rating and an 18-month price target of $4.75. He is the only analyst to actively follow it.
Why is Mr. Telzrow so upbeat? Southland is still the top name in convenience stores, with strong locations and heavy customer traffic. And its modernization of its inventory promises gains in productivity, revenue and profit margins. Until recently, its stores have been forced to fly blindly when it comes to tracking customers' purchase patterns. Unlike big retailers, most 7-Eleven stores lack such basic features as bar-code scanners at the cash registers. Clerks at most stores long have been responsible for memorizing prices, while store managers had no means to accurately study purchases. That may soon be history. The company is in the middle of rolling out a new electronic retail-information system designed to track inventory and alert store managers of fast-moving items. Installation began in the second quarter. So far, the systems, which have been under development for four years, are in 500 of Southland's roughly 5,500 North American franchise and company-owned stores. Southland expects to have about 2,500 in place by the end of the year, with the rollout to be completed at the end of 1999. Among the benefits seen by the company and Mr. Telzrow: Poor sellers will be taken off shelves, while inventory will be stocked based on customers' purchases. "Before, it wasn't exactly an environment of cigar boxes [used as tills] and best guesses," says James Keyes, Southland's chief financial officer. "Let's say it was somewhere in between that and the environment that's here today." Moreover, Southland is starting to consolidate its delivery operations through combined distribution centers, where vendors deliver goods to a central site instead of each store. Southland then ships all the products a store would need in one shot. The centers, which are in about half of the company's U.S. markets, are modeled after a successful system at its Japanese operations. The centralized distribution allows stores to be stocked daily. This in turn enables Southland to expand its selection of fresh foods, such as fruit and deli-style sandwiches, a key growth area. Mr. Telzrow notes that until recently, the company's spending to develop and run the centers has been a drag on operating earnings. But he expects that to change as the centralized distribution boosts sales. Already, same-store sales have posted gains in each of the past 13 months. Sales also are getting a boost from new products, such as Cafe Coolers, Slurpee-like drinks in cappuccino and mocha flavors that sell for much less than similar products at rivals. Mr. Telzrow estimates that Cafe Coolers added one percentage point to sales growth in the second quarter. Another fan is Frederick "Shad" Rowe, whose Dallas hedge fund, Greenbrier Partners, has bought just under two million shares of Southland stock in the past year. Though he concedes that the turnaround process has taken longer than he thought, he's convinced it's well under way. Now that the company is getting the sales increases and a retail-information system, Mr. Rowe says, it's "beginning to operate like a normal efficient American retailer." To be sure, Messrs. Telzrow and Rowe aren't smitten with all of Southland's recent moves. One initiative Mr. Rowe cites as disappointing: an Austin test run of automated teller machines that cash checks, issue money orders and dispense prepaid long-distance phone cards, among other things. Southland's Mr. Keyes says he is pleased with the initial results, but the company hasn't yet decided on a national rollout. Mr. Rowe, however, hasn't been impressed thus far. "Not one store has told us they think this has added a single penny to same-store sales," he says.