Dreyer’s a Sweet Stock; Rebuilding Toys R Us
Dreyer’s Grand Ice Cream (DRYR)
Jim: Buy
Mike: Buy
Mike: One thing I love about this gig, Jim, is how much you learn by studying companies such as Dreyer’s Grand Ice Cream.
Jim: And here I thought we’d picked a business I understood--for once.
Mike: There are wheels within wheels, Jim. Did you know that the ice cream industry has several segments? Ya got yer super-premium segment, yer premium segment and yer regular segment. Then there’s--I love this one--the “better-for-you” segment.
Jim: Better than what?
Mike: Well, super-premium and the rest are all made with varying high ratios of butterfat, and the “better-for-you” stuff has somewhat less. Of course, that strikes me as saying it’s better that Moe works on your plumbing than Larry or Curly. Anyway, Dreyer’s has done quite well in all these categories.
Jim: No question. Dreyer’s, by the way, is headquartered in Oakland, which is home to another stock we reviewed recently, Clorox.
Mike: Let’s just hope their factories aren’t too close to each other.
Jim: Anyway, Dreyer’s is a big business. It’s the leading provider of ice cream for grocery stores, does $1 billion a year in sales and it has been around a long time--it was started in the late 1920s.
Mike: Right. It was founded by two guys, named Mr. Dreyer and Mr. Edy, who opened shop on Grand Avenue in Oakland. Hence the company’s name, Dreyer’s Grand.
Jim: More important, Mike, Dreyer’s has been performing superbly for the last several years after getting hit in 1998 by surging cream prices. Earnings in the latest quarter rose 26% on a 7% sales gain. Wall Street has rewarded that performance by pushing the stock up sharply. And I think the shares are still a great buy.
Mike: I agree. For starters, Dreyer’s plans to get even bigger: It renewed a big deal to distribute Ben & Jerry’s ice cream.
Jim: Besides the deal with Ben & Jerry’s--which is now part of Unilever--Dreyer’s just bought some West Coast distributors, including one in Santa Barbara, which will give it a bigger reach. And a cornerstone of Dreyer’s strategy is to move beyond its supermarket base and get its ice cream into more convenience stores.
Mike: Yes. Dreyer’s has an incredible 62% share of the market for ice cream delivered directly to grocery stores. But now it wants to do better in the packaged market, that is, ice cream sold in your 7-Elevens, Arco gas stations and the like. These new distributors will help accomplish that.
Jim: Which is a big reason Dreyer’s stock so far this year is up an astonishing 90%.
Mike: And Dreyer’s Chief Executive Gary Rogers has steered the company to success without once being touted on the cover of Forbes or Fortune, so far as I recall.
Jim: I view Dreyer’s as a Peter Lynch kind of stock. Lynch, the famed stock picker who used to run Fidelity’s gigantic Magellan fund, loved these kinds of companies that were easy to understand, had leadership positions in their industries, were well-managed and had great growth prospects. But one thing gives me pause. Because the stock has shot up this year, it now trades at a fairly rich multiple of 42 times its expected 2000 profit of about 78 cents a share..
Mike: Yes, but I think Dreyer’s earns that--excuse the phrase--premium. It still has excellent growth potential and the management talent to exploit its markets.
Jim: Plus it has a healthy balance sheet and, so far as I can tell, there’s no indication that demand for ice cream is going to soften any time soon. Sorry, I couldn’t help myself, either.
Mike: One final irony, Jim: In health-conscious America, Dreyer’s sales of super-premium and premium ice creams are up 12% this year, while sales of those “better-for-you” ice creams are up 6%. Just shows we all know what’s better for us--and yet we avoid it like the plague.
Toys R Us (TOY)
Jim: Don’t Buy
Mike: Don’t Buy
Jim: We talked about this stock a year ago, and now we’ve decided to revisit it, mainly because it’s the toy industry’s peak season and because Toys R Us is undergoing a dramatic overhaul.
Mike: I can think of a third reason you wanted to revisit this stock.
Jim: What’s that?
Mike: You said last time that this chain was in need of a massive make-over, because Toys R Us was floundering and its stock had gotten hammered. And apparently Toys R Us was listening and took your advice!
