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LoJack Approval May Reignite Revenue Growth (LOJN)

LoJack Corp. (NASDAQ: LOJN - News) may have seen some of the first positive news in some time, which will allow the company to migrate away from being reliant solely upon tracking autos at a time where consumers are cutting whatever expenses they can cut without disrupting their lives.  The FCC has granted LoJack's petition from back in 2005 which will allow it to use the nationwide frequency used to assist in stolen vehicle recovery for a more diverse tracking and recovery applications in previously untapped or at least have not been deeply penetrated.

P&G Earnings Half Empty & Half Full (PG)

Procter & Gamble (NYSE: PG) posted a 33% earnings gain to $0.92 net EPS, but before a tax gain it showed $0.80 EPS.  Estimates from First Call were $0.78 EPS.  For its next quarter the company is also forecasting $0.98 to $1.00 EPS, while analysts were looking for $1.00 flat; and for its fiscal year ahead it sees earnings of $3.80 to $3.87 EPS versus expectations of $3.85 EPS.

State Street ETF Launch: International Consumer Staples Sector (STT, IPS)

State Street Corporation (NYSE: STT) has announced that its State Street Global Advisors unit is launching 10 new SPDR exchange-traded funds, which are supposed to begin trading on the American Stock Exchange today:

SPDR(R) S&P(R) International Consumer Staples Sector ETF (AMEX: IPS)

• The index includes over 330 non-US companies in consumer staples with market caps over $100 million.

These ETF's are benchmarked to a series of the S&P(R) World ex-U.S. Broad Market Indices, which are market cap weighted with only non-US holdings.  The expense ratio on each of these ten ETF's is listed as 0.50%.

Jon C. Ogg
July 22, 2008

State Street ETF Launch: International Consumer Discretionary Sector (IPD)

State Street Corporation (NYSE: STT) has announced that its State Street Global Advisors unit is launching 10 new SPDR exchange-traded funds, which are supposed to begin trading on the American Stock Exchange today:

SPDR(R) S&P(R) International Consumer Discretionary Sector ETF (AMEX: IPD)

• The index has over 990 non-U.S. consumer discretionary companies with market caps of greater than $100 million.

These ETF's are benchmarked to a series of the S&P(R) World ex-U.S. Broad Market Indices, which are market cap weighted with only non-US holdings.  The expense ratio on each of these ten ETF's is listed as 0.50%.

Jon C. Ogg
July 22, 2008

Another Touchscreen For The Great Unwashed (HPQ)(AAPL)

At one point in time it was "a chicken in every pot and a car in every garage". These days that extends to touchscreen phones and PCs. Before the Apple (AAPL) iPhone, very few handsets had touchscreens. The technology was expensive. Jobs solved that.

Now, Hewlett-Packard (HPQ), the world's largest computer company, will introduce a touchscreen PC for slightly more than $1,000. According to Reuters, "The TouchSmart All-in-One allows users to work with photos, music, video, the Internet and television by tapping or swiping the screen."

It is not hard to imagine that the product will be a failure. Apple's iPhone has about 1% of the global handset market. The touchscreen may not replace the plain-old phone with tiny buttons.  At least it is hard for the fingers to miss the keys.

It is probably a long-shot to think people will want to pay more money for a touchscreen PC. It may be cool, but it really does not work any better than current computer configurations. Even the Mac uses real keys.

The electronics companies have always thought that novelty will sell new products. The is usually wrong. Utility trumps novelty every time.

Douglas A. McIntyre

Kodak (EK): Inflation In a Tea Cup

CSX (CSX) is raising freight rates. So is Burlington Northern (BNI). Their diesel costs are up, and they need to pass them on to customers. Dow Chemical (DOW) said it would raise the prices of some of its products by 20%. The firm's commodities and component costs have gone through the roof.

The latest American icon to say it would have to push up prices to customers is Eastman Kodak (EK). Unlike many other companies that want to recoup costs of goods, Kodak is financially weak and has customers who may simply walk away. According to The Wall Street Journal, the firm "will increase its prices on certain consumer products by as much as 20%, citing the soaring prices of raw materials and the rising cost of petroleum."

The people who buy cameras and printers may not have the scratch to upgrade or get the latest stuff from Kodak. Personal income is not spiking but inflation has gained steam.

The present commodity price boom is creating two great pools of companies. There are those who can pass many of their costs on. That would, in most cases, include chemical companies, oil firms, and some luxury goods operations.

But the "have nots" including the airlines and auto companies are likely to be joined by Kodak and others who don't have strong balance sheets but do have customers stretched by the current environment.

Douglas A. McIntyre

2008 to 2009: The Major Inflation Years (DOW, DD, HUN, EK, POT)

This week set one specific outcome in motion: price hikes equals inflation.  We saw several major producers announce price hikes, and that is on the heels of other price hikes elsewhere that have been announced since the first of the year.  Last weekend we noted how rates were pricing in a 100 basis point rise by the end of next summer.  We also noted how CPI actually looked ok earlier in May, so long as you don't count food and groceries and other staples.

This week it was none other than Dow Chemical Co. (NYSE: DOW) that kicked things off with their "up to 20%" price hikes across the board.  After that, Huntsman Corp. (NYSE: HUN) came out and said that they would hike many prices by up to 25% and instill energy surcharges.  The DuPont (NYSE: DD) came out and said they were about service and communicating with customers, but then said the equivalent of "of course we're going to raise some prices." Yesterday at the end of the day, Eastman Kodak (NYSE: EK) came out and said they'd hike prices up to 20%.

Earlier than this, Potash Corp. of Sasketchewan (NYSE: POT) has been raising fertilizer/potash prices steadily and it seems they may get one more kiss at the pig to hike prices again based upon the actions of major companies this week.  Every other ag-based company will pass one more round of price hikes too.

Here is what we have to get used to: those chemical price hikes are going to stick and they are going to influence prices in everything you have to buy like tooth paste, paper, cleaning supplies, hygiene supplies, and just about everything else.  Unfortunately that also means packaging for food, processing food, and even more hikes in clothing, batteries, fluids, equipment and so on.  Just get used to price hikes being announced in the coming weeks to months.  That IS coming, and companies now have a free pass to pass on price hikes to you and me.

While this is definitely going to creep into the retail level by July or August, the good news is that the readings may actually be one-time for the next 12 month.  If prices in materials stabilize, that could set up and end of the inflation readings on a year over year basis toward the end of 2009.  The bad news is that your name would have to be Pangloss to think that is good news.

