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Discounting A Sign Of Slowing Sales

Sunday morning I picked up my newspaper and one thing instantly stood out. The coupon sections where excellent. The P&G (PG) stand alone coupons were for amounts I have not seen before. There were coupons there for $3 off Pampers, $4 off a razor, salad dressing coupons that were usually 50 cents off are up to $1 to $2 off now.

This matters because these discounts are for everyday items, not “father’s day” special sales event items. When you are a consumer products company like P&G or Church and Dwight (CHD) and have slowing sales, if you want to generate more of them, you have two options, advertise them more, or discount. When the discounts are this large, and the sections contain so many products, it tell me that sales are really slowing and they feel the need to slash prices to drive sales. Last summer, when things were humming along too fast and the Fed was raising rates to slow us down, not only were these discounts not as large, they were non existent. There were several weeks in which there were no coupon sections in the paper and if one did show up, it was minescule and only a new products were featured. Currently almost everything we shop for weekly has a substantial coupon for it in the paper. I have not seen discointing on such a wide aray of items in a long time.

Now, this may be a regional effect, but when you live in the heavily populated northeast like I do, that effect on producers bottom line is substantial. It is also important to note that these are not items that are being discounted on perishable items at a supermarket like Whole Foods (WFMI) where discounting is usually due to a shelf life determination. These are items that can sit on shelves, and apparently they are, for too long.

It will interesting to see what happens when this quarters results are released for these companies. If I had too bet, I would anticipate either falling profits, or if the deep discounting works and it drives sales, margin shrinkage.

Either way, the only people who come out ahead here are you and me.

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A Blogging Case Study

Here is something I though I would share (with the authors permission of course). I received it from Jane Genova and it depicts her journey in live blogging the lead paint trials. It is an interesting read for all bloggers, just substitute your blog subject for “lead paint” and you can get something out of this.

Jane blogs at Law and More

CASE STUDY OF LIVE-BLOGGING RI LEAD-PAINT TRIAL:

Insights into Applications of Digital Technology

Developed and Submitted by Jane Genova, Genova Writing & More, New Haven, CT, Mgenova981@aol.com, 860-280-5613 (cell)

From late October 2005 until the present, Jane Genova has been blogging about aspects of lead-paint litigation, including live-blogging the landmark Rhode Island lead paint trial.

She undertook this project in order to learn more about how to use digital technology as a real-time tool in event-coverage, advocating a point of view, developing new business for her communications boutique, enhancing her brandname, expanding her network, and integrating social media with mainstream media (MSM).

The four-month RI lead paint trial was conducted in downtown Providence, which was within commuting distance from her Connecticut residence. The four defendants – Sherwin-Williams (SHW), NL Industries (NL), Millennium Holdings (MNHG0 and Atlantic-Richfield – were corporations she believed were unjustly accused of creating a public nuisance. Her original stance was to be an objective Greek Chorus. But within about a week, she began to argue in favor of the defense’s position.

Her many dimensional approach to covering the trial – e.g. mixing legal analysis with gossip – came from her study of the techniques of Dominick Dunne. He had chronicled a number of high-profile trials such as the O.J. Simpson one.

Details:

During the 15 months Jane Genova has blogged about lead-paint issues, particularly litigation and threats of litigation, there have been over 1000 posts so far. About 490 of them were done during the four-month trial and so far about 510 more post-verdict.

This relative large number of posts – during the trial, about three to six daily – not only kept readers totally informed. It also functioned as a search engine optimization (SEO) tactic to attract high rankings on Google and other search engines. Search engines tend to be attracted to frequent postings each day.

In response to the posts, there have been about 3500 emails to her from security analysts, hedge-fund operators, employees at the defendants’ companies, shareholders, attorneys not involved in the case, attorneys who handle other legal issues for the defendants, a plaintiff attorney assisting with a similar public-nuisance trial in St. Louis, and those who wanted to comment off-the-record.

