Boring Portfolio

The Scoop on TCBY
...fiscal Q3 results a tad lo-cal

by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (Sept. 11, 1998) -- The manic-depressive U.S. stock market closed out the week on a euphoric note, thanks in part of upbeat news from technology bellwethers Intel (Nasdaq: INTC) and Oracle (Nasdaq: ORCL). The S&P 500 closed at an intraday high after rising 2.94%, while the Nasdaq rocketed 3.55%.

For its part, the Boring Portfolio advanced 3.31%, with six of eight holdings posting gains. Leading the Borefolio Friday were shares of Borders Group (NYSE: BGP), up $1 9/16 to $25 7/8, and Cisco Systems (Nasdaq: CSCO), up $4 5/16 to $92 3/4.

On the downside, TCBY (NYSE: TBY) gave back $1/16 of the $7/16 it scooped up Thursday, closing at $6 11/16. TCBY's stock had advanced after the company reported results for its August quarter during trading hours Thursday. The Little Rock-based frozen dessert king posted earnings of $0.24 per share versus last year's $0.18 and well-above analysts' forecasts of $0.19 to $0.20.

Although at least one investor service reported that TCBY had scored an upside earnings surprise, the company noted in its press release that about $0.06 per share of this quarter's after-tax profits were the result of a one-time asset sale. When I asked him for clarification earlier today, TCBY chief financial officer Gene Whisenhunt told me that TCBY had sold its corporate jet. (TCBY doesn't hold conference calls.) Excluding that one-time gain, the company's quarterly earnings actually came in slightly below analysts' expectations.

TCBY Quarterly Earnings Details

Product sales declined 4% for the quarter -- $28.8 million this year versus $30.0 million a year ago. The product sales comparison is complicated by the fact that, according to TCBY, the year-ago figure includes $2.5 million in sales on a one-time basis to a private-label customer that was experiencing temporary difficulties at its own plant. Excluding that windfall last year, product sales increased four to five percent.

On the bright side, gross margin on product sales plumped slightly, to 34.8% from 34.1% a year ago -- that despite stratospheric increases in butterfat prices over the spring and summer. Butterfat pricing affects TCBY's low-fat and nonfat frozen yogurt minimally, but it does impact the company's ice cream product. TCBY also makes ice cream for private-label customers; and although the company passes along any fluctuations in the costs of ingredients, the generally higher prices for the finished product have probably dampened retail demand somewhat.

In addition to its profits on product sales, TCBY reaps royalty income and initial franchise and licensing fees from its franchise operators around the world. That income was essentially flat for the quarter, at $4.1 million. The number of TCBY and Juiceworks locations increased by a net 49 during the quarter, to 2964, not counting the several thousand points of sale worldwide in such places as fast food restaurants, airport food courts, and gas stations.

Balance Sheet

Moving to the balance sheet provided in the press release, cash and equivalents rose by roughly $8 million during the quarter (according to my math), to $18.9 million. (Good.) Inventories were drawn down from $15.8 million at the end of May to $13.9 million at the end of August. (Fine.) Current liabilities were flat sequentially at $13.9 million and long-term debt (net of current portion) fell sequentially to $3.7 million from $4.6 million. TCBY also repurchased 100,000 shares during the quarter. (Fine, good, and pretty good.)

So, as we continue our review of current Borefolio holdings, what should we make of this latest information?

When the Borefolio purchased its 400 shares of TCBY at $10 apiece on May 19 of this year, we were attracted by its sensible business plan of expanding into so-called nontraditional locations, such as service stations, fast food restaurants, sports arenas, schools, hospitals, travel plazas and airport terminals. We also liked that this strategy often involved co-branding agreements with fast-food companies or other companies with a regional or national presence, such as Subway, Nathan's Famous (Nasdaq: NATH), Wall Street Deli (Nasdaq: WSDI), and a number of major oil companies.

