In Focus

A Company Too Good To Ignore?

All this week the Chicks' Eye View, we'll look at kid-related companies... from Toys R Us to Limited Too. It's a Chicklette Week!

Like a baby chick being sprung from its nest, Too Inc. (NYSE: TOO) has shown that it was ready to fly. Spun off from retail conglomerate, The Limited Inc. (NYSE: LTD) in August of 1999, Limited Too has carved out a unique niche for itself. Their clientele are those young and hip chicks, ages 7-14.

Generally, I'm not so enthused about specialty retailers. From an investment point of view, I tend to prefer those broad one-stop shopping type places, like Target or Home Depot, that have something for everybody. This company, however, capitalizes on its narrow market to an extreme advantage.

First, while they have a very specific customer in mind, they sell just about everything for that customer, including apparel, swimwear, sleepwear, underwear, lifestyle and personal care products. Like me, your first question might be, what the heck are lifestyle products? These include inflatable furniture, posters and other interior décor items Limited Too is banking no pre-teen room can do without. Limited Too better hope they're right: They recently opened their 400th mall store and believe there's room for between 600 and 700 in the U.S.

I'm convinced that CEO Michael Rayden must have a pre-teen daughter of his own - or maybe his cool quotient comes from his past experience at Pacific Sunwear (Nasdaq: PSUN). At any rate, he's certainly doing something right. To date, Limited Too stores have produced 16 straight quarters of same-store sales gains, 13 of which were in the double-digits! In fact, 90% of all its sales last quarter were at full margin (i.e. revenue came from sales at full price, not sale or clearance items)!!

What's their secret? They know their market like a parent knows his or her child. And they turn negatives into positives. For example, almost every retailer these days offers its own credit card. Everything from Parent Magazine to my alma mater, UCLA, offers one. And why not? Consumer debt interest is a great source of income and tends to encourage people to spend more. Well, Too Inc. does not offer one. Why? Because they know the bulk of their customers are the end consumers. That is to say, most 7-14 year old girls are walking the malls with allowance and babysitting money, not credit cards. Too, Inc. would have nothing to gain. This is why Limited Too has also chosen to do a full court press in their marketing strategy. In 1998, they launched their "Girl Power" shop format, addressing product presentation in a fun atmosphere with bright colors, music, giant bubble gum machines and photo booths.

E-commerce is somewhat difficult for Too, Inc. to capitalize on, again, because of the age of their consumer. However, they do have the cutest darn website that is sooooo age-appropriate and a successful "catazine" in place for mail or website orders. (I have to laugh at this new e-business terminology - "catazine." Bath & Body Works offers a "magalogue." So funny.)

Given that two revenue streams are relatively shut off in this young market (i.e. credit card interest and somewhat limited e-commerce), many retailers have either completely shied away from this niche or have decided to broaden. This is great for Limited Too: How can you not be a leader in the field when you're the only one in the field? Granted, they do have competition from these broader markets, but clearly not stiff enough that they're feeling any pricing pressures from the store two doors down in the mall! Too, Inc. probably also benefited a great deal from being a part of The Limited Inc. in establishing themselves prior to being spun off.

To broaden our scope, I say we take a look at their numbers. For the quarter ending 10/00, their numbers are as follows:

Gross Margin = 34%

Net Margin = 4.8%

Cash vs. Long Term Debt = .65x

Flow Ratio = .90

Hmmm. To be honest, I ran their numbers last quarter and they were much better. Why? It could be their expansion or perhaps the fallout from rising interest rates. There are many possibilities with no clear cut answers. Despite falling a tad short of our Chickie standards, I think they are worth watching. Wanna know what I really love about this company? For all you General Hospital viewers, last year, when Mac Scorpio's real-life daughter, Schyler, turned nine, I had no idea what to get her for her birthday (As you can imagine, she pretty much has everything!). I ended up buying her the cutest light blue clear plastic windbreaker. The next day her mother called to tell me that it was her absolute favorite present, as Limited Too is her favorite store! I was such a happy Chick!

Selling at around 14, near their 52 week low, this stock is definitely on sale. and what Chick isn't looking for a bargain before Christmas?