Future Shop: a retailer poised for growth: … U.S. expansion …

Money Digest, Feb, 1996 by Stephan Katmarian

Future Shop (TSE - FSS, $14.25) is a major Canadian retailer of computers, consumer appliances and electronics. Most Canadian consumers should be familiar with the company, as it has over 70 `super stores' in Canada and 3,000 employees.

The company sells a wide variety of name brand items "at the guaranteed lowest price in Canada and the U.S." Price advantages are promoted using extensive advertising campaigns.

Future Shop was started as a single store in Vancouver in 1982 by Hassan Khosrowshahi. His family previously ran various major businesses. The company went public in August, 1993, at $10.50. The stock soared to a high of $30 a few months later. Since then it has traded down to its current price of $14.25.

The stock trades slightly above its issue price despite sales that are 5 times 1993's and double the earnings. The market appears spooked by the company's recent expansion south of the border, where Canadian retailers have traditionally fallen on their faces. Future Shop now has 14 `super stores' in the United States, representing about 23% of revenue. The U.S. stores have been operating at a modest loss thus far.

I believe Future Shop will be successful because its managers are already experts at operating U.S.-style deep discount `super stores'. Moreover, the U.S. operations are almost at a break-even point despite high start-up costs. If the firm's U.S. expansion is even half the success of the Canadian operation, earnings growth will be explosive. Future Shop is in excellent financial condition -- the firm has little debt and Canadian operations are profitable. It's stock made $1.31/share in 1994 and should do at least that in 1995. Earnings imply a P/E of 12 moving forward -- low for a growth story.

Growth-oriented investors may want to seriously explore this stock. Investors should keep an eye on the firm's U.S. performance, as that is what will drive the stock price.

Also note that insiders control about 78% of the 12.6 million shares outstanding, which makes for a very small float and potentially volatile stock action.