by Louis Corrigan (TMF Seymor)
Atlanta, GA (April 20, 1999) -- Why do I get the creepy feeling that someone's actually reading this column? Could it be the fact that shares of Braun's Fashions (Nasdaq: BFCI), a sleepy retailer of value-oriented clothing for working women, surged 40% between last Tuesday's close, when I said it was "worth investigating," and yesterday's high?
Eh, to reiterate what maybe isn't obvious if you're reading this outside of Fooldom (www.fool.com), this column comments on candidates that show up on our Rising Margins screen. It's intended as a quick look at a few names with the goal being simply to determine whether the selected candidates seem worth further investigation -- or not. It's one of the sketchier features in a part of the Fool devoted to Stock Ideas. So the "do your own research" caveat applies even more than usual here.
First up, Cache (Nasdaq: CACH), a small mall-based retailer with 176 Cache stores, which offer casual clothing to women 25 years and up, and the 12-store Lillie Rubin chain, which targets women aged 40 and up. We saw Cache not long ago, after the stock had cashed in on a strong Q4 earnings report.
The Cache machine remains in high gear. Q1 sales rose 16% to $36.5 million thanks to a 5% increase in same-store sales. That included a 10% comp-store gain for the five-week period ending April 3, as the firm may have benefited from an earlier Easter this year. Profits surged to $0.752 million from $0.057 million last year, or $0.08 a share versus just $0.01 per share last year. That brings trailing EPS to $0.50.
With $9.7 million in cash net of long-term liabilities and an otherwise solid balance sheet, Cache remains worth investigating. Trading at $7 3/8 Monday, it sported a P/E of 15 before backing out its cash. Today, it ran all the way to $11 before falling back to around $8 after announcing the launch of its online store on Yahoo!'s (Nasdaq: YHOO) shopping site. Yet the company carries a market cap of just $74 million, which makes it relatively unattractive to most institutional investors. It also must survive on low margins in a volatile sector. So it's a bit risky.
With $9.7 million in cash net of long-term liabilities and an otherwise solid balance sheet, Cache remains worth investigating. Trading at $7 3/8 with trailing earnings of $0.50, it sports a P/E of 15 before backing out its cash. Of course, the company carries a market cap of just $68 million, which makes it relatively unattractive to most institutional investors. It also must survive on low margins in a volatile sector. So it's a bit risky.
Next up, Advantage Learning Systems (Nasdaq: ALSI), a firm that provides K-12 schools with computerized learning information systems, including Accelerated Reader, the most widely used reading software used in grades K-12. The company has been on a roll since going public in 1997, beating estimates every quarter.
The latest quarter was no exception. Revenue popped up 73% to $18.4 million while net income soared 126% to $4.3 million from $1.9 million. EPS jumped to $0.13, beating the consensus by two cents per share and nearly doubling last year's $0.06 per share. The company now serves 43,400 schools, or nearly 40% of all U.S. schools. Advantage added 26% more schools to its base of customers during the quarter than it did during the year-ago period.
With over 80% of revenue coming from high-margin product sales (software) and the rest from services (teacher training), the profit margins of this business are quite high. Although gross profits declined from 83.4% a year ago, they're still a hefty 82.2%. Moreover, operating expenses increased just 37%, revealing the leverage in the business model.
The stock has been volatile, trading up to $43 in mid-March before collapsing to around $20 just last week. Since then, they've run back to $32 and then back again to $26. At that price, Advantage Learning trades for about 58 times trailing earnings of $0.45 per share and 43 times the high-side FY99 estimate of $0.60, a slight premium to the long-term growth rate of 38%. With an enterprise value (market cap of $881.7 million minus cash of $36.6 million) of $845 million, it trades at nearly 14 times sales.
Advantage has a very strong market position. No doubt the company aims to increase product sales per school (it also offers math products) as well as winning over new schools. Without knowing the market at all, that at least seems plausible. I wonder, though, what percent of the U.S. school market any one company will be able to claim.
While Advantage appears to have a terrific business, with a return on equity over 26% according to our Fool Snapshot, I'd want to know a lot more before paying the current multiple for the stock. Still, this one could be worth a closer look.
Finally, Hasbro (AMEX: HAS), the marketer of toys, games, interactive software, and a whole lot more. Recently shifting more towards acquiring or licensing great brands or hot brands from others, Hasbro has found the sweet spot of a tough toy/games market. Ever heard of Furby? Or Pokemon? Or Teletubbies? Or maybe that little ole Star Wars prequel, The Phantom Menace? Hasbro's been turning their product rights to these franchises into more than Monopoly money and expects at least $500 million in sales this year from Star Wars gear alone (the movie opens May 19).
Q1 revenues hit hyperdrive, flashing ahead 38% to $668.4 million, thanks mostly to Tiger Electronics (acquired last April) and strong interactive software sales. Net income rose 77% to $13.8 million, with EPS up 75% to $0.07, two cents per share ahead of estimates.
Subtracting much higher amortization charges and interest payments from increased borrowing earnings before interest, taxes, and depreciation nearly doubled to $75.8 million from $39.7 million. The company also bought back 1.7 million shares during the quarter, paying what now looks like a bargain $26.47 each.
At $33, Hasbro trades for just over 22 times the high-side FY99 estimate of $1.47 per share. The firm's been leveraging its balance sheet, boosting overall liabilities by 90% in the last year, and pushing liabilities to 44% of total capitalization, up from just 30% a year ago. Assuming its product line continues to click on all cylinders as it has, that's not a problem. It may even be quite smart in that Hasbro is now a far more formidable competitor.
One point worth noting. Although inventories rose just 31.5% year-over-year, trailing the sales growth, accounts receivables were up 43%, or well ahead of sales. Not generally what you want to see. That could be due to Hasbro ensuring stores are stocked with Phantom Menace products in anticipation of blowout second quarter results.
Yet it probably just follows from accounts receivable being abnormally low last year due to massive inventory adjustments at Toys "R" Us (NYSE: TOY), which cut into Hasbro's Q1 FY98 sales. Indeed, accounts receivables are basically flat with the Q1 FY97 number, despite 20% higher sales in this latest period. So days sales outstanding have arguably declined, meaning the accounts receivable increase is probably just an anomaly.
If you're addicted to Star Wars, you might find Hasbro is just the investment you're looking for. As a market leader on the upswing, it's certainly worth a look.
Dozens of other names turned up on our margins screen this week, including other industry leaders like Charles Schwab (NYSE: SCH) and Intel (Nasdaq: INTC). For a further look, click here.