Friday, March 5, 1999
DJIA 9665.17 +197.77 (+2.09%) S&P 500 1268.33 +21.69 (+1.74%) Nasdaq 2329.63 +36.74 (+1.60%) Russell 2000 397.27 +3.25 (+0.82%) 30-Year Bond 95 1/32 +1 13/32 5.59 Yield

An Investment Opinion
by Dale Wettlaufer

CompUSA Same-Store Same Story

Computer superstore company CompUSA (NYSE: CPU) got clocked this morning for a $2 loss to $6 1/8 after it announced yesterday after the bell that it believes third quarter same-store sales will decline in the high single-digit percentage range. Combined with the cost of other initiatives, the company expects to report a loss of a few pennies per share for the quarter. Since there are a number of moving parts to the CompUSA business, it is dangerous to build overarching assumptions for someone that doesn't follow the company very closely without looking first at some of those moving parts.

First, in the third quarter last year, the company reported a 1.2% increase in same-store sales but a 6% decline in computer superstore net sales. One of the moving parts here is that the company's national accounts group net sales are included in same-store sales, so this is obviously one part of the company that is growing faster than the core superstore business. In the second quarter of this year, the company reported a 4.7% decline in same-store sales but said unit growth in PCs was quite high:

"Compared to the second quarter of fiscal 1998, both desktop and notebook computer unit sales increased by more than 50% in the second quarter of fiscal 1999 while average selling prices for both categories decreased approximately 20%. This reduction and the lower sales volume in the Computer City stores were the primary contributors to an 18% decrease in average sales per store compared to the comparable quarter last year and a corresponding increase of fixed expenses as a percentage of sales."

>Alright, a little remedial math. Say unit sales are 100 and the price is $10 in the base year. The next year, unit sales are 150+ and price goes to $8. That's $1,000 in sales in the base year and $1,200+ in the following period. I don't know what I'm missing, but when you include the national accounts results number in there, it seems like the PC unit and price metrics aren't the big deal here as far as same-store sales go. The company says its build-to-order (BTO) business and services business is going well, but pulling apart the store results from other growth initiatives isn't made easy by its disclosures.

So what do we have here? We've got a market cap of $557 million with notes and debt of another $236 million and cash of $402 million. There's a sales run-rate of around $6 billion, some of which is less than worthless and some of which is good quality revenues. You've got a company with some superstore problems that can be remedied but not without some hard work. This is somewhat reminiscent of the company's inventory management problems in the 1994-1995 period, but the competitive landscape is much different these days and other resellers are consolidating. So some of the value of the BTO business and the Web business is being eroded by poor economics at the stores.

As an asset, the store base is interesting. It can serve as a platform for the other businesses. But dealing with the question of what is retailing computer products at the turn of the century is the key thing here. It's not unlike what is happening with book superstores. You just have to deal with the creative destruction that is going on. As a possible turnaround story, CompUSA could get interesting. The company has done it once before with CEO James Halpin at the helm. There's no reason with the array of assets the company has -- both virtual and hard assets -- that it can't be done. The company is funding its own operations and has free cash flow, but it's attacking a highly competitive industry. While a same-store sales decline of this quarter's magnitude isn't good, this drop to around $6 puts CompUSA firmly on my "special situations" list to learn more about.


Harvey Entertainment (Nasdaq: HRVY), the company that manages and markets animated characters such as Casper and Richie Rich, took on $7/8 to $7 1/4 after founder and former head Jeffrey Montgomery offered to buy the company for about $31.4 million, or about $7.50 a share, an 18% premium over yesterday's close. The company referred the proposal to its financial adviser.

Information technology and staffing services provider Metamor Worldwide (Nasdaq: MMWW) grabbed $2 to $17 1/8 after announcing the purchase of GE Capital Consulting -- a division of GE Capital Corp., itself a subsidiary General Electric (NYSE: GE) -- for $115 million in stock and cash. Metamor expects the deal to help earnings in fiscal 1999. It also struck a three-year $105 million deal to provide information services to GE Capital Corp.

Networking chip maker Level One Communications (Nasdaq: LEVL) raced ahead $18 11/16 to $45 13/16 following last night's news that Intel (Nasdaq: INTC) agreed to buy the company for approximately $2.2 billion -- about $48 3/4 a share -- in stock, an 80% premium over Level One's closing price yesterday of $27 1/8. For more on the deal, click on today's Breakfast With the Fool. Intel advanced $2 1/4 to $115 5/8 this morning.

Computer services firm Perot Systems (NYSE: PER) sauntered ahead $2 to $41 1/4 after announcing that it won a contract from AT&T (NYSE: T) to provide support and maintenance for the long-distance giant's billing systems. The company said Q4 EPS was $0.13, up from an $0.03 loss last year.

@Home Corp. (Nasdaq: ATHM) moved up $2 3/8 to $117 5/8 this morning. The high-speed Internet access company will join the Nasdaq 100 Index after the close of trading Tuesday (March 9), replacing Tele-Communications Inc. (Nasdaq: TCOMA), which is being acquired by AT&T (NYSE: T).

Satellite systems designer Orbital Sciences Corp. (NYSE: ORB), which successfully launched a satellite for NASA last night, rocketed up $1 3/8 to $25 7/8 this morning.

Insurance company American Indemnity Financial (Nasdaq: AIFC) blazed ahead $2 7/8 to $13 7/8 after property, casualty and life insurer United Fire & Casualty Co. (Nasdaq: UFCS) agreed to buy the company for $30.6 million in cash. The deal gives American Indemnity shareholders $14.60 per share, about a 33% premium over yesterday's closing price, and deferred consideration of $1 per share in two years.