There have been about 175 phone calls. The lion’s share have been from security analysts and hedge-fund operators. Those calls were long and involved and, on the average, lasted about 35 minutes. A handful were from former Sherwin-Williams employees who wondered if the defense should have presented a case. Now and then the public relations representative from Prism Public Affairs Gregg Perry would call to alert the blogger of breaking developments. One was from media, CRAIN’S CLEVELAND, for an interview right after the verdict.

There were about 12 invitations to lunch.

Because of the legal sensitivities of the issue, there have been relatively few comments. The exception was immediately following the verdict. When the blogger registered her disagreement with that verdict, child advocates sent comments chastising her for not caring about the children. She personally responded to those making these comments through emails. That quieted things down.

Results:

On the first day of trial, that is during opening arguments, there were 1000 visitors to the blog. By the end of the week, that number of daily visitors when court was in session grew to about 3000. For the remainder of the trial, the average number of daily visitors when court was in session was about 4500. Most of these used RSS feeds, which picked up each new blog post on the trial automatically.

During the eight days of jury deliberation, daily visitors numbered about 7000. On the day of the verdict, there were 12,000 visitors. There were also a high number of visitors on each day of a posting of an interview with a juror. The total visitor count for the juror interviews was about 24,000. Several readers, including Gregg Perry, said that the jury interviews were the most helpful posts. THE PROVIDENCE JOURNAL reporter Peter Lord sent the blogger an email that he was upset that she had scooped him on the jury interviews.

Because of the large number of posts and heavy traffic into the blog, the posts made the first page of Google categories concerning the trial on a regular basis. They ranked number-one on Google about 600 times, in various categories such as “RI lead paint,” “Sherwin-Williams,” “NL Industries,” “lead poisoning.”

Wall Street bulletin boards, particularly those covering the defendants such as Sherwin-Williams and NL Industries, regularly picked up blog posts and linked to them. Insurance companies also had links on their bulletin boards, stating that the coverage was engaging on a subject that was “as boring as watching lead paint dry.”

High-profile blogs such as Overlawyered.com, Pointoflaw.com, and THE WALL STREET JOURNAL Law Blog cited coverage from her blog posts and often provided links to them. Those links further increased Google pick-up and high rankings. The Manhattan Institute’s Walter Olson provided an exclusive interview to the blog.

The mainstream media (MSM) frequently quoted from the blogs posts. It was widely noted that CRAIN’S CLEVELAND, which is based where Sherwin-Williams is headquartered, chose to interview only the blogger after the verdict. The clip from the interview had wide circulation.

Because of the blog, Jane Genova has been invited to give the keynote address at the Paint and Coatings Annual Meeting in 2007.

In addition, postings about the opposition frequently were picked up by Google and other search engines and placed in the sections of search engines covering the opposition. This gave the four defendants an opportunity to express its point of view on the opponent’s territory.

Digital Strategies:

The digital strategies which generated these results include

Frequent (three to six daily) posting of provocative material or breaking news on the blog. Use of keywords that would attract Google and other search engines. This served to scoop mainstream media and provide candid analysis of events. Readers seemed to like highly opinioned content.

Putting a human face on the trial. The blogger, before the trial started, explained her background in Jersey City, New Jersey, a political-machine town that mirrored corruption in Providence. She disclosed that as she grew up in a tenement, she chewed paint chips. Her mother and grandmother demanded the landlord supply paint to cover over the layers that were flaking. Gradually she let out details of her current life such as her intense relationship with her dog Molly Mittens. When Molly Mittens died on June 30th, there was an outpouring of condolence email from all sorts of readers, including lawyers, employees of the defendants and security analysts.

Providing drama in coverage. This was a technique the blogger from analyzing Dominick Dunne’s print coverage of court trials. Readers want the story. Therefore, she was heavy on narrative and on including tidbits of gossip such as hairstyles and sensible shoes.

Enhancing reach by copying, pasting, and emailing with a customized transmittal notes key blog posts to media, mainstream and digital, influentials in law, security analysts on Wall Street, and government representatives as well as interested parties who contacted the author about being on a “mailing list.” This was first done in late October, during jury selection, to announce the blogging effort. Then it was repeated on a regular basis.

