Yankee Candle Gets Waxed

"Show me the money!" is not just a Jerry Maguire line. Intelligent investors are also looking for strong cash producers. High levels of operating margins and owner earnings (structural free cash flow) are important guides when looking for prospective investments. However, an enterprise can be a cash cow, but if it's not growing green pastures -- if sales are contracting -- its stock will trade likewise.

Look no further than such kings of green as Microsoft (Nasdaq: MSFT  ) and Coca-Cola (NYSE: KO  ) for examples of corporations whose stocks have lost their mojo because sales have fizzled. Both giants are standouts at filling piggy banks, but cash factories do not necessarily translate into stellar stock performances.

Yankee Candle's (NYSE: YCC  ) stock was waxed this week, not because of poor profit margins or abysmal levels of free cash flow. In 2005, it will initiate its third $100 million share-buyback program in as many years -- cash generation is not one of its problems. Its stock price dropped because sales were less than impressive.

What sizzle the company had a quarter ago turned to a fizzle this week. Flat comparable same-store sales in the fourth quarter flattened Yankee Candle's stock. For the period, its sales and earnings both nudged up an unimpressive 7%. Even more disappointing, its earnings per share (EPS) came in at $0.88, while the consensus expectation was for $1.05.

For fiscal 2004, the company's sales rose 9% to $554.2 million. Its total comparables were up 3% for the year; however, its retail comparables decreased 2%. From these sales it earned $82.7 million ($1.68 in EPS) -- an 11% increase compared with 2003.

While a challenging sales environment may be one hurdle for the company, Yankee Candle doesn't have a problem with margins -- its 2004 operating profit levels came in at a stout 25%. As expected, its strong profit margins permit the company to be structural free cash flow (SFCF) positive, with trailing 12 months of SFCF at $78.2 million. But with an enterprise value (EV) of nearly $1.5 billion and an EV/SFCF of 19, its valuation is far too rich given the anticipated blended growth rate of 11%.

It's always a good time to light up its Harvest candle jar, but wait for another season to harvest Yankee Candle's stock.

Fool contributorJeremy MacNealyowns a couple of Yankee Candle jars but does not own its stock.


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