PRU's Report--LOOKS GREAT!
ELECTRONICS BOUTIQUE HOLDINGS CORP
JANUARY 5, 1999
ELBO: HOLIDAY SALES WERE STRONG HIGHLIGHTED BY GROWING INTERNET SALES; RE-ITERATING STRONG BUY AND
RAISING PRICE TARGET TO $25
Subject: Electronics Boutique Holdings Corp
(ELBO-19 5/8)--OTC
Retail
COM EPS OPINION
Current: STRONG BUY
Analyst: Harry G. Katica (404) 842-9202 Risk: HIGH
12-Month Target Price: $25
Ind. Div.: --- Yield: --- Shares: 20.2 mil. 52-Wk.Range: 26-7
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 19.1X $ 0.11A $(0.02)A $ 0.08A $ 0.77E
Proforma# $ 0.91E $ 0.09E $(0.02)
Current 01/00 $ 1.17E 16.8X
* 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.
Electronics Boutique enters the new year on a strong note. Sales trends ended 1998
in an up-trend and Internet sales continue to surpass expectations. While we are
maintaining our 1998 and 1999 earnings per share estimates of $1.03 and $1.17,
respectively, Electronics Boutique is well-positioned for a positive earnings
surprise in the fourth quarter. Based on this momentum, as well as what we believe
will be a growing recognition of the company's successful Internet strategy, we are
raising our price target from $22 to $25.
December Sales Were Driven By Video Games And A Rebound In Hardware. We believe
that same-store sales so far in the fourth quarter are up close to double-digits,
compared to our forecast of a 6% increase. While the introduction of Zelda, which
is likely to become Nintendo's largest single title, has been an important factor,
sales of video games have been strong across-the-board. In addition, sales of
hardware turned positive due to successful promotions of both Nintendo and Sony
PlayStation consoles.
Internet Sales Continue To Surge. We believe Internet sales rose significantly from
recent months and exceeded company plan as Electronics Boutique continues to improve
its Web site presentation and merchandising. While the strong December in part
reflects the seasonality of the business, the acceptance of the Internet site is
certainly a positive. Electronics Boutique has also successfully offered items
outside of the traditional product category, such as Furbies (a hot Christmas toy),
which bodes well for the company's ability to offer other types of merchandise.
Strong Sales Increase Potential For Positive Fourth Quarter EPS surprise. While
quarter-to-date sales trends currently exceed our forecast of a 6% same-store sales
gain, we want to wait until January sales are completed and see if there are any
year end adjustments (we do not expect any). In addition, some pressure on gross
profit margins, due partly to stronger hardware sales, could also have a modest
impact on fourth quarter results (tempering what could have been a much stronger
positive surprise). This situation does create a future opportunity to re-capture
margin later in the industry cycle.
New Price Target Reflects Growing Recognition Of Internet Presence. In our view,
Electronics Boutique now enjoys two important catalysts: 1) strong sales trends with
the potential for positive earnings surprises and 2) a growing Internet business.
In our view, the market does not yet fully appreciate the company's burgeoning Web
business, which we now expect to quadruple in 1999. Over the next few months, we
expect the company to better position itself by discussing its Web business in more
detail and possibly entering into alliances with other sites that can create traffic
and sales for Electronics Boutique.
Valuation Beginning To Reflect New Growth Opportunity. In our view, the exciting
potential for the company's Internet business warrants a higher target P/E for the
stock that we have been previously using. Our new price target of $25 represents a
P/E of 21, just under a single point growth rate of 23%. While this valuation is
reasonable for the retail business alone, it does not take into account the emerging
Internet business. As the prospects for this opportunity become better recognized,
we believe the stock could trade in excess of the one times growth rate benchmark
for specialty retailers.
Prudential Securities Incorporated and/or its affiliates have managed or comanaged a
public offering of securities and/or have performed investment banking or other
services for Electronics Boutique.
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shares of Electronics Boutique.
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directors, analysts, or employees may have positions in securities or commodities
referred to herein, and may, as principal or agent, buy and sell such securities or
commodities.
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See BLUE on ERA.
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