From the Motley Fool this afternoon:
The Lunchtime News
Mar 12, 1998
FOOL PLATE SPECIAL
An Investment Opinion by Louis Corrigan
Raising the Shades at Sunglass Hut
Shades can be spirits of the dead. They're also the inventories that piled up at once hot retailer
Sunglass Hut (Nasdaq:RAYS - news) , which had rocketed to $37 a share by March 1996 before
then plunging into the mid-single-digit darkness last summer. While previous reports of the
company's resurrection were greatly exaggerated, investors had their spirits raised this morning as
new management decided to close the casket on an era of overexpansion and exhume a more
moderate growth strategy. The stock rose another $1 1/16 to $10 7/8 in morning trading today after
rising 7% yesterday.
Last night, Sunglass Hut announced a $79.1 million fourth quarter loss, or a loss of $1.45 per share
versus a year-ago loss of $24.4 million or $0.45 per share. The bulk of that resulted from $102.6
million in restructuring-related charges, good for $75.8 million in after-tax losses, or $1.39 per share.
The retailer, which had expanded rapidly thanks partly to the May 1995 acquisition of its 345-store
competitor Sunsation, has decided to close 250 marginal or unprofitable stores, leading to a $23.5
million charge to write off fixed assets and the costs of exiting leases. It's also writing off another
$31.1 million associated with long-lived and intangible assets related partly to international
operations. Add another $13.3 million to discontinue its Eye-X prescription optical stores, a
potential growth vehicle that stalled. Then there's $13 million to dispose of excess inventories, and
add another $21.7 million for moving to a new accounting standard, reorganizing international
operations, and paying off longtime CEO Jack Chadsey, who departed last summer.
With 2,111 Sunglass Hut locations today, it's not immediately clear how this massive housecleaning
will affect future revenues, which totaled $573.8 million for FY97, up 9% on the year despite flat
same-store sales. But the company said pre-tax earnings could improve by up to $10 million by next
year, when these moves are completely enacted. Ubiquitous in America's malls, this retailer plans to
beef up its marketing efforts to take advantage of its position as the dominant U.S. retailer of fancy
sunglasses. Yet with its growing 78 store Watch Station segment, the company is not just sticking to
sunglasses.
The firm didn't issue an up-to-date balance sheet, but the charges appear to leave the company with
more debt than equity. Still, Sunglass Hut is now trading at about one times sales, which the board
deems cheap enough to authorize the buyback of 7.5 million of the firm's 54.7 million shares. And
that may make sense. The company reported last week that February same-store sales increased
7.8%, thanks to its international sales and its Watch Station segment. A bit of growth added to the
cold rationalization of a half-billion dollar retail franchise could finally make this an interesting
turnaround prospect. |
