Sometimes the numbers can play tricks on you. We spend a lot of time calculating free cash flow here at the Fool, but the formula can vary depending on the business. This week, Rich Smith takes a close look at some Free Cash Flow Illusions that discerning investor must pay attention to. Soak it in as part of your investing education.

In today's Motley Fool Take:

The Back-to-School Bummer

By

Bill Mann (TMF Otter)



Sometimes you just have to tip your hat to Fred Hickey. The editor of the High-Tech Strategist noted a year ago that companies' summer quarters were being pumped up by the coincidence between American consumers receiving federal tax rebate checks and the back-to-school season. Hickey noted that there would be no tax check coming in this year, said that the refinancing boom and its resultant liquidity would be long gone, and predicted that the back-to-school season this year would be lousy. Of course, technology largely being Hickey's bailiwick, he was talking primarily about the consumer electronics and PC companies such as Dell(Nasdaq: DELL), as well as the retailers that offer them, most notably Best Buy(NYSE: BBY).

But money is money, spending is spending, and back-to-school is back-to-school. And companies such as Costco(Nasdaq: COST) and Wal-Mart(NYSE: WMT) are turning in at best anemic results for the important August sales month. Wal-Mart sees its sales coming in at 2-4% higher than last year, much lower gains than expected. Costco turned in same-store sales gains of 4%, substantially lower than the 7.5% that was expected. As a counterpoint, Target(NYSE: TGT) turned in a 1.8% gain, which was substantially lower than the other two companies but at the high end of expectations. The market works in strange ways sometimes. Overall sales, as tabulated by the International Council of Shopping Centers, climbed 1.2% -- way below what was expected a few weeks ago.

There are, of course, easy targets for blame. Hurricane Charley, for one, is an easy scapegoat (and certainly did have some impact). Spiking prices at the pump, similarly, took a bite out of consumers' spending budgets. But these elements weren't surprises. If they were truly complicit to the degree suggested, then their impact should have been baked in. I think that Hickey's point -- one I made more generically long ago -- is more germane: Consumers are running low on money, and the sources that helped push them along a year ago have dried up. Watch closely for the earnings reports coming from the consumer technology companies: This could be a very interesting quarter, and not in a good way.

Bill Mann owns shares of Costco.

Discussion Board of the Day: Starbucks

Starbucks plans a jolt in the price of its java. Will you shell out a few extra cents for your fix? Talk it over with Fools on the Starbucks discussion board.

Apple Plants a Seed

By

Tim Beyers

Apple Computer (Nasdaq: AAPL) has finally agreed to pay a dividend. No, not the kind of owner dividend that would have Motley Fool Income Investor subscribers donning their iPods to go dancing in the streets, but a payout to Web publishers who send music shoppers to its iTunes music store.

Wednesday, the computer maker borrowed from Amazon(Nasdaq: AMZN) and competitor Roxio's(Nasdaq: ROXI) Napster in unveiling the iTunes Affiliate Program, which will allow Web sites to link to content in the digital archives of the iTunes Music Store. Apple will pay up to 5% of revenues generated on click-throughs. At $0.99 per song and $9.99 per album, that's anywhere from $0.05 to $0.50. Apple will issue checks to affiliates when their payout equals $25 or more. That equals 500 songs and 50 albums. (Apple says it has sold more than 125 million downloads thus far.)

To be sure, the music downloading market has been hotter than September in Vegas. The problem is the cutthroat nature of the business. Not only are the margins near zero but also everyone wants in on the game. RealNetworks(Nasdaq: RNWK) even hacked the iPod so that music downloads from its Harmony music store would run on the players. And late yesterday Microsoft(Nasdaq: MSFT)launched its MSN Music store, perhaps the biggest threat yet to iTunes' dominance.

It would be easy (and understandable) for investors to brush off the iTunes announcement as just the latest salvo in an overhyped digital music war. But there's more to it than that. If the records ever stop playing at Apple, its digital entertainment franchise -- headlined by the cultish iPod -- will take a serious hit. Sure, there's hope that the super-sleek new iMac will revive flagging desktop computer sales, but it's the pod people who have been driving revenues and profits recently. Investors shouldn't expect that to change.

Need more rockin' Foolish iTunes coverage? Try these:

Fool contributor Tim Beyers thinks Apple hit another home run with the new iMac, but he won't be trading in his PowerBook anytime soon. Tim owns no shares in any of the companies mentioned, and you can view his Fool profile here.

Starbucks Jolts Prices

By

Alyce Lomax (TMF Lomax)

Will Starbucks(Nasdaq: SBUX) addicts balk at shelling out a few extra cents for their fixes? That question may be on some people's minds today as The Wall Street Journal reported that a jolt in the price of java is on the menu at Starbucks. Will this put a damper on the coffeehouses' sales?

