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TCBY tries to thaw profits; overhaul includes co-branding, efficient distribution.

Hoping to pump up profits that have been flat over the last five years, TCBY Enterprises Inc. is changing direction - and streamlining.

Earnings haven't approached the Little Rock-based frozen dessert company's $29.5 million peak of 1989; instead they've languished in the $5 million-$7 million range. The stock price, too, has been stuck at about $4 lately.

But Frank Hickingbotham, chairman and chief executive officer, says he is encouraged by earnings of $6.5 million in 1996, a strong rebound from 1995 when the company reported a loss of $21.6 million.

According to Gene Whisenhunt, TCBY chief financial officer, "Pure operations were right at break-even for 1995." The losses, he says, were caused by the adoption of new accounting standards and money spent on capital improvements, Hickingbotham says a restructuring plan devised in 1995 with the help of Little Rock investment firm Stephens Inc. has the company headed in the right direction.

"We did the evaluation internally," Hickingbotham says. "[Stephens'] peer review helped us look at strategic alliances and whether there would be advantages to alliances in the the food industry. We looked at our strengths and weaknesses and worked with their guidance. It is a combination of their efforts and what is the best way to use our assets."

Herren Hickingbotham, Frank's son and president and chief operating officer of TCBY, says Stephens "validated many of the things we had already determined about the company. It's always nice to have an outside person come in and say the same things you do."

After TCBY's earnings soared from $8 million in 1986 to $29.5 million in 1989, the bottom dropped out. The company was adding hundreds of stores each year, and some analysts thought it was growing too fast."

"I don't think they grew too fast," says Mark Gerstein, who follows TCBY for Value Line Inc., an investment advisory firm based in New York. "It was not a problem in their heyday; they were the only kid in town. When you have 100 percent market share, it's easy to lose market share."

Frank Hickingbotham says quick growth was part of the plan.

"It was my philosophy to get to be the biggest the fastest, to be in the strongest position when the shakeout hit," Hickingbotham says. "I wouldn't change one thing about our growth curve."

To stop the decline, TCBY executives - with the help of Stephens decided to end company-owned stores, seek co-branding agreements and make its retail frozen yogurt operation more efficient.

Following a Trend

"We had 80 company stores [in 1995] in five or six states," Frank Hickingbotham says. "We closed and franchised those. We focused on franchising and launched the expansion of new locations with co-branding."

Co-branding, probably the hottest concept in the retail and restaurant industries, meant signing a slew of agreements with oil companies - Fina, Citgo, Exxon, Texaco, Shell and BP among them - to install TCBY Treats stores in what could turn out to be thousands of locations. Many of those stores will share space with McDonald's, Taco Bell, Burger King, Pizza Inn, Subway and other fast-food giants.

"[Companies] co-brand because they can leverage the real estate," Herren Hickingbotham says. The idea is simple: Convenience stores have always sold food, but it was un-branded. Why not offer names consumers know to increase traffic?

"The focus is on using the same labor and space to maximize sales," Hickingbotham says. Outlets often use the same food preparation area and the same employees. A TCBY location, for instance, might share a kitchen and several workers with Taco Bell.

TCBY, which opened its first co-branded locations with Exxon in Florida in 1987, had 2,696 stores at the end of 1996; about 210 of them were in convenience stores, with 119 more under development agreements. A little more than half the stores are in non-traditional locations - airports, convenience stores, shopping centers - and about 65 percent have adopted the TCBY Treats concept, which includes ice cream and other desserts. The only company-owned store that remains is TCBY Care on the first floor of the TCBY Tower at 425 W. Capitol Ave. in Little Rock.

[TABULAR DATA OMITTED]

Revenue from initial franchise and license fees has increased because of the switch. Fees amounted to $2.4 million in 1996, $1.6 million in 1995, $1.3 million in 1994 and $1.1 million in 1993. The initial franchise fee is $20,000, not including construction costs.

Retail Repositioning

"We also repositioned our retail frozen yogurt," Frank Hickingbotham says. "We concentrated on efficient distribution in 1996. In other words, we decided which stores to sell to."