Following up quickly to phone calls, emails and requests for lunch.

Developing and maintaining insider sources of information. This often entailed doing favors for them such as posting on her blog plugs for their special events, programs, and conferences.

Listening to readers who requested that trial coverage be split from the original communications blog and continued on a separate legally-oriented blog. Jane Genova then created the law and more blog.

Blog posts on the RI lead paint trial and post-verdict developments can be found at:

Http://janegenova.com, under “legal”
Http://lawandmore.typepad.com

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Dow Chemical (DOW): "Going Hunting"

“I want to have a water business that is $2 billion or $3 billion within two or three years (currently $400 million). I want a coatings business or a buildings solutions business that is equally as big in two or three years,” Said Dow Chemical (DOW) CEO Andrew Liveris in an interview with Reuters Television.. He continued, “These are the areas where we are going to go hunting.”

Liveras was being interviewed in relation to rumors that Dow was trying to acquire German rival BASF (BF). This comes on the heals of recent revelations that Dow made overtures to acquire DuPont (DD) last fall.

Liveras has spent the last three years cleaning up Dow’s balance sheet and now the company is in fantastic shape. With debt at it’s lowest level this century, $2.5 billion in the bank, producing almost $4 billion from operations annually and a $3 billion share buyback ongoing, Dow is now in position to acquire businesses. Is it BASF? Who knows. What is of interest here is what Liveras did not say, when asked he replied “We’ll never comment on a rumor like that, but I will say that between Dow and BASF you are looking at two of the world’s leading chemical companies and reality has to set in on do-ability, The barriers to doing deals like that are not just financial.” What didn’t he say? NO. When asked about the possibility of a Dow buyout in the past, Liveras has been crystal clear that it would not happen, this response is a bit muddy. What is clear? Liveras has made no bones about his desire to grow through acquisitions and partnerships like the one recently announced with Saudi Arabia and based on to date results, his deal making is far from finished.

If he wants a coating business, how about Sherwin Williams (SHW)? A buildings solutions? How about Owens Corning (OC)? Both could be had for a song at their current valuations, have international operations and are leaders in their business.

Now, as an investor who holds most picks several years, if not decades, normally I despise the thought of one of my picks being bought out. It means that I was right, it was undervalued and the purchase price will bring me a nice quick return at the expense of a bunch of future ones. That is the reason these folks buy them, they recognize this. But, when I own both sides of the equation (the buyer and the seller), go ahead kids, merge away. I get a nice quick return on my pick, and continue to benefit from it’s results with my ownership of the buyer and DOW gets a sweet return on it’s money sitting in the bank. Win-Win

One thing is for certain, by the time this decade is over, the Dow Chemical Company I know today will be far different and my kids college funds will be much larger.

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Altria (MO) Board Announces…… Nothing

The Board of Directors of Altria Group, Inc. (MO) Friday declared a regular quarterly dividend of $0.69 per common share, payable on July 10, 2007, to stockholders of record as of June 15, 2007. The ex-dividend date is June 13, 2007. The new dividend rate reflects an adjustment for the Kraft (KFT) spin-off, which was completed on March 30, 2007. Now don’t get me wrong, a 3.8% dividend that grows and is as close to money in the bank as you can get is nice, but not really what we were hoping for.

What we really wanted was something about a share buyback, PMI spin, maybe a nice fat increase in that dividend? But, nothing.

Now based on Altria’s history, shareholders in all reality have nothing to worry about. These will come, we will benefit and the stock will rise. It is just when you get yourself ready for something and it does not happen, you feel a bit let down. Couldn’t you even have hinted about it guys?

Now the option players are betting on an announcement by January. Open call interest for the January options is huge and where some of the most active options traded last week. For the $90 strike price there over 100,000 contracts open and the $85 and $100 prices each have over 50,000 contracts open, representing 200 million shares.

The Kraft spin was officially announced in January of 2007 so it seems folks are betting on similar timing for these other moves.

I guess we will just have to keep collecting our fat dividend, sit back and wait.

