Gymboree

Gymboree Investment Highlights
Children's apparel has a necessary replacement cycle.
By nature, children's apparel needs to be replenished several times a year, usually by a mature female demographic with a propensity to spend on their children. Yes, the Gymboree brand carries higher price points than its publicly-traded specialty competition - Carter's (CRI) and Children's Place (PLCE) - and the mass channel private labels.
However, the average Gymboree customer represents a high-end audience with limited exposure to rising gas prices and other negative macroeconomic factors. We also expect a modest sales boost in coming years from baby boomer retirees who will likely have more time and resources to devote on their grandchildren.
With the combination of established brands that resonate with mothers everywhere (Gymboree and Janie and Jack) and still-emerging brands (Crazy 8) , we anticipate robust sales growth (at least mid-teens) through the balance of the decade and likely beyond.
Strong financial footing.
When evaluating a consumer stock investment, the most important factors to evaluate are:
Top-line growth (including mature and new store growth),
The likelihood of sustained profitability and return on invested capital,
Cash generation and flexibility,
Debt requirements, and
Inventory turnover.
Gymboree generally passes the test on each of these considerations, with solid top-line growth, sector-leading operating margins and returns on invested capital (nearing 20%), ample cash on hand, a debt-free balance sheet, and inventory turnover over 4.0x (excellent for a mall-based apparel retailer).
Investment Risks
Valuation. Admittedly, we are a bit concerned about Gymboree's valuation, given the stock's impressive run this year (the stock has climbed back from a low of $27 in January to a recent close of just under $44). However, at about 14x forward earnings (the consensus fiscal 2009 estimate is $3.16, according to Yahoo Finance), we still find this stock relatively cheap to its peer group (about 15x, aided by Children's Place inflated valuation) and anticipated earnings growth (mid-to-high teens). As such, we would comfortable with owning Gymboree's stock into the high-$50 range.

Blockbuster

There haven’t been a lot of developments in the last few weeks on Blockbuster’s (BBI) $6-a-share bid for Circuit City (CC). The stock certainly isn’t trading like a company in play; the Street doesn’t seem to think anything is going to happen.
Arvind Bhatia, an analyst with Sterne Agee, asserts in a research note this morning that Blockbuster is likely to provide an update on its proposed transaction in the next two weeks. He sees three possible outcomes:
Blockbuster proceeds with its bid.
Blockbuster lowers its bid.
Blockbuster pulls its bid.
Given the still troubled financial picture at Circuit City, Bhatia thinks the odds that the company pursues a deal at $6 a share is just 5%.
He sees a 60% chance that Blockbuster lowers its bid. At $4.50 a share, he writes, CC would have an enterprise value of $750 million. Bhatia says financial synergies from a deal could be $500 million to $700 million, which means BBI could argue that they would be buying CC at 1x synergies. (Haven’t ever seen that ratio before.) Nonetheless, he thinks that BBI holders “will need to be convinced there is more to the combination” than cost cutting: they will want to hear a plan for turning CC around.
He also sees about a 35% chance that BBI simply walks from the deal.
SeekingAlpha.Initializer.LogAndRun(load_article_toolbar);

Sonic

The more I hear from Sonic (SONC), the drive-in restaurant chain, the more I believe that this is a broken company. SONC reported disappointing results on Tuesday as the company earned 28 cents for its third quarter ended May. Analysts expected SONC to earn 31 cents which was flat with the third quarter of 2007.
The company claimed that the shortfall was due to colder and wetter weather. Same store sales declined 0.4% in the quarter but there was a wide disparity between a 0.5% increase at franchised units versus a 3.9% decline at “partner” drive-ins, which are primarily company owned. To the company’s credit, sales did pick up as the quarter progressed.
SONC has several problems. Weather is certainly one of those problems but it goes much further than just some rain in March. SONC has hoped to expand coast to coast and from border to border. However, so many of those geographies don’t have the year round weather to compliment the drive-in business model.
The commodity cost pressures is certainly hurting SONC. The company gets the double whammy of higher food costs which impacts its costs and the higher cost of gasoline which puts fewer drivers on the road to dine at the company’s drive-ins.
SONC has made one big mistake in the past year, which is to take on a huge amount of debt to restructure its capital structure and buy back stock. Since 2q06 (February 28, 2006) SONC share count has declined from about 89 million shares (reflecting a 3 for 2 split in May 2006) to nearly 62 million shares and is down about 5 million shares in the last year. The stock has lost about 1/3 of its value in the last two years and now SONC has gone from being nearly debt free to carrying about $700 million in debt.
When you put this all together, I don’t have much confidence in SONC's business model or management proficiency.