Boring Portfolio

Boring Buying TBY
May 19, 1998

**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Hall of Portfolios.**

TCBY Enterprises (NYSE:TBY)
425 W. Capitol Ave., Ste. 1200
Little Rock, AR 72201

Action: Buying 400 shares of TBY within the next five business days.

Company Overview

TCBY Enterprises is the largest manufacturer-franchiser of frozen yogurt in the world. Through its subsidiaries, the company manufactures and sells soft-serve and hardpack frozen yogurt, hardpack ice cream and frozen novelty products through franchised and company-owned retail stores, non-traditional locations (such as airports, schools, hospitals, convenience stores, and travel plazas), and the retail grocery trade (grocery stores, supermarkets, and wholesale clubs). The company also sells equipment related to the foodservice industry and develops locations under the Juice Works brand, which are intended to be co-branded with "TCBY" locations.

Legend has it that "TCBY" got its beginning when Georgia Hickingbotham ordered a peach frozen yogurt at a shopping-mall food court in the early 1980s. She offered some of the strange-sounding concoction to her husband Frank, who reluctantly took a small taste, discovered he liked it, and exclaimed in delight, "This can't be yogurt!"

The Hickingbothams investigated and learned that the formula for the product was created by dairy genius Daniel Brackeen. The Hickingbothams visited Brackeen at his manufacturing facility in Dallas and arranged to purchase and distribute his product. The first "This Can't Be Yogurt!!" store -- later renamed "The Country's Best Yogurt" -- opened in Little Rock, Arkansas on September 23, 1981, managed by the Hickingbothams' son, Herren, who is now the company's president and COO. The Hickingbothams' younger son, Todd, worked his way up from manager of the third store to his present position as president of Riverport Equipment and Distribution Co., a subsidiary of TCBY Enterprises.

By the end of the first year, "This Can't Be Yogurt!!" had seven corporate stores. In 1982 the company began franchising. By 1984, 100 shops were open, moving rapidly to 400 shops by 1986 and 800 by 1987.

After a period of initial strong growth, TCBY struggled through the much of the 1990s as competition in the frozen yogurt niche proliferated. TCBY's products were great, but as frozen yogurt dispensers began sprouting in convenience stores, luncheonettes and even gas stations, consumers found it less necessary to make a special trip to a "TCBY" store. This led to a period of retrenchment, culminating with a decision in 1995 to franchise or close all but two of the company-owned "TCBY" stores and to sell the manufacturing and distribution licensing rights for "TCBY" refrigerated yogurt products in the U.S. to Dairy Farmers of America.

Non-Traditional Locations. At the same time, the company began redirecting openings of TCBY's in "non-traditional" locations, such as service stations, fast food restaurants, sports arenas, schools, hospitals, travel plazas and airport terminals. Often, this involves co-branding agreements with fast-food companies or other companies with a regional or national presence. TCBY has signed deals with such companies as Subway, Nathan's Famous (Nasdaq: NATH), Pretzel Time, Wall Street Deli (Nasdaq: WSDI), Chevron (NYSE: CHV), Exxon (NYSE: XON), Philips Petroleum (NYSE: P), Shell (NYSE: RD), Texaco (NYSE: TX) and Total Petroleum (NYSE: TOT), and a test project with Taco Bell continues. As of the end of fiscal 1997, Host Marriott Services (NYSE: HMS) operated 589 non-traditional locations under a joint venture agreement with TCBY.

TCBY Treats and Juice Works. The company also upgraded its product line with the TCBY Treats concept, which includes hardpacked frozen yogurt, premium ice cream, and shaved ice along with the traditional soft-serve product. TCBY also began experimenting with its Juice Works concept, which features fruit and vegetable juices, fresh-made fruit smoothies, and lowfat/nonfat baked goods. Host Marriott has committed to develop Juice Works locations in airports, travel plazas and malls.

International Presence. TCBY is also increasing its international presence. As of Nov. 30, 1997, there were 229 TCBY international franchised locations, which generated 5% of combined sales and franchising revenues that year. Agreements were in place to develop "TCBY" locations in over 65 countries.

As of March 1, 1998, there were 2,855 "TCBY" or Juice Works locations open, as well as several thousand retail points-of-sale for "TCBY" products worldwide.

TCBY Subsidiaries

The principal subsidiaries of TCBY Enterprises Inc. are: TCBY Systems Inc., which franchises and licenses domestic and international "TCBY" or "TCBY"-with-Juice Works locations, operates a domestic "TCBY" location in Little Rock, and sells yogurt and novelty products to the retail grocery trade; Americana Foods, which manufactures yogurt and other frozen dessert products; and Riverport Equipment and Distribution Co., which is composed of the Riverport Division, which sells and distributes restaurant equipment and supplies primarily to "TCBY" locations, and AIMCO, which sells and distributes foodservice equipment and supplies primarily to customers outside of the TCBY systems.

Americana. The Americana Foods yogurt manufacturing facility is located in Dallas, Texas and occupies approximately 216,000 square feet. The majority of the facility's capacity for hardpack and novelty products will be utilized during certain periods in producing products for TCBY locations and private label customers during 1998. The company is currently utilizing less then 50% of its capacity for mix and is actively pursuing new customers for its TCBY products and other products to utilize the capacity available at the facility.