Jon C. Ogg
May 31, 2008

Revlon Tries Reverse Stock Split Game, And Gives Guidance (REV)

If you have followed shares of Revlon, Inc. (NYSE: REV), you already know what a long-term let down this stock has been.  Despite years of having top models pedal its wares, it's stock has been a financial disaster.

Management has decided to play one of the oldest shell games on Wall Street.  Its board of directors just announced a REVERSE STOCK SPLIT with a 1 for 10 ratio.  So now 1,000 shares will become 100 shares.  management called this an effort to appeal to a broader base of shareholders, comply with NYSE listing standards, and reduction in certain costs.

The company is also giving preliminary guidance.  It sees set sales of approximately $320 million, compared to $328.6 million in the first quarter of 2007.  First Call only shows one estimate and that was for $350 million.  Other guidance is as follows:

• Operating income of approximately $30 million, compared to $3 million reported in Q1-2007;
• Net loss of approximately $5 million, compared to a net loss of $35.2 million in Q1-2007;
• Adjusted EBITDA of about $55 million, compared to $32.3 million in Q1-2007.

The company said that net sales in Q1-2007 benefited from the initial shipments related to its launch of Revlon Colorist haircolor, which was the primary driver of the change in net sales year-over-year.  But Revlon is also discussing improvements this year as "significant improvement" in it preliminary operating income, as well as its net loss and its Adjusted EBITDA in Q1-2008.  Management also called 2007 one of its best years in many and that it has remained committed to generating profitable sales growth and positive free cash flow.

Shareholders don't really need to do much here as far as any action, because the Ron Perelman entity called MacAndrews & Forbes that has a combined Class A & B total voting power of 74% of the voting power has already approved the reverse split.

You can join our open email distribution list to hear about special financings, secondary offerings, IPO's, M&A, and more previews for other special situations in various stages.  Revlon has also been reviewed for our weekly "10 Stocks Under $10" newsletter, although the debt has always been far too high for our preferences.

Revlon shares are now down about 6% on the news to $0.90 today.  This will mark a new-52-week low as the prior range was $0.91 to $1.48.  Five years ago, this was a $3 to $4 stock; and until early 2006 it had mostly traded in a range from $2.00 to $3.50.  Shares used to trade exponentially higher than today.

Jon C. Ogg
April 11, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Goldman Sachs Changes Consumer Products Coverage (AVP, CL, BARE, PG, KMB)

Goldman Sachs has made some changes in coverage to its consumer products universe. 

The bulge bracket brokerage firm favors Avon Products, Inc. (NYSE: AVP) and Colgate-Polmolive Co. (NYSE: CL) and gave both companies some increased earnings target estimates for both this year and next, while making downgrades and some estimate cuts elsewhere in the household consumer products sector. 

The brokerage firm has transitioned a Neutral rating down to a "Sell" rating on Kimberly-Clark Corp. (NYSE: KMB).  Also, both Bare Escentuals, Inc. (NASDAQ: BARE) and Procter & Gamble Co. (NYSEL PG) were downgraded from Buy ratings down to "Neutral" ratings.

This was a coverage transition in an analysts this morning at Goldman Sachs, with Andrew Sawyer assuming US Household Products coverage from Amy Chasen.

Jon C. Ogg
April 9, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Apple (AAPL): 3G iPhone A Month Out

One of the things that has kept some consumers from buying an Apple (NASDAQ: AAPL) iPhone is that it only runs on AT&T's (NYSE: T) 2.5G network. That makes the device's connection to the internet slow.

Now, the research arm of a major firm, Bank of America, says that the Apple iPhone 3G product will be out in a few weeks. According to AppleInsider "financial analyst Scott Craig points to channel investigations which show an iPhone capable of faster, third-generation cellular Internet access produced in small numbers in May."

The product would not only bring in consumers who want a handset with a faster connection. It could help Apple crack the business market. Most RIM (NASDAQ: RIMM) Blackberry products already have 3G capacity. Apple is targeting the Blackberry as it tries to take a piece of the enterprise market.

A 3G version of the iPhone could boost sales significantly and help Apple's numbers in the June quarter and beyond. It would be the largest single change in the handset since its release.

Douglas A. McIntyre

Ubiquitous 20th Century Brands That Will Disappear

Several brands which were extremely powerful during the last few decades are about to disappear. Many of them no longer drive big sales. Some are a part of companies that are in trouble. Some are part of industries which are falling apart.

Big brands disappear all the time. Sometimes we simply miss their passing. Cingular Wireless was on most Top 100 brands lists. Once AT&T (T) took over BellSouth, it dropped Cingular completely. Compaq was one of the most visible PC brands in the world. It began to fade away after it was bought by Hewlett-Packard (HPQ). The IBM PC brand, one of the original PC brands, no longer exists since it was acquired by Lenovo, a Chinese company, several years ago.

Here is a list of brands, most over them a decade old, and some much older, which are likely to go away in the next year or two.

XM Satellite Radio (NASDAQ: XMSR) will disappear either in a merger with Sirius (NASDAQ: SIRI) the acquiring company will use its brand for both services or because without a merger XM may not make it. The company has over $1.2 billion in long-term debt. XM has always been the service with the largest number of subscribers. The XM brand could begin to disappear a few months after the potential marriage is complete.

E*Trade (NASDAQ: ETFC) has survived in a discount brokerage business where a number of famous brands, like Quick & Reilly, have gone away because of mergers. For the time being, management at the company says it does not want to sell out, but the firm's $12 billion in home equity loan exposure may make staying independent impossible. The most likely buyers of E*Trade would be TDAmeritrade (NASDAQ:AMTD) and Schwab (NASDAQ: SCHW). It would be ironic if a discount broker brand disappears because it was scuttled by its mortgage business but the housing crisis does things like that.

K-Mart is one of the two big brands at Sears Holdings (NASDAQ: SHLD), Eddie Lampert's failing retail play. Based on same store sales for last year, K-Mart is the less successful of the two retail operations. Spending to promote K-Mart and Sears may cost more that the holding company can afford. It certainly makes sense to kill off the K-Mart name and re-label all of the stores with Sears. It could save hundreds of millions in promotion dollars every year.

Dodge is part of the Chrysler company which was recently bought out by private equity firm Cerberus. Chrysler management has already said that the company has too many brands and too many dealers. It is trying to cope with a vicious downturn in the US auto market. Keeping a car brand means huge advertising and marketing costs and product development. Dodge vehicles will probably be re-branded as Chrysler and Dodge will go the way of the Dodo.