Enterprise software company Smith Gardner & Associates (Nasdaq: SGAI) locked up $2 3/16 to $15 1/4 after reporting Q4 EPS of $0.11, up from a $0.41 loss last year. Two analysts polled by First Call expected an $0.11 per share loss.

ABR Information Services (Nasdaq: ABRX), which provides benefits administration, payroll, and human resource outsourcing services to employers, signed up gains of $1 7/8 to $21 after it turned in fiscal Q2 EPS of $0.20, a nickel better than a year ago and $0.02 better than market projections. Gross and operating margins for the quarter represented highs for ABR.

Missouri utility company St. Joseph Light & Power Co. (NYSE: SAJ) switched on gains of $3 7/8 to $20 3/4 after UtiliCorp United (NYSE: UCU) agreed to buy the company for $23 per share, about a 36% premium on yesterday's closing price for St. Joe stock.

Telecommunications billing and customer service software maker LHS Group (Nasdaq: LHSG), which withdrew a secondary stock offering of 3.4 million shares citing unfavorable market conditions, slid up $1 3/4 to $40 1/2 this morning.

Consumer electronics stores Circuit City Stores (NYSE: CC) connected for $4 9/16 to $67 13/16 as Donaldson, Lufkin & Jenrette analyst Gary Balter raised his target price for the stock to $90 per share from $75.

Specialty semiconductor company Microchip Technology (Nasdaq: MCHP), upgraded to "strong buy" from "outperform" by Morgan Stanley Dean Witter today, added $2 3/8 to $30 13/16. The broker made an identical ratings change for chipmaker Altera (Nasdaq: ALTR), which moved up $2 7/8 to $56 13/16.


Apparel marketer The North Face (Nasdaq: TNFI) did an about-face and fell $3 3/4 to $12 3/4 after saying it has withdrawn its tender offer for all of its outstanding shares, which was announced earlier this week, due to "unexpected delays" in preparing its audited 1998 financial statements. Those delays may end up affecting the firm's 1997 results, the company said. In a confusing twist, the company added that the previously announced tranaction agreement with TNF Acquisition LLC "remains in full force and effect."

Baseball gloves and basketballs maker Rawlings Sporting Goods (Nasdaq: RAWL) was spiked for a $1 5/8 loss to $10 after saying delayed orders due to "financial difficulties" at several retailers will lead to fiscal Q2 revenues below last year's $61.8 million and EPS between $0.38 and $0.43, short of the Zacks mean estimate of $0.66. The company said it plans to restructure and consolidate its operations while placing more of an emphasis on spurring demand for its products through aggressive marketing.

Healthcare information technology firm QuadraMed (Nasdaq: QMDC) fell $2 3/8 to $13 7/16 after saying it has completed its acquisition of privately held Compucare Co. However, QuadraMed said it issued about 2.96 million shares in the course of closing the deal, which was about 270,000 more shares than originally forecasted.

Specialty railroad trackwork maker ABC-NACO (Nasdaq: ABCR), formed by the merger of ABC Rail Products and NACO last year, derailed for a $1 9/16 loss to $13 after saying a falloff in sales and margins at its track products business resulted in pro forma fiscal Q2 EPS of $0.05, lower than the $0.12 expected by the five analysts surveyed by First Call. To address the problem, the company said it will streamline its trackwork facilities to five from seven and cut staff, which will impact the firm's Q3 results by an unspecified amount.

Healthcare information systems developer IDX Systems Corp. (Nasdaq: IDXC) dropped $10 5/8 to $15 3/8 after saying unexpected delayed purchasing decisions by some of its clients will result in a Q1 loss of $0.22 to $0.28 per share. Analysts had been expecting earnings of $0.35 per share, according to the company.

Cable TV systems operator Adelphia Communications Corp. (Nasdaq: ADLAC) was scrambled for a $4 1/2 loss to $52 5/8 this morning after agreeing to buy fellow cable company Century Communications Corp. (Nasdaq: CTYA) for $5.2 billion in cash, stock, and assumed debt. The news drove Century's shares $2 5/8 higher to $38. The deal follows Adelphia's announcement less than two weeks ago that it would acquire privately owned FrontierVision L.P. for $2.1 billion in cash, stock, and assumed debt.

After yesterday's fall by International Gaming Technology (NYSE: IGT), it was slot machine maker Anchor Gaming (Nasdaq: SLOT) throwing snake-eyes this morning. Anchor lost $3 3/4 to $36 3/4 after saying that the same potential Nevada legislation that is worrying IGT may also hamper Anchor's future earnings. Further, Anchor said income outside of its gaming joint venture with IGT is down in fiscal Q3 and will lead to EPS $0.13 to $0.23 below the First Call mean estimate of $1.33.

Group employee benefits provider Delphi Financial Group (NYSE: DFG) slipped $5 7/16 to $34 15/16 on more concerns about the near-term outlook for its alternative workers' compensation reinsurance unit, Unicover Managers. Since Feb. 23, Delphi's shares have tumbled 30% after Berkshire Hathaway's (NYSE: BRK.A) Cologne Re unit said it will add $275 million to its reserves to cover workers' comp claims, prompting speculation that a similar move is forthcoming from Unicover. This morning, Goldman Sachs cut its rating on Delphi to "market perform" from "recommend list."

Healthcare services giant McKesson HBOC (NYSE: MCK) was knocked down $5 7/8 to $60 following a downgrade from Morgan Stanley Dean Witter to "outperform" from "strong buy."


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