The WSJ article said that the price hike is expected to be in the 4% to 5% range, adding about a dime per cup to the bill. The article surmised that the higher price "could push Starbucks' luck" and cited market research from Mintel International Group, indicating that about two-thirds of "regular coffeehouse customers" say gourmet takeout coffee is too pricey.

We've all been well aware of pricey coffee ever since the advent of Starbucks, and it hasn't stopped anybody. When I did a Web search for the Mintel data, I unearthed similar data from 2001, which says to me that actually the public's view of "expensive" coffee hasn't changed. It makes it clear people have been willing to pay the price for good coffee.

Last week, I was on vacation and blissfully unaware of Starbucks' news as I threw back a few lattes in my leisure time, surprised that the suburban Starbucks stores I was hitting were bustling, even though I was going at odd hours on weekdays. Unbeknownst to me, Starbucks' August same-store sales growth wasn't quite what we've all become accustomed to. Investors were selling, inspiring Fool contributor Jeff Hwang to ask whether it's time to sell Starbucks.

The idea of impending price hikes at Starbucks is nothing new. One of the summer's major stories was high cost of dairy. However, if Starbucks is going to venture a price increase now, it doesn't hurt to remember that the coffee purveyor weathered the recession wisely by keeping prices stable; it hasn't passed a price increase on to customers since 2000.

Will higher prices drive customers to cheaper coffee break venues such as McDonald's(NYSE: MCD) or 7-Eleven(NYSE: SE)? It's my guess (and it's been my contention ever since the "Starbucks price hike" rumors began to circulate) that most Starbucks diehards will remain loyal and won't miss the extra pocket change for their daily treat.

I'd also venture to guess that once Labor Day's behind us, things should be just as strong as ever at Starbucks. School will be back in session, and the vacation season will be largely over. It's back to reality, and for many, that reality includes a Starbucks jolt of caffeine.

For more on Starbucks, check out the following articles:

Alyce Lomax does not own shares of any of the companies mentioned.

Quote of Note

"What is the first business of one who practices philosophy? To get rid of self-conceit. For it is impossible for anyone to begin to learn that which he thinks he already knows." -- Epictetus, Stoic philosopher

Fidelity Cuts Fat

By

Seth Jayson (TMF Bent)

Longtime Fool readers know that most of us are not big fans of mutual funds. That's not only because the vast majority of them underperform the indexes over time but also because far too many of them charge you big -- often cleverly hidden -- fees for their underperformance.

Despite specious arguments to the contrary -- such as a recent article by Chuck Jaffe at CBS MarketWatch.com -- most of us still feel stocks or an index fund are a better choice for the majority of investors. Don't believe me? Look here. Or here.

Unfortunately, even stock fans like us can't avoid mutual funds altogether. My wife's retirement plan -- cough, AIG Valic, cough -- is one that, like many, doesn't permit buying individual stocks. (Restrictions like these are one reason we now offer our Champion Funds newsletter to help people choose the best actively managed funds out there.)

That's a long-winded introduction to this article's raison d'etre, a polite golf clap for Fidelity Investments. The reason? America's biggest mutual fund firm has cut expenses on some of its standbys -- the index funds -- leaving more money for you.

Fidelity capped the expense ratio at 0.10% on its Spartan 500 Index Fund(FUND: FSMKX), Spartan U.S. Equity Index(FUND: FUSEX), Spartan Total Market Index,(FUND: FSTMX), Spartan Extended Market Index, and Spartan International Index. The first two track the S&P 500, the next two the broader Wilshire index, and the final shadows the Morgan Stanley Capital International Europe, Australasia, and Far East Index. That means with any of the first four, you'll own a piece of such major players as Apple(Nasdaq: AAPL), Microsoft(Nasdaq: MSFT), Wal-Mart(NYSE: WMT), Home Depot(NYSE: HD), Merck, and varying amounts of smaller companies.

How much will the move reward investors? Well, it trims by half the previous 0.19% rate on the S&P 500 index trackers. The previous 0.47% cut Fidelity took on the international index will be clipped by nearly four fifths. While that looks puny, if you put $1,000 away each month into an index that earns just around 9% over 30 years, the difference between 0.19% and 0.10% on the expense rate will come to almost $40,000 -- of the roughly $1.8 million total.

Pennies add up, as any Fool knows. So let's set aside the urge to ask why it took Fidelity so long to drop these fees and just hope that other fund companies are moved to do the same.

Seth Jayson still says mutual funds will deliver less than you can earn by investing Foolishly. He has no position in any companies or funds mentioned. View his Fool profile here.

More on Fool.com Today

In Dollars in Storage, Selena Maranjian explains why Iron Mountain stock is worth a look.... CEO Norman Wesley talks about Fortune Brands' history, expansion, and innovation in Building a Fortune.

In other news:

For a list of all our stories from today, see our Today's Headlines page.