Circuit City (NYSE: CC) has been synonymous with electronics retail, but companies like Best Buy (NYSE: BBY) and Wal-Mart (NYSE: WMT) have brought too much marketing muscle and wholesale buying power to the industry. Outside investors are already circling Circuit City trying to "improve shareholder value". That means that there is a good chance the chain will be sold. The price of the company's shares has already dropped from over $30 less than two years ago to just over $4. Best Buy could be the most logical buyer by keeping the locations that do well and closing the rest. Virtually all the merchandising, management, and public company costs would go away as would the Circuit City brand.

Gateway was recently bought by Taiwan PC firm Acer. Some investors may not remember when Gateway was considered a peer of both Dell (NASDAQ: DELL) and Compaq. In 1993, Gateway was in the Fortune 500.  Acer will not keep the Gateway brand and its own. The dual promotion costs are too high. Starting soon you will be buying an Acer PC online or at your electronics retailer.

Vonage (NYSE: VG) almost invented VoIP. It certainly made it popular. Then cable companies began to market the service to existing customers and much of the "first mover" advantage Vonage had went away. Patent suits from companies like Verizon (NYSE: VZ) and other big telecom companies bled away most of the cash that Vonage raised in its IPO. Two years ago, the stock was above $17. Now it trades at under $2. Vonage still loses money. One the large cable companies is likely to take over the Vonage customer list and let the brand disappear.

Yahoo! (NASDAQ: YHOO) is still trying to keep itself out of the hands of Microsoft (NASDAQ: MSFT), but with a $31 offer and no other bidders even close, Redmond is going to take over. Microsoft is not generous about letting other brands have the limelight. Yahoo!'s brand will last while the e-mail and instant message operations are integrated, but soon enough it will all be MSN.

Old Navy is one of Gap's (NYSE: GPS) three brands and it is the one that is pulling down overall sales at the big clothing company. Old Navy has a little over one thousand outlets. Maintaining the costs of separate buying, marketing, and management costs just isn't worth it. Soon, the Old Navy stores will just be Gaps.

Countrywide (NYSE: CFC) had an operation on almost every street corner, or so it seemed. The mortgage bank would give almost anyone a home loan.They were not so generous when foreclosure time came around. Bank of America (NYSE: BAC) is buying Countrywide. The CFC brand has so much negative baggage and such a poor image that BAC will be smart and quickly put its name on all of the Countrywide branches.

Motorola (NYSE: MOT) is still likely to sell its large handset unit to someone. It simply loses too much money and it is dragging the company under, As Motorola's stock price drops, the amount it will take for its handset operation will drop. LG, Sony Ericsson, or Samsung are probable buyers at some price, and that price gets more affordable as Motorola's global market share drops. That Motorola phone is likely to be called an LG handset sometime next year.

Douglas A. McIntyre 

Lazard Notes Bare Escentuals As Recession-Resistant (BARE)

Bare Escentuals, Inc. (NASDAQ: BARE) may be one sweet spot that is at least partially immune from the ups and downs of consumer spending.  Today we are getting word out of Lazard Capital Markets that its analyst Jacklyn Rider, its Healthy Lifestyles analyst, is reiterating her Buy rating on Bare Escentuals with a $27.00 target as she feels the growth story is unchanged.  This is fairly new coverage from Lazard Capital Markets as it appears the firm initiated it with a Buy rating earlier this month.

This call is after the company's management presented at the ICR Xchange conference in California last week to a standing-room only crowd. The company reiterated its long-term growth opportunities to acquire customers, cross-sell products, and expand its points of distribution and international business.

Some of the points noted was a back to basics approach for new products and this note even discusses a recession-resistant product line that "is less sensitive to economic factors and that women will give up other discretionary items before makeup."  Ms. Rider also noted that channel checks indicate that customer demand and enthusiasm for Bare Escentuals' products have not seen any slowdown.

Lazard is maintaining its earnings estimates of $0.93 for 2007, $1.18 for 2008, and $1.50 for 2009.  The $27 price target is based upon a 18X Lazard's above consensus 2009 estimate, a discount to two-year earnings growth, and under the low-end of its historical earnings multiple.

The company designs and sells  premium make-up for women with an all-natural and additive-free product line.  We also believe this make-up aspect of the business is at least more recession-resistant than many other businesses (particularly compared to apparel or other discretionary spending), particularly in light of the fact that the company has an all-natural and irritant-free formula.

BARE shares are up 1.8% today at $20.33 right after noon, and the 52-week trading range $19.25 to $43.22 after coming public at higher prices in late-2006.

Jon C. Ogg
January 22, 2008

La-Z-Boy Clients On Recliners Instead of Shopping (LZB, STLY, ETH)

It's of no surprise when you see a furniture maker or anything at all tied to "in home buying" very weak.  But some of these sell-offs go from mild, to bad, to outright atrocious.  Enter La-Z-Boy Inc. (NYSE:LZB).  La-Z-Boy shares are down another 1% today at $5.40, and the 52-week trading range is $5.46 to $15.20.  The maker of the good old recliner isn't immune from a weak housing and consumer discretionary spending environment.  Despite there being a very soft environment, La-Z-Boy's books are actually in decent shape even after its revenue warning last month.  It would seem that this company could easily trim costs to keep the bottom line better. 

This was briefly a $30 stock in 2002, and it has again been cut in half since this summer.  How far back on the chart do you have to go before you find these recent stock prices? The early 1990's.  Other furniture makers are in the same negative spending environment soup:

• Stanley Furniture Co. Inc. (NASDAQ:STLY) shares are $10.92, under its $10.98 to $23.74 range over the last 52-weeks.
• Even on a positive day for the stock higher-end furniture maker Ethan Allen (NYSE:ETH) up 2.6% at $29.31 is at the lower-end of its $27.46 to $39.56 trading range over the last 52-weeks.

Jon C. Ogg
December 3, 2007

Coca-Cola (KO) Shown Disrespect For Desani Water

Consumers International give out annual prizes for the world's worst products. Perhaps someone from Coca-Cola (KO) showed up a the award dinner to collect its prize.

According to the AFP news agency, one award went to drinks giant Coca-Cola for pushing marketing "into the realms of the ridiculous" in the United States and South America with its Desani bottled warter which is sourced from the same reservoirs as local tap water.

Kellogg's (K) did equally well. "Kellogg's are one of a number of international food companies that make money by selling products high in fat, sugar and/or salt," Consumers International said.

And, we can't forget Chinese toys. Toymaker Mattel (MAT) was also named over the global recall of more than 19 million products made in China because of high lead levels and small magnets.

Let's hope they display the awards in their HQ lobbies with pride.

Douglas A. McIntyre

Nike (NKE) Runs Out Of Running Room

Nike (NKE) is buying soccer shoe company Umbro for $583 million. That may seen like a modest deal for the world's largest athletic apparel company, but it will have to make a lot more.