Hickingbotham says sales of hardpack products made by TCBY's Dallas Americana Foods plant - which covers 216,000 SF after an $8 million expansion in 1995 - to grocery chains were pinpointed. Since sales to the retail grocery industry have slipped during the last several years, TCBY's strategy has shifted to geographic regions rather than the entire U.S.

"We're heavy in the Southeast, the Rocky Mountains, the upper Midwest, the West Coast," Hickingbotham says. "We also distribute through Sam's Club, wherever they go domestically."

Besides streamlining, Hickingbotham says more energy has been put into international development. TCBY has about 200 stores in 43 foreign countries and plans call for more. The company also began repurchasing stock in December 1995. About 1.2 million shares were bought in 1996; the company could buy as many as 3 million shares.

Because of the the company's nose dive in the early 1990s, very few stock analysts follow TCBY. Morgan Keegan & Co., Robinson Humphrey Inc. and others have dropped coverage over the years. Andrew LaGrone of Hill Crawford & Lanford Inc. in Little Rock has covered TCBY, but says an analyst at the home office of Sterne, Agee & Leach in Birmingham, Ala., soon will begin following the company.

"We cover them on an informational basis," LaGrone says. "We haven't been back to them in about a year. [Sterne, Agee & Leach] hasn't done anything yet."

Gerstein says TCBY's changes have helped the bottom line.

"They need patience," Gerstein says. "Co-branding is the big thing in the restaurant industry right now, and I think they're doing the right thing. Their franchise base seems to have stabilized, too."

Gerstein says Value Line has given TCBY a neutral rating. He's waiting to see what kind of reception TCBY products receive in non-traditional locations.

"If the customers want it, I don't see why the company couldn't maintain [growth]," Gerstein says. "They just had a lot of competition. They have to do a better job of getting the word out. You know, I was surprised by how good the stuff is - that's their ace in the hole."

Gerstein says adding the Treats concept was a wise decision. TCBY claims stores that have added products to the yogurt line have increased sales an average of 10 percent.

"If you just don't like yogurt, you're going to resist going to TCBY because all they had was yogurt," Gerstein says. "Now they have ice cream."

Bringing Stephens into the TCBY mix was seen as a sign of a possible sale by stock analysts who had covered the company, but Hickingbotham says that was not the case.

"No - there never has been any talk of a sale," Hickingbotham says. "There were discussions that included a sale or merger, but t here was not anything that was attractive in the review process that exceeded what we could do with our strategic growth plan.

"Needless to say, this family has a major interest in this company."

That's no understatement. Frank Hickingbotham, 60, holds about 10 million shares of stock; Herren, 38, and Todd, 33, another son, hold about $00,000 shares each. Todd is president of Riverport Equipment and Distribution Co., a TCBY subsidiary. Several other family members are franchise owners or hold positions within the company.

It's too early to tell whether TCBY's restructuring will increase the value of the company and its stock, which hasn't made significant movement since the early 1990s. Its 52-week high is $5; the low is $3.75.

"The stock [price] does not represent the value of the restaurants; earnings do," Hickingbotham says. "The only thing we can do is operate on a profitable basis; you can't impact appreciation of your company. We believe in 1996 we clearly established the direction of the company. We expect to continue in 1997 and we hope the market will see the opportunity for solid growth."

RELATED ARTICLE: Juice Works Coming to Little Rock

Two Juice Works locations soon will open in Little Rock, according to Herren Hickingbotham, president and chief operating officer of TCBY Enterprises Inc.

"One will open about March 1 as a stand-alone at the Bowman Curve Shopping Center," Hickingbotham says. "The other will open in the TCBY Tower [in the TCBY Cafe]."

Juice Works, a juice and smoothie bar operation that was based in Phoenix, Ariz., was acquired by TCBY last September.

- JEFF WILLIAMS
COPYRIGHT 1997 Journal Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997 Gale, Cengage Learning. All rights reserved.

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Title Annotation:TCBY Enterprises Inc.
Author:Williams, Jeff
Publication:Arkansas Business
Date:Jan 20, 1997
Words:1489
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