<THE LUNCHTIME NEWS>

Thursday, March 4, 1999
THE MARKET MIDDAY
DJIA 9436.43 +160.55 (+1.73%) S&P 500 1245.06 +17.36 (+1.41%) Nasdaq 2302.54 +37.34 (+1.65%) Russell 2000 393.86 +1.91 (+0.49%) 30-Year Bond 93 18/32 -3/32 5.70 Yield

FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

American Eagle Flying Ever Higher

When I look at the stunning one-year price gains recorded by a number of mainstream apparel retailers -- say, American Eagle Outfitters (Nasdaq: AEOS), up 277%; Abercrombie & Fitch (NYSE: ANF), up 142%; and the Gap (NYSE: GPS), up 124% -- I feel like shouting out, "This is why every investor ought to start with Peter Lynch." Buying what you know and use is an approach to investing that just flat out works.

Sure, you need to learn how to make sense of financial statements and to understand an industry, and not every company you buy from is worth owning. Still, investors who simply ignore these investment candidates because they're already "discovered" or appear too expensive on first glance are making a huge mistake. That's especially true of retailers, where momentum means a lot and where you can track that momentum very easily by asking a simple question: Are you still buying the stuff?

This little rhapsody was inspired by American Eagle, a 389-store value-oriented retailer of casual apparel for the college crowd. Last night, the company reported yet another stunning quarter and so winged it another $1 1/2 higher this morning to $74 1/2, a bald spot away from its all-time high. Sales for the fourth quarter ended January 30 soared 38.7% to $212 million due to a 23.8% increase in same-store sales (SSS). That followed a 16.5% SSS increase in the year-ago period. Earnings per share increased 51% to $1.03 from $0.68 a year ago, beating the consensus estimate of $0.95 per share. For the year, sales floated up 44.8% to $588 million on a 32.1% SSS increase. Earnings flew even higher, up 162% to $2.26 per share, or 19% above the consensus estimate available as recently as December. The analysts have consistently underestimated this company.

And the Eagle seems to have no plans to land. By focusing on apparel for both men and women and providing basic Abercrombie striped-shirt chic at a lower price point, American Eagle has positioned itself right in the middle of the market. You can see that from the company's tremendous growth over the last two years and from its continued momentum.

Quarter    Sales    EPS      SSS
4Q97 -13% -25% -12.2%
1Q98 12% -19% 3.3%
2Q98 23% 250% 11.8%
3Q98 33% 193% 23.8%
4Q98 25% 135% 16.5%
1Q99 64% * 79.0%
2Q99 46% 700% 45.9%
3Q99 42% 115% 29.4%
4Q99 39% 51% 23.8%

* Gain of $0.24 per share reversed a loss of $0.16.

Clearly, such outsized sales and earnings increases eventually run up against very tough comparisons from the previous year. Same-store sales just don't rise by double-digits forever. Yet, the abbreviated earnings release offered no sign of trouble. Also, a separate press release noted that February revenues skied 52.5% to $36 million on a 32.7% gain in SSS. To put that in perspective, the company scored a 49.9% overall sales gain and 40.3% SSS jump in the same period last year. That roughly means that each American Eagle store open two years ago is selling $186 worth of clothes today for every $100 worth of stuff it sold then. Impressive.

The stock now trades at about 28 times this year's projected earnings. Yet, that estimate assumes just 16% growth, which looks like a woefully lowball estimate. If the Eagle's flight can continue -- and it appears it can -- the stock could still prove a bargain. Yesterday, Morgan Stanley initiated coverage with an "outperform" rating and a price target of $85. That sounds readily doable.

Related articles:
-- Special Feature, The 1998 Year In Review, 12/17/98
-- The Daily Double, 12/3/98

UPS

Computing products and services giant IBM (NYSE: IBM) gained $9 1/8 to $175 7/8 after signing a $16 billion technology agreement with direct PC marketer Dell Computer (Nasdaq: DELL). Under the deal, Dell will be able to integrate IBM's high capacity disk drives, network adapter cards, flat panel displays, and static random access memory (SRAM) chips into its own computer systems. Dell added $2 7/16 to $83 3/8 on the news. For more details, see this morning's Breakfast With the Fool

Canadian facilities-based competitive local exchange carrier (CLEC) MetroNet Communications (Nasdaq: METNF) rang up gains of $3 1/4 to $46 3/8 after agreeing to merge with AT&T's (NYSE: T) AT&T Canada subsidiary in a deal valued at about $7 billion. MetroNet shareholders will end up with 69% of the combined company, with AT&T indirectly owning the remaining 31%.

Men's apparel superstore retailer K&G Men's Center (Nasdaq: MENS) picked up $1 5/8 to $10 after agreeing to be acquired by rival Men's Wearhouse (Nasdaq: SUIT) for between 4.1 million and 4.4 million Men's Wearhouse shares. Based on last night's closing prices, the deal is valued between $110 million and $118 million.

Web-hosting company Verio Inc. (Nasdaq: VRIO) moved up $7 to $39 1/2 after being selected as the exclusive business Web-hosting provider for online services conglomerate America Online (NYSE: AOL). Verio will provide AOL with at least a total of $42.5 million in guaranteed payments in exchange for "significant" promotion of an AOL-Verio co-branded website featuring Verio's Web-hosting products.