Nike already sells shoes for running, golfing, boating, basketball, football, and just plain walking. It sells shirts, pants, and coats. It also markets everything from sunglasses to watches to gold balls. In other words, there are very few worlds left to conquer and that can be bad for revenue.

According to The Wall Street Journal "Beaverton, Ore.-based Nike sees soccer as an important growth category in its competition with European titans Adidas and Puma. It is better for Nike to buy into a market and revenue stream than try to enter the market on its own. That will almost certainly be the case in the future, since the Nike brand is reaching a point of saturation in many markets.

Nike can hire a few MBAs and start an M&A operation. It will need one to keep up its growth rate.

Douglas A. McIntyre

Sandisk's (SNDK) Harebrained New Product

Sandisk (SNDK) has its own solution for moving content from the PC to the TV. Companies from Intel (INTC) to Microsoft (MSFT) have been working on this problems for years. Apple (AAPL) TV is an attempt to solve the problem of "home networking". But, its sales appear to be minuscule.

Now the disk storage company has come up with something completely different.

According to The Wall Street Journal Sandisk "will begin selling Sansa TakeTV, a small device that stores digital video so it can be physically moved between a personal computer and television set. The idea is to avoid the need to use a home network or a specialized device." It will also offer content that will run, at least most of it, free and supported by ads.

Sandisk has several big problems. The first is that no one watching TV at home has ever heard of the company. So the branding of the company and the product could cost tens of millions of dollars and take years. In other words, Sandisk is not Apple.

The other major problem is that there is no evidence that consumers want to move video using something that "plugs the device into a USB port on their PCs, loads it with video files and allows them to physically shuttle the device to the TV."

Like Unboxs and Apple TVs and TIVOs, the device is a burden on TV viewers who do not want to watch video from a PC. Satellite TV and cable already give them 900 channels and pay-per-view. What more do they want?

Douglas A. McIntyre

Elizabeth Arden Must Plan on Keeping Britney Spears (RDEN)

Is it more surprising that Elizabeth Arden (NASDAQ:RDEN) launched the new Britney Spears "believe" fragrance, or is it more surprising that Arden launched it with the Britney Spears name on it?  This is the THIRD Britney Spears perfume from Arden available now.  And this just launched in recent weeks.  Upon first journeying into this, it would have seemed a safe bet that any company would cut and run.  But....

If you have a baseball manager with a losing team the general manager or the team owner(s) give a vote of confidence.... and the manager is sent packing within a month.  But Britney as a brand is no baseball player, and there is surprisingly still a value or a franchise here for at least the time being.  Frankly, for most of 2007, it really looked like Britney Spears as a brand was getting tarnished (or self-mutilated) to the no-return level. 

It isn't about the divorce from K-Fed or K-reject whatever.  America used to be "mom, baseball, and apple pie."  But now "step-mom, wrestling, and chaw" seems to be the accepted slogan.  She isn't quite the looker of prior years.  But my own mirror would say the same.  So the hypocrisy is out the window. 

After the head shaving and the rehab earlier in the year I put in a call to Elizabeth Arden Inc. to flush out what the status would be of the falling star.  I've always said "follow the money" as the simplest explanation.  It seems Arden has the same idea.  Britney's fragrances are still selling quite well, and this was surprising.  Some reports I have read put the Britney fragrances at roughly 10 million individual fragrance sales, although that hasn't been released by the company.  A current reputation has seemingly not affected a corporate sponsor or branding deal here.

There is something about a "hit and run" incident of late and custody of the kids being turned back over to America's least favorite ex-husband (at least in this decade).  This week, the controversies continue.  The record label moved up the release date of her new "Blackout" CD.  Some reports put the reason being to beat leaked songs on the Internet, but it's hard not to think it might not have been to get in ahead of any more bad news about her.  Besides the gum chewing while smoking, there are probably a dozen other "occurrences" not mentioned.  Other allegations and rumors are something you won't see here.

To my surprise it seems like Arden has a solid commitment to the Britney brand.  Not a vote of confidence, but a commitment.  Who knows if that lasts if Britney gets too tarnished.  But this seems different, and surprisingly it is even more different now with a new Britney launch.  Britney Spears hasn't exactly been a good girl, or at least not anything close to a role model.  Corporations usually have "out" clauses if their star's image gets too tarnished.  There is no way to know what is coming on the calendar and there is no way to know what will happen to the star.  But for now it seems the selling continues.

Is a call-in a channel check? No, not at one or a few places, anyway.  I called to the Macy's that I sometimes go to and was surprised to hear the salesperson in the fragrances department say the new "believe" smelt quite nice and that she'd recommend it for a gift for a special someone after she went over to sniff it out.  I didn't order it, but that is no fault of the Macy's employee because I was just fishing.  I honestly expected something different and quite contrary.

Maybe not all of corporate America is cut-and-run at the first sign of trouble.  Personally, this isn't about knocking a celebrity.  This isn't about knocking a brand or an image.  This is about recognizing a brand and a commitment.  Maybe not even the top brass knows if this commitment will last.  But there is at least something worth noting about a company sticking with a less than perfect persona.  Follow the money seems to be working.  Time will tell the true outcome, but this is one that could have easily been covered in a different light if opinions or thoughts alone were applied.

Jon C. Ogg
October 12, 2007

Mattel Apologizes To China?

It is hard to imagine that Mattel (MAT), under pressure for recalls of toys from Chinese factories, would apologize to the Chinese government, but it has. According to Reuters, a senior company official said "Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people and all of our customers who received the toys."

To get its problems behind it, Mattel, with its CEO suffering withering criticism in Congress and damage in the toy retail marketplace, seems ready to say it is sorry to anyone. The company is even taking public responsibility for the flaws in its products: "But it's important for everyone to understand that the vast majority of those products that we recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in Chinese manufacturers."

Perhaps Mattel is now worried that, because it has damaged China's reputation for quality control, it may be banned from building toys in the country, where labor is cheap.

And, quality control is low. No matter what Mattel says.

Douglas A. McIntyre

Breaking Up Altria Makes No Sense

This week, Altria (MO) will probably announce that it will split its domestic and international operations into separate companies. The reason would be to allow the overseas operations to be "unfettered by legal and public relations problems in the U.S.."  The deal would give Philip Morris International its own stock to pursue acquisitions as well.

But, none of this makes much sense. The legal woes of MO in the US are mostly behind in it. There is no reason to think that cash flow or earnings would improve if the two companies were apart. Keeping the current global company intact means that if any one region faces slowing revenue growth, it can be picked up by others.

