Top 10 Turnarounds for 2006, Part 2

1-800-Flowers.com

1-800-Flowers.com(FLWS) is an operating leverage story. The company is gradually ratcheting down certain variable expenses over the next couple of years to bring operating margins to 8% or higher. With solid top-line growth and a stellar balance sheet, this is a conservative stock to own that I expect to have lots of upside. If I'm right about the margin leverage in the operating model, this stock will at least double over the next couple of years.

Blockbuster

I haven't seen so much misplaced negativity swirl around a stock since Boeing(BA) was given up for dead a few years ago. The growling bears are dead certain that Blockbuster(BBI) will be a "goner" in short order. I think they're wrong.

The financials reveal the true story. Blockbuster took on too much in late 2004 and early 2005, allocating substantial capital to a nascent online business, a growing game business and a DVD trading business, while at the same time eliminating $550 million in high-profit late fees from its $6 billion annual revenue base.

The extraordinary outlay of capital coincident with a revenue pinch (the elimination of late fees) isn't going to be repeated. Aside from its DVD rental business, which grew over the last year if you back out late fees, Blockbuster has a substantial and growing game business, with more than $700 million in revenue. It is also a significant retailer, growing at a double-digit rate with more than $1.8 billion in annual revenue. Look for big upside out of Blockbuster over the next couple of years. Predictions of its early demise are way overdone.

TJX Companies

TJX(TJX) is a low-risk turnaround with reasonably good upside. TJX is the leading off-price apparel retailer, with more than $15 billion in annual revenue. The founder is back at the helm, as of September, and is aggressively implementing a lot of operational changes. Look for earnings to improve markedly off of recent depressed results. With share buybacks supported by a healthy free cash flow stream, I think a quote of $28-$30 in 2006, a significant improvement over the current quote of around $22, is a conservative expectation.

Wild Oats

The turnaround at Wild Oats(OATS) is just starting to gain traction. This $370 million natural foods grocer with $1.1 billion in annual revenue had 6% same-store sales growth last quarter. With growth of 10% in square footage planned for next year and growth of about 5% in same-store sales, this company could surprise many on Wall Street. Shares of Wild Oats should be worth more than $18 to $20 per share by next year, with a double from the current quote of $12 per share achievable in two to three years.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider 1-800-Flowers.com and Wild Oats to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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