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Current Markets P/E’s Show Room to Run

Much has been said of the run up in the past twelve months of both the Dow and the S&P to all time highs. But, even after this impressive run, are the stocks in those averages more expensive than last year, or are they still bargains? When you have components lime Alcoa (AA), Altria (MO), Caterpillar (CAT), Hewlett-Packard (HPQ) and Boeing (BA) all trading around their all time highs, should we be worried?

Dow Jones

Current PE= 18.1
Last Year PE= 21.11
Current Earnings Yield= 5.53
Last Year Earnings Yield= 4.74

S&P

Current PE= 18.42
Last Year PE= 17.74
Current Earnings Yield= 5.43
Last Year Earnings Yield= 5.64

So, where does this leave us? The DOW, even after it’s run is at the present time cheaper than it was at the same time last years on both a PE and an earnings yield basis.

The S&P 500, while slightly more expensive that the same time last year the difference is negligible so it is essentially flat.

All this means is that the large cap Dow is currently cheaper than a year ago, so if you believe earnings and the economy will improve later this year, there is still plenty of room for the Dow to run. The S&P 500, while just about equal to last year, is in the same boat.

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This Weeks Top Dividend Hikes

Here they are, the largest increases in shareholder payouts for the week

  1. Rogers Communications, 212% (RG)
  2. Knight Transport, 50% (KNX)
  3. Jackson Hewitt, 50% (JTX)
  4. Flowers Foods, 50% (FLO)
  5. Holly Corp., 20% (HOC)
  6. UnionBanCal Corp, 10.6% (UB)
  7. Cato Crop, 10% (CTR)
  8. Heinz, 8.6% (HNZ)
  9. AlnceBerns, 7.6% (AWF)
  10. Bank of Nova Scotia, 7.1% (BNS)

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Value Investor News: Top Posts For May- Final

Another month has gone by and here is the final tally for the month of May.

1-Buffett Never Makes A Bet With Sucker Odds- FT.com

2- Whitney Tilson: not To Be Missed Tips- FT.com

3-Wally Weitz on Berkshire and Dell- Youtube.com

4-Seth Klarman: World Class Worrier- NYtimes.com

5-Cheap Stocks: Value Investing Congress Recap- stocksbelowncav.blogspot.com

Please visit George’s fine site, Value Investing News

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Lampert Buying More Sears (SHLD) Shares

So you want to buy shares in Sear Holdings (SHLD) but aren’t sure if this is a good price level? Apparently Eddie Lampert feels the current price is just fine. Between May 5 and May 25 the share count was reduced from 153.7 million and 152,492,175 shares according to today’s 10Q. That means Lampert bought back 1.2 million shares at prices ranging from ranged from $175 to $182. This is the first meaningful repurchase of shares in 6 months as in the most recent quarter Sears bought back no stock and in the quarter before that it repurchased only 82,000 shares.

Accordig to Jim Cramer: “That means the lowest price Sears could have paid was $175, the highest price $182.52. Again, while we don’t know the average price paid for those 1.2 million shares, we do know that it is higher than the $164.91 paid in the fourth quarter. That’s very important. Sears has a ton of cash, more than $3 billion. At this pace, if Eddie miraculously paid the low for all of that stock, he would go through the part of the $600 million buyback authorization that remained as of the press release in about 60 days. When that’s gone, I believe he will authorize another one.”

I said on Wednesday that no matter what happened after yesterday’s earnings release I was not going to sell shares, good thing, I would have been selling more stock to Lampert. Lesson learned..

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Walmart’s (WMT) Lee Scott: Maybe A Keeper?

Two weeks ago I wrote, in a post about Walmart “Maybe we could take some of the $7 plus billion you are sitting on and buyback a meaningful amount of shares? WalMart (WMT) is increasing cash at an over a billion dollar a year pace and last year spent just over that on share buybacks. It would appear folks at Walmart felt the same way as today the board announced a new $15 billion share repurchase plan that replaces the existing $3.3 billion one. In that post I said that CEO Scott just wasn’t “getting it” and had to go. Seems like he may be turning thing around.