A look at the last MO 10-Q shows that international revenue grew 13% to $13.948 billion. Domestic revenue grew a fraction to $4.809 billion. And, those numbers are a good indication that shares of a new domestic company would drop in value as the international shares would rise. At least show term.

How are investors helps by going from owning one fairly strong stock to one that is weak (domestic) and one that is strong. (international).

They aren't.

Douglas A. McIntyre

Owning Altria (MO): Cigarettes Sell

With the market in bad shape and likely to get worse, investors are running in circles looking for something to buy? Well, tobacco takes a long time to go out of style. And, Altria (MO) sells more of it than any other company in the world.

Some investors don't want to own shares in a tobacco company, and, that is their business.

Altria shares are flat over the last three months. But, the company has gotten rid of Kraft (KFT) which has troubles due to owning some food line that are not doing well and because of high commodity prices.

The big tobacco company made $6.5 billion in operating income during the first six months of the year on $36.4 billion in revenue. Of that revenue, $27.2 billion came from overseas, where people still smoke. Operating income from international sales was $4.4 billion.

The company has a 4% yield, and, as far as anyone can tell, does not own any mortgage related securities or private equity loans.

Douglas A. McIntyre

Procter & Gamble Trumps Earnings With Huge Stock Buyback (PG)

Procter & Gamble (NYSE:PG) did post earnings at $0.67 EPS versus $0.66 estimates from First Call. It also put next quarter targets for $0.88 to $0.90 versus $0.91 estimates and said that fiscal June-2008 earnings per share would grow at a double-digit rate on sales growth and improved margins.  It is going to face near-term margin pressure due to higher commodity prices for an upcoming conversion to a compacted formula for detergents.

But here is the kicker.  The household products giant is going to buy back up to $30 Billion in stock in only a 3-year period.  According to the company, this will be $8 to $10 Billion per year.  This could represent 5% of the outstanding shares if the entire amount is used.  Its whole buyback plan for fiscal 2007 was $5.7 Billion.

P&G has a market cap of $199 billion, and shares are within about 5% of its highs.  Shares are not that volatile though, as its 52-week trading range is only $58.13 to $66.30.  It is kicking out ample cash flows to fund the buyback with $13.4 Billion in cash flow from operations during fiscal 2007.  Its current assets were $24 Billion, total assets including current were $138 Billion, and total liabilities were $71.25 Billion. 

Jon C. Ogg
August 3, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Playtex's Odd Acquisition By Energizer (PYX, ENR, PG)

If you thought roll-up mergers expanding into new lines had gone the way of concentrating on core operations, guess again.  Playtex Products Inc. (NYSE:PYX) is being acquired by Energizer Holdings Inc. (NYSE:ENR) in perhaps one of the stranger mergers out there.  Once upon a time in 2000 a dog food operator named Ralston spun-off Energizer so that the companies could focus on core operations, and Energizer shares are up nearly 5-fold since then.  Now Energizer itself is making a transition back into the weir, and it would make one wonder if Cramer still thinks Energizer is heading to $120.00 after he touted it as the easy-money trade just on Tuesday.

Energizer will acquire Playtex for $18.30 per share in cash plus the assumption of Playtex debt, and the deal has been approved by both boards.  Total enterprise value of the transaction after debt is approximately $1.9 billion. The all-cash offer per share represents a 26% premium over Playtex's closing stock price on July 10 and its average stock price for the past 90 trading days.  This represents an all-time high for Playtex shares.  We named this as a second-line defensive stock in the first quarter when there was a worry of a mini-meltdown.

Energizer is known for batteries and flashlights and is also the parent company of Schick-Wilkinson Sword, the second largest manufacturer of wet shave products in the world.  Playtex makes bras, feminine hygiene products, sun block, moisturizer, diaper disposal systems, toddler products, and more.  Energizer's CEO, Ward Klein, has also said this will provide a platform for possible additional value-adding acquisitions.   

Energizer noted that the acquisition will be accretive to fiscal 2008 results, but the accounting will be dilutive to earnings for the first turn of acquired inventory and will also negatively impact the second quarter after the closing of the deal.

The combined company will be a stronger growth model, although this still seems a bit odd and is a true 180-degree turn from the spin-off and focus on core operations model that Wall Street is selling to Main Street.  Playtex's most recent 12 months through March 2007 totaled $641 million sales and EBITDA of $126 million with GAAP earnings of $34 million, not including Playtex's recent acquisition of Hawaiian Tropic with 2006 sales of approximately $112 million.  Energizer's sales for the last 12 months came to $3.255 Billion, EBITDA was $607 million, and GAAP earnings was $279 million.

The company claims similar customers, similar distribution channels, geographic expansion capabilities, and integration and cost reduction opportunities all resulting in a more diversified company.  In other words, there is a new conglomerate in town.  If the companies can execute as well as they say then this will make sense.  But it is still strange and you can only imagine the battery powered jokes with so many of the Playtex brands that will be in papers over the weekend.  Proctor & Gamble (NYSE:PG) owns Duracell Battery, so maybe this mini-conglomerate building trade isn't quite so weird after you can get past the jokes.

Jon C. Ogg
July 13, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Reasoning Behind Borders Group 'Cut to Sell' at Goldman Sachs (BGP)

When a bulge bracket firm issues a 'Sell' rating on a stock, you always have to consider the reasoning.  'Sell' recommendations can cause many more backlashes historically than other downgrade and ratings changes, particularly since the description leaves such little leeway in the interpretation.

Goldman Sachs downgraded Borders Group (BGP-NYSE) this morning from a 'Neutral' to a "sell' rating. and BGP shares are down more than 6% as a result.  Technically an analyst downgrade based on indirect news is technically not a game-changer, but there are instances where this is not the case.

The reasoning behind the downgrade actually has some ties to the Federal Trade Commission trying to block the proposed merger between Whole Foods (WFMI-NASDAQ) and Wild Oats (OATS).  Goldman notes that the market has been expecting a more permissive merger environment, even though the proposed XM Satellite Radio (XMSR-NASDAQ) and SIRIUS Satellite Radio (SIRI-NASDAQ) is under fire by the FCC.

Goldman believes that the prior share price of Borders (BGP) was pricing in the possibility of a transaction, and the new merger climate might be less permissive to such a deal.  It also states that shares are overvalued on a purely fundamental basis and trimmed its 12-month target by $1.00 to $19.00.  Shares are down more than 6% to $20.35 so far, and the 52-week trading range is $16.20 to $24.19.  Its key competitor, Barnes & Noble (BKS-NYSE), is trading down 0.8% at$41.85 on the day. 