Office supplies retailer Staples (Nasdaq: SPLS) tacked on $2 to $30 after reporting Q4 EPS of $0.22 (excluding charges), up from $0.16 last year and $0.02 ahead of analysts' expectations. The company also announced it will repurchase $200 million of its shares over the next year.

Electronics retailer Circuit City Stores (NYSE: CC) charged ahead $3 1/16 to $60 1/8 after reporting a 12% increase in same-store sales at its namesake stores during February. Total sales for the month rose 23% from a year ago to $770 million. Same-store sales at the company's CarMax unit were down 6% for the month, despite a 42% increase in total sales during the period to $124 million.

Discount retailer Dollar General (NYSE: DG) added $1 13/16 to $32 1/4 after reporting a 4% rise in February same-store sales despite a tough comparison from a year ago, when the firm's "comp" figures marched ahead 21.8%. Total sales for the period were up 17.9% year-over-year to $252.7 million.

Solid waste disposal company Browning-Ferris Industries (NYSE: BFI) rose $1 5/8 to $33 1/16 on rumors that the company may be a takeover target.

Arts and crafts retailer Michaels Stores (Nasdaq: MIKE) constructed a $2 5/16 gain to $20 3/4 after reporting fiscal Q4 EPS of $0.99, up from $0.79 last year and ahead of the Zacks mean estimate of $0.93. Additionally, the company said its same-store sales figures for February rose 5% from a year ago and added that it expects its comparable stores sales growth to continue throughout this year.

Several oil and gas services and contract offshore drilling companies rose this morning, adding to yesterday's gains following a report that crude oil and refined product inventories dropped by 8 billion barrels last week due to unusually warm weather. The inventories' slide prompted optimism that the ongoing global oil supply glut is subsiding, albeit slowly. Schlumberger (NYSE: SLB) gained $2 7/16 to $54 3/16, Halliburton (NYSE: HAL) added $1 11/32 to $31 3/4, Baker Hughes (NYSE: BHI) rose $15/16 to $20 9/16, and Diamond Offshore (NYSE: DO) picked up $1 3/16 to $23 3/16.

DOWNS

Applied Micro Circuits (Nasdaq: AMCC), which makes semiconductors used in communications networks, gave up $2 1/4 to $35 1/4 after it agreed to buy privately held Cimaron Communications Corp. for around $115 million in stock to expand its high-speed digital communications business.

Discount apparel and accessories e-tailer Bluefly (Nasdaq: BFLY), which announced a marketing agreement with Web portal Excite (Nasdaq: XCIT), shooed away $2 1/4 to $14 4/8 this morning. Bluefly, which got promotional space throughout the Excite network, was the topic of a recent Foolish column.

Department store retailer Saks Inc. (NYSE: SKS), which said February same-store sales were flat with last year's levels, lost $1 7/8 to $34 1/8 this morning. Revenues rose 7% to 403.9 million for the month.

Biopharmaceutical firm Abgenix (Nasdaq: ABGX) trailed off $9/16 to $15 after announcing the sale of 3 million shares of company stock for $15 each, a slight discount to yesterday's $15 9/16 closing price. Proceeds from the offering are slated for research and development.

Small-town pharmacy company Horizon Pharmacies (AMEX: HZP) was rocked for a $2 7/8 loss to $5 3/8 after it said complications with its prescription pricing communications technology are likely to result in a loss in Q4, full-year 1998, and Q1 1999. Wall Street was calling for profits in all three reporting periods. Horizon said is has fixed the problems and is trying to recoup its losses.

Gaming products and software developer International Game Technology (NYSE: IGT) paid out $4 1/8 to $14 3/16 after it said it may not meet analysts' estimates for fiscal 1999 because of slower replacement machine sales and uncertain timing of new casino openings. The company is also tracking the possibility of legislation in Nevada that could stop gaming machine makers from receiving a percentage of floor profits from those machines.

Auto components supplier Hayes Lemmerz International (NYSE: HAZ) was hazy today, dropping $2 9/16 to $21 7/8 after it reported Q4 EPS of $0.31, badly missing First Call's six-analyst estimate of $0.56. The company said Q4 results were hurt by "economic turmoil in developing markets, primarily Brazil, and equipment downtime issues in the steel wheel business in North America."

Aviation petroleum products, cargo services, and support systems provider Mercury Air Group (AMEX: MAX) descended $1 1/4 to $6 3/4 after ending talks with an unnamed company that expressed acquisition interest last month.

Local area network (LAN) switching and wide area network (WAN) access systems maker Level One Communications (Nasdaq: LEVL), reportedly downgraded to "accumulate" from "strong buy" by Adams, Harkness & Hill, shed $3 9/16 to $28 13/16.

Electronic payment and collections systems maker CheckFree Corp. (Nasdaq: CKFR) lost another $4 7/8 to $30 5/8 after retreating $3 3/8 yesterday when personal finance software developer Intuit (Nasdaq: INTU) sued the company for breach of contract related to an agreement signed last year. In a statement released this morning, CheckFree said it is "confident that we have been correct in all actions that we have taken." Intuit added $2 15/16 to $90 15/16.

CD and software distributor Navarre Corp. (Nasdaq: NAVR) tuned out $1 1/16 to $14 1/16, reversing yesterday's small advance powered by news that the company filed with the SEC for a $37.4 million IPO of its NetRadio operation, which broadcasts audio over the Internet.

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