<THE LUNCHTIME NEWS>

Tuesday, February 16, 1999
THE MARKET MIDDAY
DJIA 9340.29 +65.40 (+0.71%) S&P 500 1247.47 +17.34 (+1.41%) Nasdaq 2348.56 +26.67 (+1.15%) Value Line 892.08 +6.04 (+0.68%) 30-Year Bond 98 9/32 -26/32 5.37 Yield

FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay

A Sharper Focus on Sharper Image

Gadget retailer Sharper Image (Nasdaq: SHRP) shot up $1 3/4 to $15 15/16 this morning after reporting fiscal Q4 EPS of $1.00, up from $0.67 last year and in line with estimates. For some reason, the Sharper Image reminds me of the Mark Twain quote about "classics." Those books that everyone talks about but no one actually reads seems to bear a queer resemblance to the retailer, whose products everyone talks about but no one actually buys for themselves. However, like those book classics, they always make acceptable gifts. I've personally been going into their stores for over ten years, and I think their products are really neat, but in that time I've only bought one item for myself and the rest of the purchases have been gifts.

Of course, the purpose of this column is not to impose my bias on readers, but in this particular instance my experience seems to jibe with most everyone else's. Indeed, the gift-giving fourth quarter is the most crucial time of year for the firm, as it raked in 45% of its total sales for the year and all of its profits. Much of the move today has to do with the firm's margin improvements and its catalog/Internet sales, which increased 25% to $36.8 million from last year's $29.4 million. The Internet component of sales for the fourth quarter -- though growing 243% year-over-year -- still only grabbed $3 million, or 8% of catalog sales and 2.71% of total sales for the quarter. Understandably, the firm announced that it was committed to "aggressively expanding our Internet presence in 1999."

That's no big surprise considering that the firm's initial boost last year came from excitement over the prospects for the Internet business. In April, shares rocketed up from just under $4.50 to $8.50 in one day. The shares have also come a long way from their 52-week low in October of under $3. In the long term, as proprietary products garner a larger, margin-boosting portion of total sales and the asset-light returns on capital inherent in the Internet business gain momentum, the Sharper Image should do just fine. Just fine for a retailer of high-priced gadgets that is.

In stark contrast to the typical higher-end model of making up for low asset turns by grabbing high margins, the Sharper Image sports net margins more in line with a business putting out a pure commodity offering (1.89% for last year, with average asset turns around 3.5). Even though its own designs have become roughly 16% of its total sales over the last year -- passing on lower prices and garnering higher margins -- the Sharper Image is never going to be the kind of explosive growth story that has attracted legions of investors to "Internet stocks." In 1999, Internet sales are expected to account for anywhere between 3-5% of total revenues. Until then, to get a sharper image on the firm's financials, they must be wrenched away from the Internet embrace and re-focused on the company's performance as a retailer.

UPS

Truck and bus maker Navistar International Corp. (NYSE: NAV) drove ahead $6 7/8 to $42 1/8 following reports over the weekend that Sweden's Volvo AB (Nasdaq: VOLVY), the world's second largest heavy-truck maker, is in talks to buy Navistar. The acquisition would double Volvo's share of the North American market. Navistar reported fiscal Q1 earnings late last week.

Diversified manufacturer, financial services giant, and NBC parent General Electric (NYSE: GE) gained $1 15/16 to $99 9/16 after it won a $1.74 billion contract from the Defense Department to provide spare parts for certain military engines through 2012. The company was the sole bidder for the fixed-priced contract.

American Depositary Receipts (ADRs) of British bank National Westminster plc (NYSE: NW) surged $16 7/16 to $133 13/16 after rival Barclays plc (NYSE: BCS) reported second half results and saw its ADRs move up $7 to $109. Barclays reported second half revenues of �3.584 billion, down from �3.836 billion reported in the first half. Profit attributable to shareholders fell to �448 million in the second half from �887 million in the first half due to heavy loan writedowns and provisions at the international bank. Apparently, that was better than expectations, which pleased both Barclays and NatWest investors.

AMR Corp.'s (NYSE: AMR) shares rose $1/2 to $55 5/8 after American Airlines said it expects business as (almost) usual today. The company plans to resume nearly all of its 2,250 scheduled flights after a damaging pilots' sick-out. For more on this story, head back to today's Breakfast With the Fool.

Discount retailing giant Wal-Mart (NYSE: WMT) advanced $3 1/2 to $87 7/8 after reporting Q4 EPS of $0.70, up 23% from $0.57 last year. Analysts predicted EPS of $0.67. Sales totaled $40.785 billion, a 15% gain year over year. Same-store sales jumped 8.7% during the quarter, representing an 8.2% rise for Wal-Mart stores and a 10.3% gain for the Sam's Club division.