It will be interesting to see if Goldman takes the air out of other 'potential merger candidates' in the coming days and weeks.  These are actually small businesses in the grand scheme of things:  Borders Group has a $1.2 Billion market cap, and Barnes & Noble has a $2.7 Billion market cap.

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

If Bed Bath & Beyond is Warning, Who's Next? (BBBY)

Bed Bath & Beyonds (BBBY-NASDAQ) is apparently feeling the same consumer pinch as elsewhere, it guided $0.36-0.38 EPS versus $0.39 estimates and guided same-store-sales for the quarter down to up 1.6% from a prior 3% to 5% range.

Steven H. Temares, CEO stated, "Based upon what we have experienced and has been reported by others, the overall retailing environment, especially sales of merchandise related to the home, has been challenging. The efforts of our associates and their ability to execute remain at high levels. We continue to base our decisions upon what is necessary to achieve our long-term objectives. While we did not achieve all of our financial goals during our initial fiscal quarter of 2007, we remain optimistic that this year will be our best ever."

Here is the problem though: Even though this company has been dead money, it rarely has to issue an outright warning and rarely misses its targets (even if because of crafty guidance management).  Shares closed down marginally at $40.47 on Monday and have been mostly in a $35.00 to $45.00 trading range for most of the last 4 years after a meteoric rise in the 1990's.  If you've ever been in a Bed Bath & Beyond, you'll know that this is the ultimate 'nesting' shop and if Bed Bath & Beyond is seeing a fall-off then there are others behind it. 

If its gets cheap enough this might start to look attractive to private equity on a cashflow and earnings ex-Cap-ex and on an EBITDA basis, but if they are going to slow too much then it may be a while before this starts to make sense.  This may take out some near-term private equity speculation in the retail and 'nesting' plays.

Jon C. Ogg
June 5, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Can You Smell a Dell Inside Wal-Mart?

The news that Dell (DELL-NASDAQ) is selling Linux computers bunled with Ubuntu is really long overdue, but the point that Dell will start selling two multimedia desktop PC's on a sub-$700.00 level inside Wal-Mart (WMT-NYSE) seems puzzling at first glance. 

We do not know  what the specifics for the Dimension desktops will be yet, but this is supposed to start as soon as June 10 in Wal-Mart and Sams' Club stores in the US and Canada.  Why did they not try to go with a Best Buy (BBY-NYSE), Circuit City (CC-NYSE), or others?  The company has signaled that it is going to be rolling out more and more retail initiatives, so maybe those are going to be expanded as well.  Dell will sell the same products on its own web site.

The truth is that this will increase unit sales for Dell, but will ultimately increase inventories simultaneously.  It also puts Dell in a me-too status where it is already competing against Hwelett-Packard's (HPQ-NYSE) Compaq, Gateway's (GTW-NYSE) eMachines, Acer, and more.  Here is the list of all Wal-Mart's PC units, and you'll see that this probably isn't going to be the cheapest price PC in the store.

Radio Shack (RSH) already sells lower-end Acer and Hewlett-Packard units.

Best Buy (BBY-NYSE) sells Acer, Hewlett Packard, Apple (AAPL-NASDAQ), Gateway's emachines, and more.

Circuit City (CC-NYSE) sells eMachines, H-P, Sony (SNE-NYSE), and Acer.

The truth is that when I read this at first it sounded a bit off.  Now it sounds like a "me too" strategy.  This may crimp margins, but it looks like the time has come that Dell has realized if it wants to win back market share or maintain its place that it has to have a physical presence inside retail centers that sell PC's and electronics.  Maybe now they can stop flooding our mailboxes with as many expensive brochures.

If Wal-Mart hired Kevin Rollins to work the floor in the electronics area, would he promote the Dell or a different brand?

Jon C. Ogg
May 24, 2007

Jon C. Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Bausch & Lomb May Get a Higher Bid

It looks like there is going to be a new bidder in the buyout for Bausch & Lomb (BOL).  Advanced Medical Optics (EYE-NYSE) is reportedly forming a bid according to CNBC's David Faber that would trump the Warburg Pincus buyout offer of $65.00 per share.  We had noted that Bausch & Lomb was selling itself far too cheap back on may 16, 2007 and that it had traded in the $70.00 handles back in the late 1990's and had traded over $80.00 in recent years.

The issue here is that this would truly be a public leveraged buyout as Bausch & Lomb is larger and has a higher market cap than Advanced Medical Optics.  That is not an ultimate deal killer because companies can borrow and partner with other firms just like the private equity firms can.

Bausch & Lomb shares are up 5% at $70.00 pre-market and Advanced Medical Optics shares are down 2.3% at $41.50 in pre-market activity.  This may not be the final offer either, so there is always the chance that a higher bid may be hoped for by holders.

Jon C. Ogg
May 24, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Bausch & Lomb Selling Itself Away Too Cheap

Bausch & Lomb (BOL-NYSE) announced today that it has entered into a definitive merger agreement with affiliates of Warburg Pincus, the global private equity firm.  The transaction is valued at approximately $4.5 billion, including approximately $830 million of debt.  Bausch & Lomb common stock will be acquired for $65.00 per share in cash.

While this is a tiny premium to today’s price the companies are claiming this is a 26% premium over the volume weighted average price of Bausch & Lomb's shares for 30 days prior to press reports of rumors regarding a potential acquisition.

Bausch & Lomb's Board of Directors, following the recommendation of a Special Committee composed entirely of independent directors, has unanimously approved the agreement and recommends that Bausch & Lomb shareholders approve the merger.

The transaction is subject to certain closing conditions: the approval of Bausch & Lomb's shareholders, regulatory approvals, and the satisfaction of other customary closing conditions. There is no financing condition to consummate the transaction.  Bausch & Lomb does have a go-shop alternative where it may solicit superior proposals from third parties during the next 50 calendar days and Bausch & Lomb would only be obligated to pay a $40 million break-up fee to affiliates of Warburg Pincus.

Shares of Bausch & Lomb closed at $61.50 yesterday and its 52-week high was $62.26.  Shares are trading north of the buyout price because there are obvious hopes that this would represent a sheer giveaway and hopes of a higher bid.  For some reference, this stock traded in the $70’s in the late 1990’s and had been over $80.00 in recent years.  This may be far from over.

Jon C. Ogg
May 16, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Is Hillenbrand Already at Full Value?

