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Thursday, Mar 28, 2024

Not Just Big; Rolling In It

Want to get a picture of how a typical, highly profitable company might operate? Consider Cherokee Inc. The Van Nuys apparel brand licensing company has just 40 employees and doesn’t own any plants or distribution warehouses. So over three years its average return on equity has topped an impressive 50 percent, making it No. 2 on this year’s annual list of Most Profitable Public Companies. However, several of the other leading performers on the list are not what you may expect, including corporate giants and even two restaurants, which often are low-margin businesses with high overhead. Among them is Avery Dennison Corp., the Glendale label maker that has been profitable for years even as it underwent a recent restructuring that slimmed it down. Its three-year average return on equity is about 14 percent. “Over the past few years we have transformed the company to accelerate sales growth, increase earnings and maintain our strong free cash flow,” said Chief Executive Dean Scarborough in an email, adding that he expects the restructuring to save the company about $100 million annually. Last July, Avery Dennison sold its office products and engineered-solutions divisions to CCL Industries Inc. of Toronto, a printing and label company, for an estimated $400 million. It also downsized offices from its long-time headquarters in Pasadena to Glendale. It is focused on pressure-sensitive, self-adhesive labels used on a wide range of consumer products and reflective highway signs. Division sales have been growing, rising 5 percent in the first quarter to $1.14 billion. Other notable names in the top 10 include DineEquity Inc., the Glendale operator of the IHOP and Applebee’s restaurant chains, at No.3; Amgen Inc., the Thousand Oaks biotech giant, at No.4; Calabasas casual dining restaurant chain Cheesecake Factory Inc. at No. 7; and Burbank media and entertainment giant Walt Disney Co., which ranks No. 10. Companies on the list are ranked by return on equity over a three-year period. Return on equity (ROE) is defined as net income, or profit, divided by the shareholder’s equity in a company. James Hillman, managing director of portfolio management at BNY Mellon Wealth Management, said larger companies are doing better and better in the globalizing world economy as they take advantage of easier access to capital and the ability to expand internationally. “In particular, the space of large cap companies are benefiting from accelerated economic growth,” he said. “They have a continued ability to leverage relatively inexpensive money and grow through expansion.” Corporate giants The top spot on the list remains, for the third straight year, with Crown Media Holdings Inc. of Studio City, which runs the Hallmark Channel and Hallmark Movie Channel. Its ROE is 106 percent. The company produces very little of its own new content, keeping costs under control and has placed in the top two on the list since 2005. In second place for the second straight year is Cherokee, with an ROE of nearly 52 percent. It has lucrative contracts with Target Corp., Tesco plc. and Tmall.com, the Chinese equivalent to Amazon, which sell its branded clothing. The company boasted revenue of nearly $29 million in its last fiscal year. The newest entrant to the top 10 is Disney, which last year ranked No. 12. Its three-year average ROE is nearly 14 percent. Revenue at Disney has remained steady the last few years in the $10 billion to $11 billion range, while net income has fluctuated between $1.3 billion and $2 billion. The company is in a historically boom-or-bust industry that can brings huge profits when a company strings together hits – as Disney has been doing for years, most recently with its international box office smash “Frozen.”  David Bank, an analyst at Toronto corporate and investment banking firm RBC Capital Markets, said in a recent report that all segments of Disney met or outperformed expectations. “In other words, right now, it’s all clicking,” he wrote. Another large company in a traditionally high profitable industry – in this case biopharmaceuticals – is Amgen, which reported an ROE of 20.5 percent. And the biotech could have returned even more money to investors, but decided last year to spend $10.2 billion to acquire Onyx Pharmaceuticals, a cancer drug company in San Francisco. Analysts see it as a smart purchase. Karen Andersen, senior biotechnology analyst at Morningstar Inc. in Chicago, believes Amgen has a sustainable competitive advantage because of patents on new and investigative products. They include denosumab, a cancer drug that Andersen thinks could bring in $3 billion in sales; Nexavar and Kyprolis, two drugs from the Onyx deal; and brodalumab for cholesterol treatment. “Amgen’s newest drugs as well as late-stage pipeline products should allow the firm to achieve 3 percent top-line growth and 7 percent bottom-line growth over the next five years,” she wrote in a report last month. Restructured success The Valley’s largest restaurant business by market cap, Cheesecake Factory, ranks high on the list as well. Its three-year average ROE is 18 percent. That’s surprising given that the company’s 169 Cheesecake Factory outlets and 11 Grand Lux Cafés are all company owned. The company, however, has several restaurants oversees that are franchised. More importantly, its success with customers has given it an advantage at the bargaining table with landlords. Jerry Prendergast, founder of Culver City restaurant consultancy Prendergast & Associates, said the foot traffic a Cheesecake Factory outlet can bring to a mall gets the company pretty sweet deals on tenant improvements. “Cheesecake Factory doesn’t spend any money to open their restaurants, so there’s not a lot of capital,” he said. “The developers pay them to put their restaurant in their property.” The Valley’s other large restaurant chain operates in a completely different way. After DineEquity spent about $2 billion to acquire the Applebee’s restaurant chain in 2007, the firm began franchising its outlets, which it concluded last year. Between its two brands, 99 percent of restaurants are franchised and its ROE is more than 33 percent. Chief Executive Julia Stewart said franchising has helped the company return more money to shareholders. “We’re far leaner than any company that owns a lot of company-operated restaurants,” she said. “It saved us a lot on general and administrative costs. We run a lean, tight ship.” Reporters Stephanie Forshee, Mark Madler and Joel Russell contributed to this article.

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