Bottom of the Barrel: Small-Cap Shopping at Cost Plus

Shopping for a quirky specialty retailer to fill your small-cap portfolio? Cost Plus (CPWM Quote) may be just what you're looking for.

This Oakland, Calif.-based retailer operates 150 stores in 19 states under the names World Market and Cost Plus World Market. The stores offer an eclectic mix of casual home furnishings, housewares, gifts and other decorative stuff.

It competes with the likes of Pier 1 (PIR Quote), but what sets Cost Plus apart is its selection of gourmet food items and value-priced wines from around the world. Cost Plus stores feel much like a mix of Pier 1, Pottery Barn and maybe even a hint of a middle-tier Williams-Sonoma. Shoppers can find everything from a miniature bottle of Tabasco to a delicious bottle of Chardonnay.

What keeps me coming back to the store is its ever-changing merchandise. Basics such as solid-stemmed wine glasses are always available, but I have yet to walk into a Cost Plus store that looks stale. A typical Cost Plus World Market store has 16,000 square feet of selling space and contains about 10,000 items.

Slowly Getting Better

The past year has been challenging for all retailers, including Cost Plus, but the economic and shopping environment appears to be improving. Fourth-quarter sales at this retailer rose 11% to $230 million, with same-store sales increasing 2.7%, ahead of the expected 2% gain.

At a Glance Cost Plus (CPWM:Nasdaq)
March 5 Close	$25.21
52-week Range	$31.20-$14.25
Price-to-Earnings Ratio*	24.5
Market Cap	$565.2 million
Avg. Daily Volume	252
Inst. Ownership	95%
Dividend Yield	N/A
Beta	1.7
Company Web site	www.costplus.com
*Based on 2002 Estimates Source: Market Guide, Zacks, Company Reports

During a tough 2001, Cost Plus held the line on costs -- primarily by reducing general and administrative expenses such as insurance and corporate overhead by renegotiating existing contracts and outsourcing various administrative functions -- all this helped stabilize the bottom line. The company is scheduled to release earnings March 20, and the First Call consensus estimates that it will earn 92 cents a share for the fiscal year, down from last year's $1. Margins will likely be about 5.9%, solid in a slowing economic environment but well below the company's peak of 8.2% in 1999. (Like most retailers, Cost Plus' fiscal year ended Jan. 31.)

The balance of this year should begin to show improvement. The First Call consensus predicts that Cost Plus will earn $1.08 a share in the fiscal year ending January 2003 and $1.38 the following year. This year looks like a rebuilding year, which should be followed by strong growth in 2003. Cost Plus plans to add 25 stores in 2002 and projects 16% total sales growth, to about $657 million.

"While we expect to see some [margin] recovery in 2002 (about 0.6%), the real opportunity seems to be in 2003, when greater leveraging of the infrastructure enhancements of the last few years take place," notes David Magee, retail analyst at SunTrust Robinson Humphrey. He rates the stock outperform, and his firm hasn't provided investment banking services to Cost Plus.

Focus on the Long Term

At its current level, Cost Plus trades at roughly 24 times estimates for earnings in the coming year. Although a retail rally could push Cost Plus even closer to its 52-week high of $31.20, the stock is close to fair value based on this year's earnings.

"We continue to maintain that the share price is relatively expensive here," notes Magee. "We see Cost Plus as an 18% grower on a longer-term basis. Thus the stock continues to sell at a premium to its growth rate."

Worldly Growth Cost Plus shows the goods
Year	Revenue (in millions)	Earnings Per Share
1999	$315.1	$0.65
2000	402.3	0.93
2001	493.7	1.00
2002*	567.7	0.92
2003*	660.0	1.08
*Estimates Source: FirstCall, Company Reports, TSC Research

One reason to be conservative on Cost Plus is its dependence on California. With nearly 40% of its stores in California, the company has felt the impact of previous economic shocks in the Golden State. For Cost Plus to achieve its growth targets, California must participate in the economic recovery.

But for patient investors who are looking for a specialty retailer to provide upside in the economic recovery, Cost Plus should be on the short list. We "believe accounts can get nice appreciation from this name over the longer term," concludes Magee.