This morning we were happy to see that Hillenbrand Industries (HB) was splitting itself up.  The company had two entirely unrelated segments: medical technology under the Hill-Rom name, and caskets under the Batesville Caskets name.  About the only commonality was that there's a good chance you will eventually use the second brand whether you use the first brand or not.  This was on our radar for some time and we anticipated this after the review was telegraphed last year. 

Roughly 1/3 of the company revenues and profits are derived from the funeral related operations.  The other 2/3 from th Hill-Rom brand is divided with real medical products sales and with hospital bedding and furniture for patients and around surgeries. 

The problem is that the combined operations trades at almost 21-times forward earnings, a premium to the S&P that is now magnified because of the 10% stock rise.  Neither business has a lot of sex appeal.  When we started evaluating this in 2006 shares were roughly $55.00.  We had left this one on the back burner earlier this year because we came up with a rough estimate value that may be only a little north of $60.00.  Sure, the market is higher and the company has now made its split up announcement.  But since we operate on a market neutral strategy with the 10% market rise and the $67.00 price here today, this one just looks much closer to being fully valued. 

It's always possible we are being far too conservative and that the companies will be able to fly onward and upward as independent operators.  We often undershoot on these perceived valuations even in a "private equity gone mad" world.  But a conservative investor would at least lock in some of the gains now that the stock is close to all-time highs.

Jon C. Ogg
May 10, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Shutterfly Signs Target as Distributor (SFLY, EK)

Shutterfly (SFLY-NASDAQ) has scored a digital photo pact with Target (TGT), where Target customers will be able to use the Shutterfly digital photo storage, printing, and ordering systems.  The pact has several offerings, but the most obvious win here is that Shutterfly customers will be able to order prints and print them directly to Target stores, and the prints may be ready as soon as one-hour.  That would be a major score for the company and may end up being a better "online photo" carryover to physical photos.

Other service offerings are the following: Order prints on-line and pick them up in local Target stores within an hour; Order Shutterfly products and receive them at home via mail delivery; Purchase Shutterfly ship-to-home products at select Target stores.

This is the sort of deal that Eastman Kodak (EK-NYSE) needs to be pursuing and it shows how young innovators can score at the expense of the old leaders. 

Jon C. Ogg
May 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in any of the companies he covers.

When will Under Armour (UA) come back and should you be buying?

It's been a rough week for Under Armour Inc. (UA) and their shares are down 9% since Monday. On Tuesday's (5/1) earnings call Under Armour reported Q1 07 revenue increased by 42% and their net profit rose by 14%, but it was the outlook for Q2 that made shares drop 12% in one day.

Next quarter Under Armour is expecting to have higher marketing costs that are going to eat into the bottom line. Shares of UA are trading in the middle of its 52 week range at around $44 a share. UA revised their 2007 revenue growth guidance from 25%-30% to 30%-35%, thus the dip in share price.

Wachovia raised its rating on Under Armour from "outperform" from "market perform" on Tuesday and said there is long-term growth opportunities in Europe for their footwear, women's and outdoor gear. Yesterday Credit Suisse stood by their "outperform" rating on UA and set their target price at $65 a share.

So maybe Wall Street has been too hard on Under Armour?

They have to realize that they are not Nike (NKE), but they are gaining ground and market share every day. Under Armour is a popular brand and watching their revenue go from $281 million in 2005 to $430 million in 2006 is very impressive. Compare that to their annual revenue of $17,000 in 1996, this company is moving fast. Under Armour IPO'd back in November of 2005 at $13 a share and closed its first day at $25. It's been on the move ever since and perhaps this latest Under Armour ad says it all...

Can you hear them coming? Don't expect their stock to be quiet for long.

Frank Lara Jr.

Frank Lara Jr. can be reached at franklara@247wallst.com; he does not own securities in the companies he covers.

Altria Raises Guidance

Smoke 'em if you got 'em. Altria (MO) raised guidance for the year to $4.20 to $4.25 per share. Previously, the number had been $4.15 to $4.20.

Oh, yes, and net revenue for the last quarter was $17.56 billion up from $16.23 billion in the comparable quarter a year ago. Weak domestic sales drove net income down 21% for the first quarter, so Altria must think the rest of the year is going to be a homer.

Nice work, if you can find it.

Douglas A. Mcintyre

Johnson & Johnson Earnings to the Rescue

Johnson & Johnson (JNJ-NYSE) reported $1.16 Non-GAAP EPS vs $1.05 estimates; Revenues $15.0 Billion versus $14.45 Billion estimates.  Outside of all the items after R&D, acquisitions, and sales, gains, and other items showed a net of $0.88 on GAAP EPS basis, but the street is focusing on the non-GAAP report so far. 

This is not an easy quarter to compare year over year because of the large deal it closed, but here are some items: Operational growth was 13.3% (positive currency impact of 2.4%). Domestic sales were up 11.9%, while international sales increased 20.8%, reflecting operational growth of 15.4% and a positive currency impact of 5.4%. On a pro-forma basis, including the net impact of the acquisition of Pfizer Consumer Healthcare in both periods, worldwide sales increased 6.3% operationally. Operational growth was 13.3% (positive currency impact of 2.4%). Domestic sales were up 11.9%, while international sales increased 20.8%, reflecting operational growth of 15.4% (positive currency impact of 5.4%). On a pro-forma basis, including the net impact of the acquisition of Pfizer Consumer Healthcare in both periods, worldwide sales increased 6.3% operationally.

It looks like the formal guidance won’t come out until its conference call.  Shares are now up over 2% to $64.50 in pre-market trading as investors are welcoming what they were fearing just two weeks ago.

Jon C. Ogg
April 17, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Budweiser the King of Beers, maybe its the King of Stocks?

From The Stock Masters

Anheuser-Busch Companies, Inc. (NYSE:BUD) has been getting plenty of good attention lately including upgrades and being added to Warren Buffett's portfolio just before the start of the year. You know if the Godfather of investing is picking up BUD, it's got to be worth looking at. Cramer has hounded BUD for years and with the stock trading near its 52-week high it would appear they could do no wrong.

Just after Warren picked up his shares BUD, Anheuser-Busch received two upgrades in January and two this month. It's even on the China bandwagon with BUD to double the number of Chinese cities where it sells its products, all the way up to 100 municipalities over the next five years. Beer is cool. A.G. Edwards upgraded BUD and said "Budweiser is showing gains in volume growth and marketing while buying back stock." I bet Homer Simpson would upgrade BUD shares if he were a Wall Street analyst. If only Homer could drink a Bud, he'd never touch Duff again. Even Homer can understand the benefit of buying a solid brand name like Budweiser. No matter how bad times get in America, people will always drink beer. In 2006 BUD sold 102 million barrels of beer in the U.S. and 22.7 million internationally. They report solid revenue every year and brought in $15.7B in 2006 and $15B in 2005.. They make the best commercials every Superbowl and more importantly, they can afford to buy the ad time during the whole game. So with shares trading near the 52-week high, why would you care about buying? During times of crisis and market despair, Beer is King, and who's the King of Beers? You get the point. Hmmm, Beer.

