Fool.com: Sunglass Hut's Q2 Shimmers (News) August 19, 1999

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Sunglass Hut's Q2 Shimmers

By Richard McCaffery (TMF Gibson)
August 19, 1999

Eyewear retailer Sunglass Hut International (Nasdaq: RAYS) reported solid second quarter financial results today, posting earnings of $0.42 per share and inching past the First Call mean estimate of $0.40 per share. Sales rose 3.4% to $199.6 million.

The Coral Gables, Florida company -- the world's largest retailer of specialty sunglasses -- continues to see rewards from an aggressive restructuring campaign. The company has closed over 300 unprofitable or marginal locations, introduced combination stores that sell sunglasses and name-brand watches, focused its merchandise, and stepped up its marketing campaign. Those efforts helped grow same-store sales for the most recent quarter by 5.9%, and 6.1% for the first six months of fiscal 1999. That's a nice turnaround for a company that reported flat same-store sales in fiscal 1997, the same year it took a $103 million restructuring charge and posted a pro forma net loss of $70 million.

Management continues to like the economics and flexibility of operating small stores and kiosks, which allows it to quickly close outlets that aren't generating cash and move to better sites. The company operates 1,771 sunglass stores, 108 Watch Station stores, and 95 combination outlets. It plans to double the number of combination stores by year-end and double it again in 2000.

Those plans could startle investors concerned about careless expansion, but the company seems to have learned its lesson. For the most recent quarter, Sunglass Hut's gross margin increased slightly to 44.9% from 44.7% a year ago. Sales, general, and administrative (SG&A) expenses dropped to 27.2% from 27.6%, and net margins moved up to 10.3% from 9.6%. That shows management is keeping a watchful eye on operations.

In addition, the company has started to see its e-commerce strategy pick up speed from the purchase of two online retail companies in January. The $4.1 million purchase of SwissArmyDepot.com and shades.com contributed to the company's $648,000 in total Internet sales for the quarter. That represents growth of 109% in Internet sales from a year ago. Don't get too carried away, however. Internet sales are just a fraction of the company's $199.6 million in quarterly sales, so it's too soon to start calling Sunglass Hut an e-tailer.

Using yesterday's closing price of $12 13/16, the company is trading at a trailing P/E multiple of 26, safely below the S&P 500's current P/E of 31 and at an attractive level for a growth stock. According to First Call, analysts predict earnings of $0.56 a share this year, $0.74 a share in 2000, and $1.00 a share in 2001. That gives the company an average annual growth rate of 34% for the next two years. If the company meets those estimates, it would have a forward P/E of 23 for fiscal 1999 and 12.8 for fiscal 2001.

Looks like a bargain, right? Investors shouldn't put much faith in long-term estimates, however, especially for a company with a mixed track record. This is not to say management's recent successes shouldn't be commended. After all, it has beaten estimates for the last three quarters; for some, that may be enough. Others might want to watch the company's performance over the next few quarters to see if it matches expectations. Also, be sure to scour the balance sheet for growth in inventories and receivables before taking any action.

Related link:

Daily Double, Sunglass Hut International, 07/22/99

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