07:12am EST 26-Oct-98 Prudential Securities (H.G. KATICA 404-842-9202) ELBO
ELBO: REITERATING STRONG BUY FOLLOWING CLIENT VISITS WITH MANAGEMENT LAST WEEK
ELBO: REITERATING STRONG BUY FOLLOWING CLIENT VISITS WITH MANAGEMENT LAST WEEK
R E S E A R C H N O T E S October 26, 1998
Subject: Electronics Boutique Holdings (ELBO-11 1/8)--OTC
OPINION
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Current: Strong Buy
Prior:
Analyst: Harry G. Katica (404) 842-9202 RISK: High
12-Month Target Price: $20
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Ind. Div.: $0.00 Yield: --- Shares: 20.2 mil. 52-Wk.Range: 14-10
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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 $ 1.00E 11.1X $ 0.11A $(0.06)E $ 0.06E $ 0.76E
Proforma# $ 0.87E $ 0.09E $(0.04) $ 0.06E $ 0.76E
Current 01/00 $ 1.13E 9.8X
* 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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Last week, we accompanied the management of Electronics Boutique on several
visits with institutional investors. The discussions highlighted the company's
strong competitive position, the current health of the industry, and several new
initiatives being undertaken by the company. Based on these factors, we
believe Electronics Boutique is well-positioned to meet or exceed our earnings
per share estimates for 1998 and 1999.
A Steady Flow Of New Software Titles Should Lead To Solid Third Quarter
Results... An example of the strong demand for new titles is the recent release
of Metal Gear, which recorded the fourth highest day of sales for a new
release. Same-store sales have rebounded since a slowdown in September (due to
a tough comparison) and are expected to meet or slightly exceed our estimate of
a 6% gain in the quarter. In turn, we believe there is a good possibility of a
positive earnings surprise in the third quarter.
...While Expense Leverage Could Be The Source Of Stronger Earnings Growth Next
Year. Over the last few years, Electronics Boutique has developed an efficient
distribution system, built-out its corporate infrastructure, and reorganized its
field management to support future store growth. In turn, we believe these
expense categories will grow slower than the overall revenues during the next
two years. Since our forecast calls for only a 10 basis point improvement in
the expense ratio in 1999, we believe there is plenty of room for a better-than
expected performance.
New Store Openings Could Exceed Our Current Forecast Of 80-85 In 1999. We now
anticipate 50-55 domestic store openings and 15 each in Canada and Australia.
Management indicated that it would like to maintain a stable growth rate in
1999, suggesting as many as 90-95 store openings. An acceleration of store
growth would be a positive for future growth rates and indicate that the format
remains well short of saturation in the United States.
Stores Will Soon Begin To Carry Pre-Owned PC Software... Electronics Boutique
has already established a very strong business selling pre-owned video games,
which now represents 5%-6% of sales and a much higher proportion of gross margin
dollars. Similar results have been achieved in a test run in Canada for the PC
software business. While it is difficult to assess the financial impact of
this new business, our current estimates do not include significant expectations
from this new program.
...And The Sale Of Personal Computers Will Be Tested On A Limited Basis. For
the Christmas season, Electronics Boutique plans to a single personal computer
model in about 40 stores. The computer will carry a sub-$1,000 price point,
will be competitively priced in the market, and be designed for the game player
(with a graphics card). While the gross margin on hardware sales will be below
the company average, we expect high sales per square foot. In addition,
software and accessory sales should benefit from the additional foot traffic.
Management Is Focused On Generating Sales Growth Through The Next Cycle. Since
the industry is now three years into the current product cycle, Electronics
Boutique is already working ways to stimulate sales and margins when sales begin
to slow. The additional of computers and pre-owned software should be a
positive for sales. In addition, the company should be able to increase
marketing support from vendors as mass merchants are less aggressive with the
category. Also, PC entertainment software should grow consistently over the
next five years, helped by rising penetration levels, and will provide a partial
offset to any weakness in the video game business. Lastly, Electronics
Boutique typically enjoys higher market share in the early parts of a product
launch and should benefit from the introduction of the Dreamcast system by Sega
in late 1999.
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