If you are concerned the stock market is going to keep getting worse or a recession is on hand, BUD is your stock. Take it from Homer:
Beer... Now there's a temporary solution.
You can even use Homer's beer advice for help with those awkward father-son talks:
Bart, a woman is like beer. They look good, they smell good, and you'd step over your own mother just to get one!

Beer is the answer to all of man's problems and it may be the cure if your stocks have taken a beating in recent weeks. But don't listen to us, Christopher R. Growe from A.G. Edwards said BUD is poised for growth and it's stock price is "cheap". Growe boosted his rating on the maker of Budweiser and Michelob to "Buy," from "Hold," pointing to a turnaround in fundamentals in the last nine months. He noted a recent run up in the stock price after rumors surfaced about a possible buyout, but discounted that possibility. Now that those rumors have subsided (like the head on a beer after it's poured), Growe said: "the exuberance has clearly dissipated and the stock is back down to what we consider 'cheap' levels given the improved growth profile we foresee here." Let's also keep in mind Christopher R. Growe worked at Anheuser-Busch for three years, so he may be playing for the home team, but still, perhaps that makes his analysis even more credible. Growe also said: "We look at improved volume growth trends as one of the alluring features here," he wrote, citing the recent acquisition of Rolling Rock and deals regarding imports and distribution of other beverages. "A very solid year of activity in our opinion and one that should help support improved volume growth alongside improved core brand performance following increased marketing investments and more 'feet-on-the-street'." He also pointed to international growth, particularly in China, as a catalyst for Anheuser. Ah, another reason to toast when drinking beer, "To China and to Alcohol!"

Shares of BUD may be trading close to it's 52-week high at around $50 per share, but like a good beer, its worth paying for the good stuff. Last month, Anheuser-Busch reported profit rose 31% in the fourth quarter on renewed growth in domestic beer sales. In the past few months, BUD reached import alliances with InBev, Grolsch, Kirin, Tiger and the Czechvar brand. It also bought the Rolling Rock brands and introduced its own internally developed specialty brands. This Bud Light ad says it all...

What more can I say after that, I'm thirsty for a Bud.

Article written by: Frank Lara Jr.
Article posted on: March 22nd, 2007

http://thestockmasters.com/index.asp

Cramer Almost Changed His Wal-Mart Stance

Cramer on CNBC's MAD MONEY tonight, actually came out and reviewed Wal-Mart (WMT) as one of his segment stocks.  He is taking a contrarian view on it to see the other side after having a challenge on it from his UT Austin presentation yesterday. He still has Lee Scott on his Wall of Shame (we think Scott still needs to be fired).  Cramer thinks that despite all the negative press and negative coverage, the fact that 16 of 28 analysts follow the stock with a BUY or a BUY-bias and that is too bullish for him.  He thinks they will scale back store openings to boost the dividend and that is good, but he doesn't like the company stores even if they are trying to make them better.  He says he is taking this rating UP now (sort of) from a Triple Sell to a "DON'T BUY."  There was some trading activity as it sounded like Cramer was going to change his stance on the company, but it is back to unchanged after closing up almost 1% on the day.

We actually had something here on this today as far as a strategy for the company.  Wal-Mart needs to lower its headcount.  We actually gave a strategy for it where it could avoid announcing lay-offs and thereby avoid the massively negative PR they would get for it.  That might not entirely save Lee Scott, but it might help shareholders that have been long and wrong for far too long.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Companies That Need A Headcount Reduction: Wal-Mart

Wal-Mart (WMT-NYSE) may find itself with little choice, although there are ways it can accomplish the same end-result without the negative publicity that would come from a headline of “Layoffs!”.  In fact, it can accomplish this in a way that may reward shareholders and have almost no negative social backlash to the company itself.

24/7 is taking an ongoing look at some companies in a wide array of businesses that may be forced to reduce headcount or close stores in order to maintain existing margin levels and earnings growth, especially in an environment of declining GDP growth as has been forecast for 2007 and beyond. 

The mere mention of “Wal-Mart” and “employees” in the same sentence conjures up strong emotions in many people, but for a moment let’s set aside the debate on how those employees are compensated and focus on their contribution to top-line (and therefore the bottom-line) performance.   That’s what it really comes down to for WMT shareholders.

Wal-Mart may be at an inflection point where future revenue per employee figures could decline and force the company to reduce headcount, close underperforming stores, or scale back on new store openings.   In order to have some workable figures on Wal-Mart, we have to do some massaging of the raw revenue data to account for Sam’s Club and the international operations, which skew the results for domestic Wal-Mart stores: Sam’s Club operates in a much different model, having far fewer employees per location and revenue per employee at a level nearly three-times higher than at Wal-Mart stores.  And as for the international units, the store density figures don’t come close to what we find in the U.S., where the company has over 3,300 Wal-Mart stores and employs about 1.3 million people as of January 31, 2007.  At what point does cannibalizing occur at a level that can’t be ignored?  Many living in the U.S. can probably drive to three or four different Wal-Mart stores in 30 to 45 minutes or so, and the company is planning on opening up to 330 new stores domestically.

If we just looked at company-wide revenues that included Sam’s Club and international stores, Wal-Mart would sport a revenue/employee figure of about $190,000.  But if we isolate the domestic Wal-Mart store revenues, we arrive at a revenue figure for 2007 of roughly $226 billion, and total revenue per stated employee of nearly $175,000.  This compares to $176,000 in revenue per employee at Target, but the difference that overall volume is much more important to Wal-Mart because it runs on operating margins that are lower than Target.  In order to achieve the same level of profitability metrics as Target, Wal-Mart’s revenue per employee would need to be 40% higher if everything remained static.  Online sales figures may skew these numbers slightly, but they are generally lumped in at other discount and big-box retailers as well.

Wal-Mart is not getting it done with their comparable same-store-sales anymore; same-store sales came in at less than 1% in February; forecasts are not that much higher for this month; and the company is slashing prices more and more in the holidays to bump up its raw sales numbers on volume.  As employee costs rise either through minimum-wage hikes or a public-relations benefits increase (it could actually happen), the revenue per employee figures could fall off the proverbial cliff regardless of how many cheap plasma TV’s it sells.

Investors who have been impatiently stuck over the last 5-years should