A couple of weeks ealier I wrote “There seems to be a trend recently in former high flyers like Wal-Mart (WMT), Starbucks (SBUX) and now Home Depot (HD) to not fully recognize that they cannot continue to just grow and grow to get results. There comes a point in time where you begin to just cannibalize your own customers. Rather than focusing on their current locations and improving them and their customers experience in them, they still have an almost myopic focus on more locations. All three are experiencing discontent among many of their core customers as they have felt “neglected” or taken for granted and are leaving for competitors like Target (TGT), Dunkin’ Donuts, McDonald’s (MCD) and Lowes (LOW) whothey feel more appreciated by, who have grown smarter, and have retained what made them popular. As a result, all three are experiencing difficulty and an onslaught of negative sentiment.”

Again board does agree as it was announced that they are scaling back their expansion plans from 250 to 270 stores a year to an average of about 170 a year for the next 3 years, reducing capital expenditures to about $15 billion in 2008.

Now the saving will allow Walmart to fund the buybacks and spend more time enhancing our shopping experience. A novel idea.. Details are still seeping out of the meeting so it remains to be seen exactly how soon the shares will be repurchased so final judgment will have to be left until we know all.

Seems like ‘Ole Lee may be getting with the program. Maybe he’ll turn out to be a keeper.

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ValuePlays Most Read Posts for May, 2007

Here they are, the top five most read posts for May. If they look familiar it is because two of them were linked to in Altucher’s “Daily Blog Watch” in TheStreet.com and the other in the Adviser Soapbox in Fortune Online.

1- Home Depot (HD) vs. Lowes (LOW): Go With Oprah

2-Sears Holdings (SHLD) To Spend Cash Hoard

3-Google (GOOG) Update: Il Caveat Emptor

4-Wal-Mart (WMT): Time For Scott To Go

5-Using Stops: Are You Stopping Gains?


Subscribers and traffic jumped again this month and given the blogs only four month existence, I am very please (though not satisfied) with the results. By the time the next update comes out I expect to have an exciting partnership to announce. I had anticipated one by now with another site that got in touch with me but it fell through as the potential “partner” was clearly excited to (and did) reap the benefits of my work but was not as excited to share the proceeds of that work in any meaningful way so I declined their offer. What is the saying? “When one door closes, another one opens”? It has and I am confident in it’s success.
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Corn Prices and Ethanol: No Worries To Date

The U.S. Department of Agriculture released the May agricultural prices report yesterday at 3 p.m. and corn prices, at $3.48 per bushel, were up 9 cents from last month, $1.31 above May 2006 and 4 cents above February and March levels. The report measures the average prices received by farmers for corn and other crops

Farmers and other agriculture experts expect corn prices to continue to rise as ethanol producers like Archer Daniels Midland Co. (ADM) and Pacific Ethanol (PEIX), Verasun (VSE) and The Andersons (ANDE) drive demand for corn. Investors had expected the high corn prices to hurt profits at ethanol producers but in fact all but Verasun correctly hedged against the spike and actually reported an improvement in corn processing results despite never before seen high corn prices. ADM actually reported a 15% improvement in corn processing operation in Q1 2007 despite the then record prices. The increase in prices seems to have actually helped corn processors as they were easily able to pass along the increase to end users of HFCS like Coke (KO) and Pepsi (PEP)
Ethanol producers are in a very unique position to hedge against input price increases. Further corn prices increase, based on results over the past year, far from hurting profits should actually helped them. It would seem the only danger ethanol producers face is rapidly falling oil prices but with an active (surprise!!) hurricane season being forecast, that is not likely to happen anytime soon.

After hovering around $2 a bushel for about a decade, corn prices have vaulted past $3. Last month the average price per bushel of corn was $3.20, up more than 50 percent from $2.11 in the same month last year. The elevated corn prices have driven up prices of other commodities as farmers dedicate fewer acres to crops like beans and grain. The USDA expects corn prices to peak at $3.75 a bushel by 2009 and then begin a steady decline after that.

