07:33am EST 20-Nov-98 Salomon Smith Barney (MCGRATH/MULLINS (212) 816-3808) ELB
ELBO: Electronics Boutique Reports Strong 3Q98
--SUMMARY:--Electronics Boutique--Emerging Growth--Specialty Retail
* Electronics Boutique reported third quarter EPS of $0.08 versus our
estimate of $0.06 and $0.02 last year.
* Same-store sales increased 6.7%, in-line with 2Q97 and our expectations
* Gross margins declined somewhat as a result of a higher shipping costs
associated with lower ASPs and more units shipped, as well as a higher
shipping costs associated with the build-up of Christmas inventory.
* Operating margins increased 160 basis points, due largely to co-op
advertising revenue generated by the company's Web site.
* We expect the fourth quarter to be strong given a solid line-up of new
release titles.
* We are maintaining our 1-S (BUY, SPECULATIVE) rating on the stock and
our $18 price target.
--EARNINGS:-----------------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 01/98 EPS $0.08A $(0.08)A $0.02A $0.74A $0.76A
Previous 01/99 EPS $0.11E $(0.02)E $0.06E $0.75E $0.99E
Current 01/99 EPS $0.11A $(0.02)A $0.08A $0.75E $0.99E
Previous 01/00 EPS $0.13E $0.01E $0.08E $0.91E $1.13E
Current 01/00 EPS $0.13E $0.01E $0.08E $0.91E $1.13E
Previous 01/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 01/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS:-------------------------------------------------------------
Current Rank........:1-S Price 11/19/98......:$13.50
Prior Rank..........: Target Price........:$18.00
P/E 01/99...........:13.6X 52 Wk Price Range...:14.00 - 7.00
P/E 01/00...........:11.9X Proj. 5yr EPS Grth..:20.0%
Return on Equity 98.:49.20% BookValue...........:$5.70
LT Debt-to-Capital..:9.06% Dividend............:$N/A
Revenue 1999........:$553.51 mil Yield...............:N/A%
Shares Outstanding..:20.16 mil Convertible.........:No
Mkt. Capitalization.:$272.16 mil Hedge Clause(s).....:#
Comments............:
--OPINION:------------------------------------------------------------------
Electronics Boutique reported strong third quarter earnings of $0.08,
beating our estimate of $0.06 and vs. pro forma earnings (assuming C
corp. status) of $0.02 last year. Same-store sales were up 6.7%, which
is in-line with prior-year, but particularly impressive given the fact
that sales this year were not aided by a last year's blockbuster "Final
Fantasy VII" which sold 110,000 units at $50 each. Sales were strong in
all categories. The most popular titles were "Madden 99," "Metal Gear
Solid," and "NFL Gameday" for Playstation and "NCW NWO Revenge" for
Nintendo 64. For PCs, the most popular titles were "Starcraft," "Rainbow
6," "Unreal," "Fallout II," and "Sin."
Gross margins declined 80bp due to: 1) a large number of new release
products 2) an increase in the number of units shipped as a result of
lower ASPs on an increase in sales 3) an effort to get the products to
the stores earlier for the Christmas selling season. SG&A expenses fell
dramatically to 20.55% of sales from 23.1% in 3Q97, largely as a result
of increased co-op advertising revenues from dollars and good sales
leverage. Operating margins increased 160bp in the quarter to 2.3% of
total revenues vs. 0.7% a year earlier and operating income more than
doubled to $2.5 million from $640,000.
ELBO redesigned their Web site in September, experiencing an almost
immediate 200% increase in sales and a 347% increase vs. 3Q97. Co-op
advertising revenues from the site also increased substantially to
$800,000. The site now offers 4,800 titles.
The outlook for 4Q98 remains strong, given a broad assortment of new
software titles and the company's excellent 4Q 97 inventory position.
Company Description
Electronics Boutique is among the world's largest specialty retailers of
electronic games, including video games, personal computer entertainment
software, some video game hardware, and PC productivity software and
accessories. At the end of the third quarter, Electronics Boutique
operated 500
stores in 43 states in the U.S. as well as Puerto Rico, Canada,
Australia, and South Korea. Stores are operated under the Electronics
Boutique and Stop 'N Save names. EB stores are typically located in
choice, high-traffic locations in regional malls, average 1,100 square
feet, and offer 2,600 stock keeping units. Stop 'N Save stores are
located in strip centers, average 1,500 square feet and also carry 2,600
stock keeping units. Almost 90% of stores are in the U.S.. The company
plans to open 80-85 new stores per year over the next two years,
including 50-55 in the U.S. and 30-35 in foreign markets.
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