Well, at least they're not trying to "force" a profit. After seeing the numbers from discount clothier Goody's Family Clothing
Consider: In predicting the numbers that Goody's was to release, analysts had expected the company to lose $0.06 per diluted share on sales of $300 million last quarter. As it turned out, the company raked in fewer sales -- and lost less money. Goody's reported just $293 million in sales, a 3.4% year-on-year decline, and a $0.05 loss as a result. In other words, by doing less business than expected, the company did less harm to its shareholders. Flip that around, and the logical conclusion is that the more Goody's sells, the less money it earns.
That could have spelled disaster had the company decided to dig itself further into a hole with its previous expansion plans, under which it intended to open 35 new stores and remodel or relocate 15 existing stores. So perhaps perversely, shareholders should be pleased to learn that Goody's will open only 29 new stores and remodel/relocate 10 others in fiscal 2005. Sales growth may slow. But by dialing back its growth ambitions, Goody's management should give itself more time to focus on fixing its business at the more than 350 stores already operating.
Management has its work cut out for it. The situation at Goody's has changed considerably from when Motley Fool Hidden Gems first put this company on its watch list. Back then, the company was trending toward $26 million in annual free cash flow (FCF), giving it an ultra-low price-to-FCF ratio. In fiscal 2004, however, Goody's produced just $1.7 million in FCF -- and a ratio in the triple digits.
Until the company fixes the problems at its existing stores, investors should hope that it keeps a tight rein on any further expansion. Until it gets its free cash flowing again, there's little chance it will merit a formal recommendation from Hidden Gems.
Fool contributor Rich Smith does not own shares in Goody's.
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