About 90.5 million acres of corn are expected to be planted this year, up 15 percent from 2006 and the most in over 60 years.

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Starbucks (SBUX): Pinching Pennies On Milk

Early this month I posted about Starbucks and how milk costs were going to effect the bottom line.

Starbucks (SBUX) said Thursday it plans to switch its dairy standard to reduced fat, or 2%, milk from whole milk for all espresso-based drinks in its stores in the United States and Canada. The change will be complete by the end of 2007. The Seattle-based coffee chain also said it is assessing options for a conversion to a lower fat dairy standard in the 39 markets it operates in outside of North America.

Said Denny Post, senior vice president of global food and beverage in a statement, “The move to reduced fat milk as our core dairy offering comes directly from our customers’ requests, and while they will still have the option to customize their drinks, our standard beverages will now come with fewer calories and less fat”. Do not believe him. Why?

This is all about price and Starbucks doing anything it can to reduce rising costs in the face of stagnant store traffic. According the USDA, 2% milk averages 8 cents a gallon less than whole milk and when you buy almost 300 million gallons a year, 8 cents a gallon adds up real quick. Starbucks can try to gloss over this by saying they are “listening to our customers” but the cold hard reality is they have been making drinks this way for almost two decades now and no one has complained. If they really were listening, they would have eliminated all milk with growth hormones from the stores, but that would be expensive and negatively effect profits. The tell tale sign here is that they are cutting costs, not raising prices like they have in the past. This is perhaps the most public recognition that even they feel they are at the top of the price range and going higher here will cause even more defections to Mcdonalds (MCD) than they have already suffered.

I am not against a company saving investors money, but let’s not play games and call it what it is when you do it. Of course for Starbucks to say that now, it would scare folks into thinking there was an earnings miss coming and with your stock at an almost 2 year low, that is the last thing they need.

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Another Mystifying Analyst Call: Ethanol Producers

MarketWatch reported Thursday:

Bank of America (BAC)downgraded four ethanol makers, giving three of the companies sell ratings, on concerns of a 70% slide in margins by 2009.

While record gasoline prices have led to a 30% increase in ethanol prices and a 180% jump in production margins so far this year, analysts at the bank said they expect producers “will face an extended period of deteriorating margins resulting from new ethanol capacity.”

Starting this quarter, 1 billion gallons of new capacity is scheduled to come online each quarter through at least the fourth quarter of 2008. The new supply could depress ethanol’s premium to gasoline, drive corn prices higher and pressure distillers’ grains values, Bank of America said. The Andersons (ANDE ), VeraSun Energy (VSE ), Pacific Ethanol (PEIX ) and Aventine Renewable (AVR ) were all downgraded.

Here is the mystifying part. For two years we have been hearing that ethanol is not the answer because we will never be able to replace enough gas to make a difference. Now we are talking about an ethanol glut? Let’s make up our mind here folks. If ethanol priced drop far below that of gas, demand will pick up immediately, especially with the increase in E85 vehicles coming online. Right now it is only blended in 3% to 4% of all gas, the goal is 10% so there is still plenty of room to grow. Wal-Mart has been talking about installing E85 pumps all over the place but supply problems currently prohibit it. A glut? WalMart (WMT) will gladly take it, they could use the good PR. If prices drop far enough, there will be an inevitable consolidation in the industry in which case the strongest players will pick up cheap production and make up for smaller margins with increased output.

Let’s talk politics. Does anyone really think anyone running for the White House is not going to woo Midwest voters by promising higher ethanol mandates and more support for producers? Don’t you think the battle cry will be “let’s spend the money here instead of Iraq”. Now whether you agree with the policy or ethanol or not is irrelevant, the reality of the situation is. This industry has the support of the American people and Lawmakers, it will be just fine.

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Google Coverage: Overkill Reached 6 Months Ago

First things first. I have no position and never have in Google (like most tech). I could care less what the stock does. Again, great company and great products and I use them everyday.

