Sometimes, bigger really is better.
Case in point: last November, Ennis (NYSE:EBF) (the artist previously known as "Ennis Business Forms") rolled up two competing business-form printers, Crabar/GBF and Royal Business Forms, and expanded its business into the field of t-shirt manufacturing (!) with a buyout of Alstyle Apparel. Combined, the three deals doubled the company's size, and opened the door to improving the company's already strong generation of free cash flow. Back in April, Ennis estimated that the three additions to its new corporate family would contribute an additional $270 million per year in sales. However, that estimate may have been a bit conservative.
Let's take a quick look at Ennis's numbers from the first quarter of fiscal 2006. The results, published yesterday, show a 127% increase in sales from the year-ago quarter and a 130% increase in profits. The extra stock Ennis issued last year to acquire its new companies diluted those gains, of course, reducing growth in diluted earnings per share to 51%. Meanwhile, free cash flow increased 49% to $14.2 million for the quarter.
Let's now return to the company's prediction of $270 million in additional revenues for fiscal 2006. In the same press release, the company also gave its investors a heads-up on one business change they might otherwise have overlooked: t-shirts sell better when it's warm outside. CEO Keith Walters explained that the Alstyle acquisition added a cyclical nature to Ennis' business, with activewear sales strongest in the first and second quarters.
Following that reasoning, it's probably not a good idea to annualize the company's fiscal Q1 2006 in estimating total apparel sales for the year (which would yield an estimate of $273.6 million). But consider: in fiscal Q1, one of the two "good" quarters for t-shirt sales, Ennis' apparel division sold $16.7 million more worth of goods than in fiscal Q4 2005. Assume it can repeat that growth in the hot summer days of fiscal Q2. Then assume that in each of Q3 and Q4, the apparel division sells only as much as it did in Q4 of last year. Companywide, after examining just one of the new business segments, that already leaves you with a more than $300 million increase in sales.
Annualizing a single quarter's results is never an exact science, and the cyclical factor makes this even harder. But in my opinion, Ennis stands a good chance of beating its own sales forecast handily.
Fool contributor Rich Smith does not own shares in Ennis.