Dell Computer (Nasdaq: DELL) moved ahead $3 5/8 to $93 1/2 in anticipation of its fourth-quarter earnings report, expected after today's close. Analysts project EPS of $0.31 compared with last year's split-adjusted $0.20. Hewlett-Packard (NYSE: HWP) is also expected to report this evening, with Wall Street calling for fiscal first quarter earnings of $0.83 a share. That would be down from $0.86 a year ago.

Shaving blades and razors maker American Safety Razor (Nasdaq: RAZR) lathered up $3 13/16 to $13 11/16 after J.W. Childs Equity Partners II agreed to buy the company for about $173 million in cash. J.W. Childs will pay $14 1/8 for each Razor share, a 43% premium on Friday's closing price. Holders of about 19% of Razor's shares -- including members of senior management and the Jordan Company -- agreed to tender their shares in response to the offer.

Preppie apparel retailer Abercrombie & Fitch Co. (NYSE: ANF) rose $1 13/16 to $76 3/8 following reports in the New York Times that Goldman, Sachs & Co.'s senior retail analyst Richard Baum expects the company's stock to hit $90 per share in 18 months. Baum named the stock his favorite for the second year running.

Atlantic Southeast Airlines parent company ASA Holdings (Nasdaq: ASAI) lifted off $2 to $33 15/16 after Delta Air Lines (NYSE: DAL) agreed to buy ASA for about $700 million. The $34 per share cash offer represents about a 6.5% premium on Friday's closing price for ASA shareholders. Delta rose $1 to $53 9/16 this morning.

Online brokerage E*Trade (Nasdaq: EGRP) advanced $1 3/4 to $47 3/4 after the company earned approval from the SEC and the National Association of Securities Dealers (NASD) to go into the asset management business. The company plans to launch an S&P 500 index fund next week and add more products over the next 12 to 18 months.

Disk drive maker Seagate Technology (NYSE: SEG) spun up $1 5/16 to $35 5/8 after announcing an expansion of its share buyback plan, adding $500 million to the existing $600 million previously announced. Seagate purchased about $514 million worth of shares, about 15.3 million all told, under the original plan as of Feb. 15.

Footwear retailer Shoe Pavilion (Nasdaq: SHOE) tied up a gain of $1 15/16 to $7 15/16 after the company said online services company America Online (NYSE: AOL) will link to the company's website on its shopping channel as well as a storefront on the shopping section of AOL's CompuServe service.

DOWNS

Family Golf Centers (Nasdaq: FGCI) bogeyed for a $5 3/4 loss to $7 11/16 after warning that fourth quarter earnings will fall short of analysts' expectations due to underperforming locations. The operator of golf ranges and ice rinks and family entertainment centers put preliminary results at around $27 million in revenue and EPS of $0.03 to $0.05, compared with the mean estimate of $0.11. What's more, the company added that underperforming sites will continue to underperform in the near term.

Neonatal and pediatric care physician group Pediatrix Medical Group (NYSE: PDX) dropped another $1 1/4 to $26 3/4 after last Friday announcing that it may have to restate previously reported earnings. The announcement came after the company said on Wednesday that it expected to beat analysts' estimates for the fourth quarter and full-year 1998. Not surprisingly, several law firms have already filed class action lawsuits against the company for overstating results and for issuing false and misleading statements.

Outdoor clothing, equipment and footwear catalog retailer The Sportsman's Guide (Nasdaq: SGDE) lost $1 to $5 7/8 after turning in fourth quarter EPS of $0.10, down from $0.71 last year and below the single-analyst projection of $0.13 listed by First Call. The company said unseasonably mild winter weather contributed to lower demand for cold weather products.

Women's apparel direct marketer DM Management (Nasdaq: DMMC) tumbled $2 1/4 to $15 3/8 after reporting Q4 EPS of $0.28, which was up from $0.16 a year ago and a penny ahead of estimates. The company's shares jumped $2 last week in anticipation of the earnings release.

Biopharmaceutical company OXiGENE Inc. (Nasdaq: OXGN) exhaled $1 3/8 to $7 5/8 after it said it has decided to stop the development of Neu-Sensamide in order to focus on "products with greater commercial promise." Neu-Sensamide was being developed for use in conjunction with radiation therapy in patients with non-small cell lung cancer and in patients with glioblastoma.

Medical cost management services firm Healthcare Recoveries (Nasdaq: HCRI) fell $2 1/2 to $11 1/16 after announcing it has closed the acquisition of MedCap Medical Cost Management Inc. by paying $10 million in cash. In addition, the company added that it may pay additional amounts over the next two years depending on earnings growth.

Managed care software developer Health Risk Management (Nasdaq: HRMI) shed $1 1/4 to $10 1/2 after reporting a fiscal Q2 loss of $0.16 per share (before charges) versus a profit of $0.17 in the same year-earlier quarter.

Digital business phone systems company Inter-Tel Inc. (Nasdaq: INTL) sank $2 13/16 to $20 after announcing Q4 EPS of $0.24, up from $0.18 last year but right in line with estimates.

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Editing
Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
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