Boring Portfolio

Borders to Midcap 400
Friday, June 12, 1998
by Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (June 12, 1998) -- Late-session buying -- probably some combination of bargain hunters and short-sellers locking in profits -- turned heavy losses in the Dow and S&P 500 into modest gains and trimmed losses on the Nasdaq to a relatively modest 5 points, or -0.27%.

The Boring Portfolio posted a 0.76% gain thanks mostly to a $2 boost in shares of Borders Group (NYSE: BGP). Borders benefited from news that the company would join the S&P Midcap Index as well a "buy" recommendation from Fahnestock.

Borders will join the S&P 400 on Monday after the close of trading. Stocks of companies moving into an S&P index usually rise on such news, because funds that mirror the various indexes are obliged to purchase shares of newly joining companies.

In addition, Fahnestock analyst William Armstrong initiated coverage of Borders with a "buy" rating and set a 12-month price target of $40 for the stock. Echoing the sentiment of other analysts (and this individual investor), Armstrong said that Borders is a solid retailer with "very strong" management.

Armstrong expects Ann Arbor-based Borders to generate annual earnings growth of 25% going forward -- that is, in line with the guidance that Borders' management has repeatedly endorsed. The analyst offered earnings forecasts of $1.22 per share for the current fiscal year ending January 1999, and $1.51 per share for the following year.

I received a call back from TCBY Enterprises (NYSE: TBY) this morning. Thursday, the company reported second quarter earnings of $0.15 per share, in line with analysts' projections and up nicely from last year's $0.13. TCBY cautioned, however, that "sales and franchising revenues were adversely impacted by the economic challenges in Asia, which are expected to continue throughout 1998."

TCBY's net income for the May quarter rose 13% to $3.6 million, but sales and franchise revenues were $30.9 million, down slightly from the $31.2 million reported a year ago.

Not surprisingly, the stock tanked on the news, and it slipped another quarter-point Friday to close at $8 1/4.

As noted in Thursday's Borefolio recap, I questioned the degree to which the economic situation in Asia could affect TCBY's results, given that only about 5% of the company's revenues originate outside the U.S., and only a fraction of that fraction comes from Asia.

I also wondered why trade accounts receivable of $14.9 million were so much higher than the $8.8 million figure at which the company began its fiscal year last November, and why inventories had ballooned to $15.8 million from the $10.7 million level six months ago.

The TCBY spokesperson confirmed that Asia does indeed represent a very small part of the company's business. But since it was seeing challenges there, the company thought it best to point that out in the press release, she said.

Well, I guess.

As for the receivables and inventory bulges, those are seasonal fluctuations that occur before the heavy summer selling period, as TCBY prepares products for sale to its franchisers and also to private-label clients. She said that those inventories are currently being depleted as product is shipped, and sales in the current (i.e., third) quarter will reflect that fact.

Following the conversation, I went back to TCBY's 10-Q for last year's second quarter and found that, indeed, receivables and inventories spiked then, as well. In fact, relative to the year-ago period (as opposed to the start of the current fiscal year in November), trade receivables were actually down about 9% and inventories were up by a reasonably modest $3.1 million, versus the $5.1 million relative to the November number.

Beyond that, the TCBY spokesperson noted that the company is progressing in its plan to smooth out the seasonality of its business by attracting customers for whom TCBY could profitably utilize its production capacity in the off-season. She mentioned that the production of non-frozen dairy products for commercial uses was one such business that was proceeding.

Finally, I think it's worth noting that the sales figures are obscured by at least two material factors.

First, TCBY's press release notes that last year's sales include about $1.2 million in revenues generated by the Carlin Manufacturing subsidiary (which made mobile foodservice equipment), which was sold last July. Excluding that amount from sales -- and leaving aside franchise revenues for the moment -- sales from continuing operations increased about 6%, by my calculations.

Now to the franchise revenues side. Those declined to $3.8 million from $4.4 million a year ago -- and that may be where the Asian "challenges" are showing up.

But it's also to be expected, in my opinion, in light of the fact that the company is focusing on expanding into co-branded outlets, with gas stations and fast-food stores, for example -- rather than opening new stand-alone TCBYs. The former bring in somewhat lower initial fees up-front, even if they offer solid opportunities for continuing product sales, uh, down the road.

Bottom line: I won't pretend that I'm delighted with the quarterly report. And I particularly think the company could have done a better job of informing investors of where things stand. That said, I'm reluctant to sell the stock just as the summer season is heating up and just as the co-branding strategy is beginning to bear fruit.

Speaking of bearing fruit, I think that TCBY's Juice Works plan is quite interesting, and I plan to stick around to see how that develops, too.

Have a great weekend, folks. Why not treat yourself to a TCBY treat or two? Maybe wander over to Borders and buy a book or CD while you're at it, huh?

FoolWatch -- It's what's going on at the Fool today.

Stock  Change    Bid 
 ANDW  -  1/8   20.00 
 CGO   -  5/8   34.06 
 BGP   +2       32.94 
 CSL   +  1/16  45.75 
 CSCO    ---    79.06 
 FCH   -  1/2   32.00 
 PNR   -  3/16  41.00 
 TBY   -  1/4   8.25 
                   Day   Month    Year  History 
         BORING   +0.76%  -1.68%  -0.49%  25.21% 
         S&P:     +0.39%   0.74%  13.23%  76.77% 
         NASDAQ:  -0.28%  -1.91%  11.12%  67.63% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     32.94   192.62% 
   6/26/96  150 Cisco Syst    35.93     79.06   120.03% 
   8/13/96  200 Carlisle C    26.32     45.75    73.79% 
    3/5/97  150 Atlas Air     23.06     34.06    47.72% 
   4/14/98  100 Pentair       43.74     41.00    -6.27% 
   11/6/97  200 FelCor Sui    37.59     32.00   -14.87% 
   5/20/98  400 TCBY Enter    10.05      8.25   -17.87% 
   1/21/98  200 Andrew Cor    26.09     20.00   -23.34% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13175.00  $8672.51 
   6/26/96  150 Cisco Syst  5389.99  11859.38  $6469.39 
   8/13/96  200 Carlisle C  5264.99   9150.00  $3885.01 
    3/5/97  150 Atlas Air   3458.74   5109.38  $1650.64 
   4/14/98  100 Pentair     4374.25   4100.00  -$274.25 
   5/20/98  400 TCBY Enter  4018.00   3300.00  -$718.00 
   11/6/97  200 FelCor Sui  7518.00   6400.00 -$1118.00 
   1/21/98  200 Andrew Cor  5218.00   4000.00 -$1218.00 
                              CASH   $5511.82 
                             TOTAL  $62605.57