I concur. Cost Plus is my favorite specialty store to shop for home basics with unparalleled variety. While I agree that the stock may be a bit ahead of itself at current levels, a low-$20s entry point seems a prudent way to participate in the economic recovery and the possibility that Cost Plus can grow faster than conservative estimates.

I give Cost Plus 2 1/2 barrels and place it in the "market outlook" portion of the portfolio.

For an explanation of our barrel rating system, see our recent description.

On the Links

As always, the table below updates the Bottom of the Barrel portfolio over the past week. As I'm taking a long-anticipated vacation, I'll save my specific stock comments for next week. Overall, however, many of the small-caps have kept pace with the recent market rally.

Perking Up Barrel stocks react well in rising market
Original Rating	Current Outlook	Company/Ticker	Date of Mention	5-Mar Close	Mention Price*	Price Last Week	% Change From Mention	% Change Weekly
Positive Outlook
2.5	Positive	Rare Hospitality Intl. (RARE:Nasdaq)	February 20, 2002	$26.33	$25.72	$27.00	2.37%	-2.48%
3	Positive	Netbank (NTBK:Nasdaq)	February 6, 2002	15.97	13.45	14.34	18.74	11.37
2	Postiive	Endocare (ENDO:Nasdq)	January 23, 2002	15.15	18.21	14.90	-16.80	1.68
2.5	Positive	SurModics (SRDX:Nasdaq)	December 19, 2001	35.89	34.60	34.62	3.73	3.67
2.5	Positive	VitalWorks (VWKS:Nasdaq)	November 21, 2001	4.79	4.30	4.45	11.40	7.64
2	Positive	FPIC Insurance (FPIC:Nasdaq)	November 14, 2001	12.70	12.83	12.42	-1.01	2.25
3	Positive	Witness Systems (WITS:Nasdaq)	October 31, 2001	13.05	8.06	13.05	61.91	0.00
Market Outlook
2.5	Market	Coastal Bancorp (CBSA:Nasdaq)	December 12, 2001	31.94	27.84	31.64	14.73	0.95
2.5	Market	Coinstar (CSTR:Nasdaq)	November 7, 2001	27.80	19.96	29.75	39.28	-6.55
2.5	Market	Hibbett Sports (HIBB:Nasdaq)**	October 24, 2001	23.90	20.04	22.10	19.26	8.14
2.5	Market	Quixote (QUIX:Nasdaq)	October 3, 2001	17.95	21.44	18.12	-16.28	-0.94
Special Situation
1	Special Sit.	Luby's (LUB:NYSE)	February 27, 2002	6.47	6.22	6.22	4.02	4.02
3	Special Sit.	Quanta Systems (PWR:NYSE)	January 9, 2002	16.10	16.05	14.75	0.31	9.15
Avoid
2	Avoid	Actrade (ACRT:NYSE)	January 30, 2002	15.00	20.65	14.45	-27.36	3.81
0.5	Avoid	Goody's Family Clothing (GDYS:Nasdaq)	November 28, 2001	4.14	4.50	4.38	-8.00	-5.48
1	Avoid	Bridgford Foods (BRID:Nasdaq)	October 10, 2001	10.70	13.18	11.00	-18.82	-2.73
Income Portfolio
	Yield
2.5	6.04	Empire District Electric (EDE:NYSE)	January 16, 2002	21.15	21.23	21.05	-0.38	0.48
2.5	2.43	Met-Pro (MPR:NYSE)	October 17, 2001	13.30	11.16	13.48	19.18	-1.34
2.5	4.62	Integra Bancorp (IBNK:Nasdaq)	January 2, 2002	19.95	20.75	19.94	-3.86	0.05
3	4.49	Alexandria Real Estate (ARE:NYSE)	February 13, 2002	41.98	40.25	41.28	4.30	1.70
*Average price on date of mention. **Prices Adjusted for 3:2 split on Feb 20, 2002. Source: TSC Research

See you next week.

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Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a TSC gift to commemorate your pick.