,500 company shares at $7 each... Internet portal Lycos (Nasdaq: LCOS) moved up $10 1/2 to $102 3/8 after saying it will launch a co-branded website with Banc One's (NYSE: ONE) WingspanBank.com subsidiary offering online financial products and services. The deal could generate up to $135 million in revenues for Lycos if certain performance thresholds are met... Carbonated beverage maker Coca-Cola (NYSE: KO) gained $2 7/8 to $64 7/8 thanks to a Salomon Smith Barney upgrade to "outperform" from "neutral."

IPO Thursday: Black tie search engine company Ask Jeeves (Nasdaq: ASKJ) moved ahead $50 15/16 to $64 15/16 in its first day of trading after selling 3 million shares at $14 each... Scalable Internet protocol (IP) phone products maker Clarent Corp. (Nasdaq: CLRN) rang up $10 1/2 to $25 1/2 after selling 4 million shares at an IPO price of $15 per share... Business-to-business e-commerce software firm Commerce One Inc. (Nasdaq: CMRC) jumped $40 to $61 following its IPO of 3.3 million shares at a price of $21 per share.

Web-based customer problem resolution software developer Primus Knowledge Solutions (Nasdaq: PKSI) gained $6 9/16 to $17 9/16 after offering 4.15 million shares at a price of $11 per stub... Religious radio programming broadcaster Salem Communications (Nasdaq: SALM) marched onward $3 1/2 to $25 1/2 following its IPO of 8.4 million Class A shares at a price of $22.50 per share... Scented candle maker Yankee Candle Co. (NYSE: YCC) ignited for a $6 1/8 gain to $24 1/8 after selling 12.5 million shares at a price of $18 per wick... er... share.


TV and Web content provider CNET (Nasdaq: CNET) was kicked $5 7/8 lower to $51 3/4 after unveiling a $100 million ad campaign over the next 18 months to establish the CNET brand name in consumers' minds as "the place to go for computer and technology information." The expenditures will result in unspecified net losses this year, tossing the First Call mean estimate for full-year EPS of $0.21 into the rubbish heap. The size of the $100 million layout is a shocker, especially considering CNET has only booked a little more than a combined $108 million in total revenues in the entire five-year life of the company. Despite the cost, the ads should bring higher visibility to the firm's main revenue-generating businesses of providing tech-oriented online shopping services, including its ShopBuilder.com and CNET Auctions sites.

Well, so much for the Efficient Market Theory. Benefits administration outsourcer ABR Information Services (Nasdaq: ABRX), which surged 203% in the closing minutes of trading yesterday to close at $90 1/16 per share, completed its round-trip back to reality today and fell $62 1/16 to $28. While the company said it can't explain the rise, various news outlets have attributed the spike to traders mis-typing the firm's ticker, weighting changes in the Russell 2000 Index, short-covering, or perhaps even all three scenarios. Whatever the case, Ceridian Corp. (NYSE: CEN) has already acquired 98.3% of the firm's shares at $25.50 per share, raising questions as to why anyone would still be willing to buy the remaining ABR shares out there for more than the buyout price. The Ceridian merger is set to be completed later this month.

QUICK CUTS: "It's a Small World After All" originator Walt Disney Co. (NYSE: DIS) got a little smaller today, dropping $1 13/16 to $29 after Morgan Stanley Dean Witter cut its rating on the firm to "neutral" from "strong buy"... Multi-family apartment communities operator Lexford Residential Trust (NYSE: LFT) left a $3 13/16 loss to $20 1/16 on its shareholders' doorsteps after agreeing to be acquired by apartment real estate investment trust (REIT) Equity Residential Properties Trust (NYSE: EQR) for about $203 million in stock and $530 million in assumed debt... Athletic footwear giant Nike (NYSE: NKE) stumbled $3 13/16 to $59 9/16 after posting up and scoring fiscal Q4 EPS of $0.38 before charges, beating analysts' expectations by a penny. However, revenues for the quarter fell 5% from last year to $2.18 billion as U.S. apparel sales sank 19%.

