Fool.com: Consolidated Stores: Lots To Offer? (News) November 17, 1999

Consolidated Stores: Lots To Offer?

By Dave Marino-Nachison (TMF Braden)
November 17, 1999

Investors looking for exposure to deep-discount retailing started visiting Consolidated Stores (NYSE CNS) in 1995 and the results were astounding, the stock turning in three-year returns of better than 300%.

But then things began to turn at the operator of Odd Lots, Big Lots, Pic 'N' Save, the K*B Toys operation, and the wonderfully named MacFrugal's Bargains*Closeouts -- the company's main competitor was bought in 1998 for about $1 billion. Shortly after that deal closed, the company said fiscal-year earnings would disappoint as high-margin toy sales came in lower than anticipated; a hefty charge for the MacFrugal's buy didn't help matters.

So the company tried a reorganization of its closeout division -- and then dismissed former MacFrugal's executive Mark Miller, who the company hoped could do the deed, after less than a year. Investors have since been wary of showing too much faith in their tarnished former star.

This year hasn't been much better for Consolidated stockholders despite an aborted late spring-early summer rally. Where does the company stand now?

Through the first three quarters of 1999, it appears progress is evident but hardly gaudy. Revenues are up 15% year-over-year, closeout sales rising slightly while toy sales have moved back a bit -- not necessarily a bad thing since closeout gross margins are somewhat higher and showing gradual improvement.

Third-quarter losses were $0.14 per share, a penny better than last year and three cents ahead of Wall Street's consensus estimate (Consolidated's first three quarters are historically thin, earnings-wise, while the company gears up for the holidays.) Excluding the KBKids.com online venture -- a joint project with BrainPlay.com launched in late July -- Consolidated broke even for the quarter. Same-store sales rose 9.8% in Q3, compared with a 6.2% decline a year ago.

So how is the company positioned for the all important holiday season? Chairman and CEO William Kelley is optimistic.

"Our inventories are in good position," he said in a statement, "and we are restoring
customer traffic to historical levels." Citing strong performance at the toy division, where Q3 comps rose 8%, he said: "The launch of Sega Dreamcast along with Pok�mon and many other toy drivers contributed to this performance... [and] KBkids.com is showing significant growth in customer traffic and sales as we approach the key holiday selling season."

Consolidated believes KBkids.com will be a key driver of revenue growth and help it keep pace with the likes of eToys.com (Nasdaq: ETYS) and Amazon.com (Nasdaq: AMZN); the company is counting on its market experience and buying power to help it provide selection and cost advantages over its competitors. An August Associated Press article quoted KBkids.com's CEO as saying it expects to be the online toy sales leader by Christmas.

But when Consolidated was rolling is was delivering profits in all four quarters, something investors would probably like to see resurrected. Still, the company is expected to begin posting earnings growth again this year and a strong fourth-quarter performance from the toy division might be just the thing to convince investors that the company is back on track.

Investors would do well to remember, though, that losses at the Internet division are likely to continue as the company builds out its inventory, distribution and fulfillment capabilities, and boosts marketing; and don't stop watching the retail divisions, either, since it was poor performance at the store level that drove the stock downward in the first place.

Related Links:
Consolidated Stores Web site
Consolidated Stores Message Board
Five-year Chart
KBkids.com

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