09:46am EST 20-Nov-98 Prudential Securities (H.G. KATICA 404-842-9202) ELBO
ELBO: STRONG SOFTWARE SALES DRIVE BETTER-THAN-EXPECTED Q3 EPS
ELBO: STRONG SOFTWARE SALES DRIVE BETTER-THAN-EXPECTED Q3 EPS
R E S E A R C H N O T E S November 20, 1998
Subject: Electronics Boutique Holdings Corp
(ELBO-13 1/2)--OTC
OPINION
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Current: Strong Buy
Analyst: Harry G. Katica (404) 842-9202 RISK: High
12-Month Target Price: $17
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Ind. Div.: --- Yield: --- Shares: 20.2 mil. 52-Wk.Range: 14-7
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 01/98 $ 0.74 $ 0.08 $(0.09) $ 0.02 $ 0.86*
Proforma# $ 0.62 $ 0.07 $(0.06) $ 0.03 $ 0.58
Current 01/99 $ 1.03E 13.1X $ 0.11A $(0.02)A $ 0.08A $ 0.77E
Prior 01/99 $ 1.00E 0.06E $ 0.76E
Proforma# $ 0.91E $ 0.09E $(0.02) $ 0.06E $ 0.76E
Current 01/00 $ 1.17E 11.5X
Prior 01/00 $ 1.13E
* Includes non-recurring income of $0.08 per share after-tax.
# Assuming the offering, reorganization, and S-Corp Dividends were
completed at the beginning of 1997.
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Electronics Boutique reported diluted third-quarter share earnings per share of
$0.08 versus a pro forma $0.02 last year. The performance surpassed our
estimate of $0.06 per share, driven by strong sales of video game and
entertainment software along with excellent expense leverage. Electronics
Boutique continues to maintain a strong competitive position in the growing
electronics game market.
A Strong Software Outlook And Further Expense Leverage Will Drive Earnings
Gains. Based on the excellent third quarter performance, we are raising our
1998 and 1999 EPS estimates to $1.03 and $1.17 from $1.00 and $1.13. Growth for
Christmas and into 1999 will be supported by a still growing installed base of
video game consoles, which should drive strong increases in software sales.
Electronics Boutique also has opportunities for additional expense leverage,
based on the experience of the third quarter.
Strong Buy Rating Reflects Favorable Earnings Momentum And Attractive Valuation.
At a recent price of $13 1/2, the stock is trading at 13.1 and 11.5 times our
1998 and 1999 earnings estimates. These multiples represent a significant
discount to an estimated 20% to 25% five-year growth rate. In our view, the
stock could easily be awarded a higher multiple if the company were given some
credit for its successful Internet sales efforts.
Strong Demand For Video Game And Entertainment Software Drove Q3 Results
Total sales reached $111.3 million in the third quarter, an 18.2% increase over
last year's $94.2 million. Sales of video game software were up 42%, while PC
entertainment sales rose 29%. Reflecting a drop in the average selling price,
hardware sales were down in dollar terms, despite a slight increase in the
number of units sold. Twenty-six stores were opened in the quarter, net of
closings, bringing the total number of locations to 500. Year over year, the
company added 61 stores, for a 13.9% gain.
Same Store Sales Rose 6.7% On Strong Demand In Nearly Every Product Category.
Sales were up against a difficult comparison with last year's results, when the
blockbuster software title Final Fantasy VII sold 110,000 units at $50 each.
There was no blockbuster title on sale in this year's third quarter. The nearly
7% same-store sales growth reflected continued robust demand in most of the
company's product categories, particularly Playstation and Nintendo 64 software.
Higher Freight Costs Pressured The Gross Margin. The gross margin fell 80 basis
points, from 25.2% last year to 24.4%. First, freight costs increased as a
result of an effort to move a larger percentage of new-release products into the
stores. Second, with a drop in the average price per unit, the company needed
to ship more product to the stores in order to maintain its sales volume in
dollar terms. Finally, the company built up its inventory at the store level in
anticipation of the fourth quarter holiday selling season. At the same time,
margins on software sales slipped in the quarter. Although the sales mix
shifted away from low-margin hardware products, the overall merchandise margin
was flat with last year.
Strong Sales Increase Leveraged Store Expenses. SG&A expenses accounted for
20.4% of total revenues in the third quarter, down 2.6 percentage points from
23.0% a year earlier. Higher sales helped leverage occupancy costs, which fell
as a percentage of total sales. An increase in promotional and marketing
reimbursements, including more than $800,000 in advertising income generated
from the company's website, contributed to the drop in the SG&A expense ratio.
In addition, last year's results were hurt by an unusual charge of $1.0 million
relating to the company's Canadian operations.
Proceeds From Stock Offering Helped Raise Interest Income. The company recorded
interest income of $149,000 in the third quarter, versus an expense of $343,000
in 1997. Proceeds from the recent initial public offering helped retire most
of the company's outstanding debt and raised the level of interest-bearing cash
assets. The tax rate fell slightly from 41.1% to 39.2%. All told, net income
more than tripled year over year.
Strong New Release Schedule Likely To Boost Near-Term Outlook
Earnings estimates for 1998 and 1999. We look for the company to open 34 new
stores in the final quarter of 1999, bringing the yearend total to 534. Next
year, more than 80 new locations should increase the store base by 15%. Total
revenues are likely to reach $563 million this year and $679 million in 1999.
Nintendo 64's Zelda Should Become The Largest Title In Company History...
Titles in the Zelda series have been some of the best-selling games for the
Nintendo console. Zelda is due out on November 24. Likely blockbuster titles
for Nintendo also include Turok 2 and Rogue Squadron, both to be released within
the next 30 days.
Strong Hardware Sales Should Support Another Good Year For Software In 1999.
Hardw are sales continue to exceed expectations. The rising installed base
should support strong growth in software sales for the next 12-18 months. In
our view, unit sales of hardware consoles could get another lift in 1999 if, and
when, prices are reduced from the current $129 to $119 or even $99.
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