Aerospace structural materials maker Hexcel (NYSE: HXL) slid $1 1/16 to $9 1/16 after saying softness in some of its markets and lower build rates from plane maker Boeing (NYSE: BA) will result in Q2 EPS between $0.13 and $0.16 and full-year EPS between $0.60 to $0.70. The Zacks mean estimate had called for Q2 EPS of $0.26 and full-year EPS of $0.93... Specialty electrical contracting and maintenance services firm Quanta Services (NYSE: PWR) was zapped $4 3/16 to $39 13/16 after BancBoston Robertson Stephens lowered its rating to "long-term attractive" from "buy," citing valuation concerns... Integrated circuit electronic connectors maker PCD Inc. (Nasdaq: PCDI) slid $3 3/8 to $7 5/8 after saying soft demand and falling prices for its products will result in Q2 EPS between $0.03 and $0.05, short of the Zacks mean estimate of $0.17.

Microsoft Windows-based enterprise manufacturing systems maker Made2Manage Systems (Nasdaq: MTMS) slipped $1 3/16 to $6 7/8 after warning that deferred purchases by clients due to Y2K will lead to Q2 earnings of $0.01 to $0.02 per share, missing the First Call mean estimate of $0.10... Clothing maker Nautica Enterprises (Nasdaq: NAUT) keeled over for a $7/8 loss to $16 after Morgan Stanley Dean Witter cut its rating on the firm to "neutral" from "outperform"... Retail merchandising and industrial services firm SunSource (NYSE: SDP) was burned $1 15/16 to $11 after saying it will discontinue its quarterly dividend and take a $14.5 million charge in Q2 as part of a restructuring. Including the charge, the company is forecasting a loss for the quarter of $1.45 per share.

Internet portal and websites operator Go2Net (Nasdaq: GNET) lost $3 3/4 to $88 1/8 after agreeing to buy privately held online payment authorization company Authorize.Net Corp. for $90.5 million in stock and cash... Urbana, Illinois-based bank holding company First Busey Corp. (Nasdaq: BUSE) shed $4 1/8 to $21 3/4 after signing a deal to acquire thrift holding company Eagle BancGroup (Nasdaq: EGLB) for $26.6 million in cash, or $25.74 per share. Eagle took flight and rose $2 3/8 to $24 1/2 on the news... Regional fiber optic network operator CapRock Communications (Nasdaq: CPRK) was rocked for a $5 3/4 loss to $34 3/4 after Merrill Lynch cut its near-term rating on the firm to "neutral" from "accumulate."

An Investment Opinion
by Dale Wettlaufer

Starbucks Brew Ha Ha, One Year Later

Since it's been a little less than a year since I addressed Starbucks (Nasdaq: SBUX) in this column, and since it was bashed pretty hard today, and since this company is sort of near and dear to many Fools' hearts, I thought I'd write about it today.

The coffee roaster, retailer, and lifestyle marketer (what the heck, if it's a new age company, I can make up new age descriptions) last night reported that it expects fiscal 1999 EPS results to come in 10% below the mean estimate of $0.60. Starbucks says the difference between the mean estimate and its own estimate of full year EPS of $0.54 "reflects the fact that despite strong Retail performance and a likelihood of even higher year end store count than previously announced, some of the Company's other businesses have not grown as previously anticipated. In addition, the Company has incurred significant additional costs related to its commitment to its Internet strategy."

First, retail performance does look strong, with same-store sales having risen 7% for the five weeks ended June 27 and total sales having risen 30% year-over-year for the same period. When my colleague Yi-Hsin Chang talked with Starbucks CEO Howard Schultz last year, an August same-store sales number of +3% had everyone worried and had knocked the stock down a few pegs. Compared with same-store sales comps of +5% for the first three quarters of fiscal 1999, we can see that condition didn't persist.

Further, invested capital has grown a little more slowly than revenues (not converting operating leases over to the balance sheet), which is at least one sign that the economics of the business haven't changed for the worse. Return on capital hasn't expanded year-over-year and the company is still underperforming its cost of capital by my estimations, but the story here is one of huge growth. Year-over-year, invested capital expanded 23.5% with very little additional equity being contributed to the company while the store base grew 31.2% year-over-year when you include licensed stores as well as company-operated stores.

Those are extremely impressive growth figures. Is that enough, though? At what point do investors want to see the kick in return on investment above the company's cost of capital? Well, you could have asked that for many years at McDonald's (NYSE: MCD), couldn't you? The simple answer is that a relatively mature company, which is decades into its goal of achieving world ubiquity, is going to show a lot better return on book capital characteristics than a company that is decades behind in that goal. The contrast I'm drawing here has to do with the fact that Starbucks is in the midst of taking market share from low-end coffee purveyors, building out a ubiquitous North American store platform, building out widespread retail distribution with its Kraft agreement, and moving on to build out a worldwide retail presence and brand platform. Near-term profits aren't exactly what the company is shooting for.