Now, am I the only one who could go the next 6 months without reading another Google article or post? Holy Christ, I am seeing 20 a day on the same topic. This stuff is not even original content, just the same news rehashed over and over and over… Enough is enough kids. There is such a thing as overkill and the Google (Goog) coverage hit that 6 months ago. Google taking search share stopped being news in 2006, I do not need to see it 15 times when they announce it EACH MONTH.

I am waiting for twenty posts tomorrow about what CEO Schmidt ate for breakfast and what color it turned his stool, where I can find the video on Youtube and how this is just another brilliant marketing ploy. Once again, Google originality on display

We all know what is going on. The stock has been stagnant for 8 months now while the DOW and the S&P have raced to record highs almost daily. You can’t understand why and feel the need to remind everyone how great the company is, DAY AFTER DAY AFTER DAY. Here is the problem, we all already know that. That is not the reason the stock is stagnant.

The law of large numbers is. As % growth declines as a company grows increasing larger (this is an undeniable trend), the multiple investors will pay for shares also decreases. That is what is happening to Google. That is it.

It is not that folks do not “understand” it or “hate” it. People are now at the “show me” stage of Google growth, not the “don’t worry, it will happen” stage. If Google performs, so will the stock, if not, it won’t. Period. No conspiracy, no short sellers, no confusion by the unwashed masses.

I need to go, there are 43 articles on “Google Gears” clogging my inbox. I need to get rid of them before Schmidt eats lunch and that coverage starts

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Sears Holdings (SHLD) Q1 Earnings

Sears Holdings Corporation (SHLD) today reported net income of $216 million, or $1.40 per diluted share, for the first quarter ended May 5, 2007, compared with net income of $180 million, or $1.14 per diluted share, for the first quarter ended April 29, 2006 (22% growth). Our quarterly results included the net favorable impact of certain significant items as described in the “Significant Items” section below.

Same Store Sales

Domestic comparable store sales declined 3.9% during the first quarter of fiscal 2007. Sears Domestic comparable store sales declined 3.4% for the quarter, while Kmart comparable store sales declined 4.4%. We believe these declines reflect both increased competition and the impact of external factors such as rising energy costs, a slower housing market and poor weather conditions during the latter part of the first quarter of fiscal 2007. Land’s End and children’s apparel experienced sales gain, marking the third consecutive quarter of apparel segments improvement.

Operating Income

For the quarter, our operating income increased $62 million to $393 million in fiscal 2007, as compared to $331 million in the first quarter of fiscal 2006. This increase primarily reflects: 1) a gain of $30 million for a legal settlement reached in connection with a contractual dispute, 2) a $27 million curtailment gain recorded for amendments made by Sears Canada to its post-retirement benefit plans, and 3) a $15 million gain for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005.

Cash

We had cash and cash equivalents of $3.4 billion at May 5, 2007 (of which $3.1 billion is domestic and $0.3 billion is at Sears Canada) as compared to $3.2 billion at April 29, 2006 and $4.0 billion at February 3, 2007. The decline from February 3, 2007 primarily reflects increased merchandise inventories given seasonal shifts in our inventory levels in support of the spring/summer-selling season. Merchandise inventories at May 5, 2007 were approximately $10.3 billion, as compared to $9.6 billion at April 29, 2006. Additionally, we spent $113 million on capital expenditures and made debt repayments of $47 million, net of new borrowings, during the first quarter of fiscal 2007.

Swaps

Gains were partially offset by investment losses of $21 million ($13 million after tax or $0.08 per diluted share)incurred during the quarter on our total return swap investments.

What to think? Not much either way really, earnings improved so we can’t complain there. True is is because of “certain item” but cash is cash and profits are profits. It is clear the housing slowdown is hurting Sear as they do a ton of home related sales (appliances, paint, furnishings etc.). Apparel sales continue to improve at Sears and that is good news as once housing turns around, and, yes it will, retail operation should see significant improvement. If we strip out all the “other factors” affecting earnings for 2006 and 2007, earnings were flat. Considering the relationship Sears has with the housing market through both it’s appliance sales and “home services” division, this bodes very well. In short, good quarter, not great, but given housing, good is just fine.