by Louis Corrigan (TMF Seymor)
Atlanta, GA. (April 27, 1999) -- An overflow of stocks this week on our Rising Margins screen.
First up, bebe stores (Nasdaq: BEBE), a 96-store specialty apparel retailer that markets "body-conscious" apparel to ultra-thin 18-35 year old women. Think Ally McBeal. Since going public last year, bebe has continued to deliver the kind of growth and return on equity that makes short skirts seem dull by comparison.
Third quarter results couldn't have been sexier. Sales increased 38% to $46 million on a sparkling 26.2% gain in same-store sales. That came atop a 32% same-store sales boost in the year-ago period and resulted in the tenth consecutive quarter of double-digit comps. (Year-to-date, sales rose 36% to $146 million thanks to a 27% comp-store increase following the 43.5% gain for the first nine months of FY98).
No surprise, EPS jumped to $0.21, up 62% from the $0.13 reported a year ago and better than the consensus estimate of $0.19. Strong demand for bebe's novelty items helped push gross margins to 51.2% from 48.8% a year ago while operating expenses dipped slightly as a percent of sales.
Though inventories increased 55% year-over-year to $17 million, that's explained largely by the addition of 11 new stores, including 6 opened during the third quarter. Indeed, bebe is known not just for tight clothes but for tight inventory management, made possible by the fact that the company sources products in the U.S. Of course, a little scarcity also gives customers an impetus to buy now. And with popular Hollywood stars like Calista Flockhart and Party of Five's Jennifer Love Hewitt sporting bebe's attire, the customers have been pouring in.
After trading up to a new all-time high of $50 prior to the earnings release, bebe shares have sold off to around $39. Despite the exceptional growth, stellar return on equity, and a solid balance sheet ($52 million in cash and no debt) reflected in the Fool Snapshot, bebe leaves some investors antsy. With trailing EPS of $1.00, it's got a rich P/E. More importantly, the company's past success is creating some high hurdles for the future on the same-store sales front.
Finally, while the company plans to add 15 stores a year for the next few years on the way to doubling its store base to 200, many wonder how far the bebe concept will carry. After all, even some relatively slim women have trouble squeezing into bebe's outfits. Moreover, consistently hitting the fashion mark in women's apparel is tricky. With 88% of the stock held by Chair/CEO Manny Mashouf, any disappointment could punish these thinly traded shares. While bebe is worth a closer look, the risk-reward starts looking less attractive over $35. For more, see our December Daily Double.
Next, Medicis Pharmaceutical (NYSE: MRX), a former Fool Rule Breaker holding that's the leading independent U.S. pharmaceutical company focused on treating dermatological problems. Q3 sales rose 34% to $30.2 million thanks to new brands acquired last quarter and increased sales of its higher-margin prescription products. Gross profit margins increased to 83.4% from 82.3% while operating expenses as a percent of sales declined by 4.9 percentage points.
The result was rising margins, as EPS jumped 37.5% to $0.33 from $0.24. That takes into account a 13% bump in shares outstanding. It also excludes a one-time after-tax gain of $4.3 million that boosted reported earnings to $0.47 per share. Backing out acquisition charges and one-time gains, Medicis appears to be wearing attractive 12-month trailing earnings of $1.21 per share with a consensus earnings estimate of $1.26 for FY99 (ending in June) and $1.46 for the following year.
What's interesting is that Medicis, at $25 1/4, has taken a beating since hitting $47 earlier this year. A P/E of 21 would seem to make Medicis worth a closer look. But the story is even more interesting given the firm's $252 million in cash, or $8.46 per share, and lack of debt. Backing out the cash, the company is selling for less than $17 per share, giving it a P/E of about 14.
At least one brokerage firm sees a bargain. On April 21, BancBoston Robertson Stephens analyst Donald Ellis reiterated his "strong buy" rating while boosting his FY2000 estimate to $1.52 per share. "We fail to find any reason for the stock's decline... and believe that the company represents one of the best values in the specialty pharmaceutical sector."
Given that the company hasn't attracted inordinate interest from short sellers, Medicis looks like an excellent candidate for further research.
Finally, we'll take a quick look at Lexmark International (NYSE: LXK), a leading manufacturer of laser and inkjet laser printers. Lexmark delivered yet another outstanding quarter, making 14 straight in which it has delivered earning growth. Shareowners have been rewarded with a ten-bagger over the last three years.
Q1 sales printed up a 17% gain to $787 million, thanks to a 21% increase in revenue from printers and associated supplies, as CompUSA (NYSE: CPU) and Staples (Nasdaq: SPLS) started carrying its inkjet printers during the period. Although a change in product mix caused gross margins to dip to 36.2% from 36.7%, Lexmark shaved 2 full percentage points off its operating expenses, which declined to 23.1% of revenue. EPS rose 40% to $0.96, whipping up on the $0.88 analyst consensus.
CEO Paul Curlander said the company is comfortable with the consensus estimates for the year, which stood at $4.20 at the time. The market liked the news, sending Lexmark to a new all-time high of $127 Monday. In recent weeks, the stock had been crunched along with other highflying technology issues, dropping below $100 early last week.
Lexmark has $81 million in cash versus $149 million in long-term debt. In the first quarter, the company spent $155 million (or about $98 a share) to acquire 1.6 million shares. The board has already authorized another $75 million in stock buybacks.
At Monday's close of $123, the stock trades for 33.5 times trailing earnings of $3.68, or just over 29 times this year's estimates. That's a premium to the projected long-term growth rate of 19%, but the premium is probably justified. Investors interested in an outperformer in the PC peripherals market should take a closer look at Lexmark, especially if it's discounted again in a technology pullback.
That just scratches the surface of the 193 names on our screen this week, which include the likes of Microsoft (Nasdaq: MSFT), Dollar Tree (Nasdaq: DLTR), EMC (NYSE: EMC), Gateway (NYSE: GTW), Knight/Trimark (Nasdaq: NITE), and my margins sweetheart K-Swiss (Nasdaq: KSWS). Happy hunting.
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