Nevertheless, it is generating strong growth in operating cash flow and shows free cash flow, the absence of which could be forgiven in the context of its strategic goals. The simple question is this: Do people love the product? Do people prefer the product? Is it a fad? I would say yes, yes, and no, even if I don't spend too much in their retail stores. I'm not going to overlay my preferences over a significant chunk of consumers that have acted in an obviously receptive and loyal fashion to Starbucks' traditional and new products.

The question today is whether the market is acting rationally with the price of Starbucks down $10 5/8 to $26 15/16. Is it the earnings shortfall in the near-term that the market is discounting or is it other strategic initiatives the market doesn't like? After all, investments to build out value-creating projects should be welcomed if they increase the intrinsic value of the company, even if they do knock down 1999 EPS. I would have to say ultimately that the market is not welcoming last night's discussion of Starbucks' "lifestyle portal" plans:

"As part of its innovative Internet strategy, Starbucks Coffee Company announced today that it will create a new lifestyle destination/portal that will include expanded content and commerce offerings within the gourmet/specialty food, kitchen products, and home furnishings categories.

"The new portal will be launched in the form of a unique 'canopy brand' site in time for the 1999 holiday season. It will represent a single destination for customers to purchase both traditional Starbucks core coffee, tea and music offerings as well as complementary products and services from a portfolio of selected online and land-based retailers.

"In conjunction with the portal development, Starbucks plans to announce a major strategic partnership later this summer.

"'Creation of the canopy brand portfolio enables us to extend the leadership we now enjoy as a specialty coffee retailer to new and highly complementary products centered around the lifestyle of our customers,' said Howard Schultz, Starbucks chairman and [CEO]."

Deion Sanders can play two sports and so could Bo Jackson, but even the mighty Michael Jordan couldn't hit breaking balls, Hall of Fame quarterback John Brodie didn't exactly dominate seniors golf, and Carl Lewis certainly couldn't sing too well. Does this "lifestyle portal" thing bring up some risks? Yeah, definitely. I know everyone wants to go after the high disposable income sort of customer and I know it's a temptation to think that since you've got a few things figured out about your customers that you've got their "lifestyle" nailed, but it doesn't mean it's easy to accomplish those things. "Lifestyles" and capturing this intended lifestyle, whatever medium you're using, is NOT a new business. So you've got some stores and you've got a brand. Can you leverage it and increase the value of the company? Why not? But in wanting to do so, the company just introduced some uncertainty into a pretty straightforward and easy-to-understand investing proposition.

Sticking with my valuation of the company last year and assuming intrinsic value has grown about 25% year-over-year, I think the stock is very interesting again at $21 1/4. I would want to see some movement on the Kraft deal, like actually seeing the coffee in some local retail outlets. Until they can cover a straightforward initiative such as that, then I wouldn't be the biggest supporter of this somewhat flaky lifestyles thing. If I saw some action there, I would be willing to believe that there are supernormal returns over 10 years available at this price level.

($ in millions, except per share. EV = enterprise value)

Market Cap.....$5,073.65
Enterprise Value.....$5,064.25
EV/Invested Capital.....5.62
Price/Book Value.....5.70
EV/Net Income.....54.97

A/R Days Sales Outstanding.....9.41
Inventory Turnover.....5.09
Capital Turnover.....1.81
Days in Inventory.....71.99
Days in Payables.....49.52
Days Sales Outstanding.....9.41
Cash Conversion Cycle.....31.88

Current Ratio.....1.95
Quick Ratio.....1.24
LT Debt/Equity.....0.00%

Begin Invested Capital.....$730.04
End Invested Capital.....$901.54
Avg. Invested Capital.....$815.79
YOY IC Growth.....23.49%
Tax Rate.....38.00%

Trailing Revenues.....$1,473.59
Operating Earnings.....$131.27
Net Income.....$92.13
Gross Margin.....55.55%
Operating Margin.....8.91%
Net Margin.....6.25%

Cash & Equivalents.....$165.70
Excess cash.....$9.40
Last year excess cash.....$31.03
Last Yr receivables.....$34.07
Last Yr Inventories.....$128.28
Current Assets.....$357.27
Current Liabilities.....$183.40
Long-Term Debt.....$0.00
Shareholder's Equity.....$889.34
Last Yr Shareholder's Eq.....$744.70
Diluted Sharecount.....188.35
Average receivables.....$36.02
Average inventories.....$128.73
Average share equity.....$817.02


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