Riverport Equipment and Distribution Co. This subsidiary offers for sale a complete equipment, furniture, and signage package to TCBY franchisees and non-traditional locations. Riverport operates at a relatively low gross profit margin, and its sales are tied primarily to new store and location development. AIMCO Equipment Co., located in Little Rock, Arkansas, is a regional distributor of equipment to the foodservice industry and serves customers primarily outside of the TCBY franchise system.

Results of Operations in Fiscal 1997

Sales increased 9% in 1997 over the prior year, to $90.6 million. Cost of sales was $60.4 million in 1997 (66.7% of sales) versus $53.5 million in 1996 (64.5% of sales), resulting in gross profit of $30.2 million in 1997 as compared with $29.4 million the year before. Franchising revenues increased 7% to contribute an additional $13.8 million.

Operating expenses were 30% of combined sales and franchising revenues in 1997 versus 34% in 1996, due primarily to the closing of underperforming stores. The company expects that the current operating expense level will be maintained throughout 1998. Operating income increased 34% to $13.0 million.

Interest expense decreased by approximately $201,000 in 1997 compared to 1996, due to reductions in outstanding debt. TCBY's tax rate was 34.5% in 1997, essentially unchanged from the preceding year. The company expects its future tax rate to approximate the 1997 rate.

Net income of $8.9 million in fiscal 1997 represented a 36% increase over 1996, and earnings per share increased 42% as a result of share repurchasing, to $0.37 versus $0.26. Average shares outstanding was 24.06 million for fiscal 1997 versus 25.16 million the year before.

Cash Flow. Cash provided by operating activities was $17.1 million in 1997 compared to $18.9 million in 1996 and $8.6 million in 1995. The decrease in fiscal 1997 resulted primarily from a tax refund of approximately $4.1 million and the proceeds of sales of assets of approximately $2.4 million in 1996 which did not reoccur in 1997. The increase in 1996 resulted primarily from improvements in operating results and cash received from tax refunds, disposals of assets held for sale, and reductions in inventories and receivables. Depreciation and amortization was $5.2 million in 1997 and $5.4 million in 1996. Cash generated from operations has been used to finance all capital expenditures. Purchases of property, plant, and equipment amounted to $1.9 million, $2.4 million, and $9.9 million in 1997, 1996, and 1995, respectively. The company estimates $2 to $3 million for capital expenditures in 1998. The company's foreseeable cash needs for operations and capital expenditures are expected to be met through cash flows from operations, although it has available a $5 million unsecured credit line to meet seasonal cash needs.

Balance Sheet. Cash, equivalents and short-term investments totaled $22.1 million at the end of fiscal 1997 as compared with $19.2 million at the end of fiscal 1996 and $5.6 million at the end of fiscal 1995. Current assets increased slightly to $46.2 million versus $44.7 million, and total assets declined slightly to $99.3 million versus $102.5 million. Current liabilities stood at $11.7 million at the end of fiscal 1997 as compared with $10.8 million a year earlier. Long term debt declined to $6.3 million versus $9.5 million. Stockholders' equity was $77.4 million versus $79.2 million.

1998 First Quarter Results

On March 10, TCBY reported that net income increased to $741,588, or $0.03 per share (basic and diluted) in the first quarter of fiscal 1998, up from $251,651, or $.01 per share (basic and diluted) in 1997. Analysts had been expecting a $0.02 per share profit.

Sales and franchising revenues were $19.2 million as compared to $18.5 million for the same period last year. The sales and franchising revenues for 1997 included approximately $800,000 from Carlin Manufacturing Inc. which was sold in July 1997. Domestic franchise fees increased 47% over the year-ago period.

The Stock

Founder, CEO and board chairman Frank Hickingbotham, 61, owns or controls approximately 42% of TCBY stock. Altogether, insiders control just under half of the stock.

In Dec. 1995, the company was authorized to repurchase up to three million shares of its outstanding common stock, and in Dec. 1997, the company was authorized to repurchase an additional two million shares. As of March, 1998, the company had purchased approximately 2.4 million shares under these authorizations using cash from operations.

TCBY stock is currently trading at or near the top end of its 52-week range, which is $5 5/8 to $10 1/4. The stock was probably helped when Value Line recently added it to its portfolio for performance and income.

The stock carries a dividend with a current yield of approximately 2.2%. The beta for TBY is a 0.87, which means that the stock is somewhat less volatile than the S&P 500.


A key objective of TCBY continues to be the enhancement of shareholder value. As such, the company's executive management team will receive their full incentive bonus only if the company attains basic earnings per share of $0.46 in 1998, which would approximate a 24% increase over 1997 EPS.

According to Zack's, analysts are forecasting profits of $0.15 per share for the May quarter, versus $0.13 last year, and $0.46 for FY98 as compared with $0.37 last year. Value Line offers $0.58 as a forecast for FY99, and another analyst forecasts $0.60.

Based on a share price of approximately $10 (at the time this report was prepared), TBY is trading at 21.7-times projected EPS for FY98 and 16.9-times expected EPS for FY99. A multiple of 20 times FY99's forecast suggest $12 as a near term target, and a valuation based on projected future cash flows yields a similar target.

With what seems to be to be a sensible business plan and evidence of solid implementation, a lightly leveraged balance sheet, and a decent dividend to provide some downside protection, TCBY should make a profitable long-term addition to the Boring Portfolio.