Jim: Thanks, but it was pretty obvious to everyone that this big chain, which used to dominate U.S. toy sales, had fallen apart. Toys R Us has more than 1,500 stores and does $12 billion a year in sales. But its stores were decrepit, their help was useless and their shelves weren’t stocked with enough of the toys people wanted.
Mike: It was an amazing collapse.
Jim: Some people partly blamed a shift in toy-buying habits among consumers, namely that they were buying fewer toys for kids age 10 and older, and that they were buying more toys at mass-merchandisers such as Wal-Mart and Target. Indeed, Wal-Mart is now the No. 1 seller of toys. But most of the blame rests with Toys R Us itself.
Mike: Right after our last review, the chain hired John Eyler as its chief executive. Eyler came from FAO Schwarz, and he has been scrambling to repair the damage Toys R Us did to itself.
Jim: But his task isn’t kids’ stuff. FAO Schwarz is an upscale but much smaller toy chain, yet Eyler is trying to transfer some of Schwarz’s pizazz to Toys R Us to burnish its image.
His ideas have included building a massive new store in New York’s Times Square. He’s also beefing up training and staffing, he has ordered more toys in advance to keep shelves stocked this holiday season--even though supplies of some top toys are sure to be scarce nationwide--and he’s revamping hundreds of the chain’s shoddy stores.
Mike: Including how they’re laid out.
Jim: Right. It was clear that although the warehouse-style look might work at Home Depot, it had become a flop at Toys R Us. So Eyler is rearranging the store layouts, making inventory more appealing and easier for shoppers to get to.
Mike: The only option a Toys R Us shopper had before was to start at one end and walk aisle by aisle through the store until you found what you wanted. That’s not a great way to shop.
Jim: In fact, you know what Mr. Eyler’s biggest challenge is? Getting back some of the untold number of consumers that his chain had completely alienated in the last few years. By the way, I stand by what I said last time: He can start by getting rid of that dumb giraffe as the company mascot. How about a new logo to show the new Toys R Us?
Mike: Anyway, one of the numbers that just leaps out and grabs you by the throat is that Toys R Us has missed its profit estimates for its fourth quarter--that’s holiday time--in 14 of the last 15 years, according investment firm Sanford C. Bernstein & Co. That’s incredibly bad.
Jim: However, Eyler said last month that in this year’s fourth quarter, the company will meet or exceed analysts’ forecasts. And he has made another move that has gotten applause: He took the company’s struggling online business and formed a joint venture with Amazon.com, which should help get Toys R Us’ Internet site in the black a lot sooner than planned.
Mike: We should note that it helps that some of Toys R Us’ leading online rivals, such as EToys, are struggling themselves. But I have to say that, for all of the great advance press Eyler received when he got to Toys R Us, and for all his early initiatives, he doesn’t have much experience in engineering a turnaround of this size.
Jim: No, and it has been pointed out that while he grew FAO Schwarz’s sales quite well . . .
Mike: He didn’t do as well with its profit. For that and other reasons, I’m not ready to lay down my money on Toys R Us.
Jim: Me neither. I’d like to buy this stock as a turnaround play. And in fact, investors have cautiously bid up the stock’s price this year.
Mike: But over the last two years this stock has registered a gain of exactly--and it’s not easy to hit a number like this on the nose--0.0%. Not only is the jury still out on Toys R Us, I’m not sure it’s even left the courtroom.
Jim: I know. Eyler so far has remodeled something like 200 stores and has plans to overhaul 300 more next year. That’s only a third of Toys R Us locations. Simply put, I don’t see this stock moving noticeably higher until Eyler strings together three or four quarters of matching or exceeding analysts’ earnings estimates, because Wall Street remains very skeptical of this operation.
Mike: And let’s not forget: Except during the holiday season, is there a more discretionary purchase than a toy--especially an expensive toy--other than an expensive car? So what happens if the economy turns down, as many expect it will next year?
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Peltz can be reached at james.peltz@latimes; Hiltzik can be reached at michael.hiltzik@latimes.com.