The upgrading of "TCBY" stores to include hardpacked frozen yogurt and ice cream also made good sense, as did the Juice Works concept, which features fruit and vegetable juices, fresh-made fruit smoothies, and lowfat/nonfat baked goods. And we were impressed with TCBY's progress in expanding its international presence in some 65 countries.

Finally, we liked the fact that the company was back on track financially, generating good sales increases and positive cash from operations, and in possession of a solidly respectable balance sheet. The above-average dividend was something to consider, too.

Apparently, we weren't alone. Value Line added TCBY to its portfolio for performance and income as we were completing our own research, and the stock hit a 52-week high about the same time, at $10 1/4.

The factors that attracted us to TCBY remain largely in place -- although sales have come in somewhat below our expectations so far. Part of the explanation for the flattish sales may be the problematic financial situation in much of the world and, to a degree, the historically high dairy prices. Virtually all ice cream stocks have melted this year.

Additionally, though, the rollout of TCBY co-branded locations has proceeded more slowly than we had anticipated. We've come to realize that despite its obvious advantages, one downside of co-branding is that you are not entirely the master of your fate when you partner with another company; and to some degree you can only expand as rapidly as your partner allows.

The Bottom Line

Prior to the latest earnings report, analysts who follow TCBY had been expecting the company to earn somewhere around $0.44 per share in the fiscal year ending this November and $0.53 to $0.54 next year. I anticipate those projections getting trimmed by a penny or two going forward.

At its current price, TCBY stock thus trades at less than 16 times this year's earnings (even allowing for a penny or two of downside revision) and 13 times a slimmed down FY99 forecast of $0.51. Those are hardly exorbitant multiples for the stock of a solidly profitable, if perhaps temporarily stalled, company. The dividend, which is now around 3.3% on an annualized basis, helps cushion any further softening of the share price, as well.

All in all, I find myself making a bit like a waffle-cone on TCBY. Absent some positive news out of the blue, the stock will probably idle pretty much where it is for the indefinite future. On the other hand, the downside is probably fairly limited, as well.

Some folks like vanilla, and others like chocolate. Me? I can go either way.

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09/11/98 Close

Stock  Change    Bid 
 ANDW  +  1/2   14.25 
 CGO   +  1/2   21.63 
 BGP   +1 9/16  25.88 
 CSL   +1 13/16 37.81 
 CSCO  +4 5/16  92.75 
 FCH   -  7/16  20.00 
 PNR   +  1/8   30.06 
 TBY   -  1/16  6.69 
                   Day   Month    Year  History 
         BORING   +3.31%   9.12% -15.20%   6.70% 
         S&P:     +2.94%   5.38%   3.98%  62.33% 
         NASDAQ:  +3.55%   9.50%   4.54%  57.70% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     92.75   158.12% 
   2/28/96  400 Borders Gr    11.26     25.88   129.87% 
   8/13/96  200 Carlisle C    26.32     37.81    43.64% 
    3/5/97  150 Atlas Air     23.06     21.63    -6.22% 
   4/14/98  100 Pentair       43.74     30.06   -31.27% 
   5/20/98  400 TCBY Enter    10.05      6.69   -33.42% 
   1/21/98  200 Andrew Cor    26.09     14.25   -45.38% 
   11/6/97  200 FelCor Sui    37.59     20.00   -46.79% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  13912.50  $8522.51 
   2/28/96  400 Borders Gr  4502.49  10350.00  $5847.51 
   8/13/96  200 Carlisle C  5264.99   7562.50  $2297.51 
    3/5/97  150 Atlas Air   3458.74   3243.75  -$214.99 
   5/20/98  400 TCBY Enter  4018.00   2675.00 -$1343.00 
   4/14/98  100 Pentair     4374.25   3006.25 -$1368.00 
   1/21/98  200 Andrew Cor  5218.00   2850.00 -$2368.00 
   11/6/97  200 FelCor Sui  7518.00   4000.00 -$3518.00 
                              CASH   $5750.59 
                             TOTAL  $53350.59