DJIA 7795.50 +179.96 (+2.36%) S&P 500 1009.06 +28.87 (+2.95%) Nasdaq 1641.64 +56.31 (+3.55%) Value Line ndx 778.16 +16.82 (+2.21%) 30-Year Bond 104 3/32 +12/32 5.23% Yield
Semiconductor bellwether Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> rose $5 7/8 to $84 15/16 on its announcement after yesterday's close that thanks to stronger-than-anticipated demand, especially in North America and Europe, the company now predicts third quarter revenue will be 8% to 10% higher than its second quarter revenue of $5.9 billion. This will be Intel's first quarter of positive revenue growth this fiscal year. In July when the Pentium chip maker reported Q2 earnings, it had warned that it expected Q3 revenue to be flat or slightly higher than that of the previous quarter. As it had earlier predicted, the world's largest chip maker now expects revenue in the second half to top that of the first half. For more details, click here.
Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> took off and climbed $2 1/8, or 8.25%, to an altitude of $27 7/8 after the nation's fourth largest airline and its pilots reached a tentative agreement on a proposed settlement of their contract dispute, clearing the way to end the pilots' 13-day-long strike. The proposed settlement must be approved by the pilots' union Master Executive Council before the strike can be called off. Northwest also issued guidance today, saying that it expects to report a loss (surprise, surprise) for the third and fourth quarters, as well as for the full year. The statement seemed to be more of a formality than a real need for disclosure, as investors had already factored in the damage done by the pilots' strike. The good news for Northwest was somewhat contagious. Continental Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI.B)") else Response.Write("(NYSE: CAI.B)") end if %> regained $1 1/4 to $38 1/16 after falling yesterday as its pilots declared an impasse in labor negotiations.
QUICK TAKES: Drug maker Pfizer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> jumped $6 1/4 to $100 5/8 after the American Journal of Psychiatry published a study reporting that the company's psychiatric drug Sertraline HCI was shown to be "effective and well tolerated" in the treatment of patients with panic disorder... Campbell Soup Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %> gained $1 11/16 to $50 7/16 after announcing it will enter into forward purchase agreements to hedge the company's equity exposure from its stock option programs... Database management software company Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> jumped $3 3/8 to $25 1/2 after reporting fiscal Q1 EPS of $0.20, a nickel higher than the same year-ago period and $0.04 ahead of the analysts' mean estimate. Total revenue grew 28% to $1.7 billion from $1.4 billion.
Office products superstore chain OfficeMax Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %> tacked on $2 1/16 to $11 after announcing it is in preliminary discussions regarding a possible business combination. The company added that it has not repurchased any stock since August 21... American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> recovered $8 7/8 to $78 3/8 after the financial and travel services company said in a letter to employees that economic problems in emerging countries has had little impact on its operations. The company still expects long-term annual earnings growth of 12% to 15%... Circuit City Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %> connected for a $3 gain to $32 1/2 after Prudential Securities reiterated its "strong buy" rating on the consumer electronics retailer, adding that customers are still buying TVs and electronics despite economic worries.
Women's sportswear, suits and dresses designer, and marketer Jones Apparel Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNY)") else Response.Write("(NYSE: JNY)") end if %> put on $4 1/16 to $22 1/16 after announcing it will acquire privately held clothing manufacturer Sun Apparel Inc. for $444 million in cash, stock, and debt. Sun makes products under the Polo Jeans Co. brand, licensed from Polo Ralph Lauren <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RL)") else Response.Write("(NYSE: RL)") end if %>, as well as other brand names... Foot Locker and Champs Sports parent Venator Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> gained $11/16 to $9 5/16 after announcing it has ended its all-stock bid to acquire sporting goods superstore chain Sports Authority <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSA)") else Response.Write("(NYSE: TSA)") end if %>, which picked up $1 to $6 3/16. This leaves the door wide open for rival Gart Sports Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRTS)") else Response.Write("(Nasdaq: GRTS)") end if %>, which made a competing cash and stock bid in July that Sports Authority spurned last month. Gart climbed $5/8 to $10 3/4.
Adobe Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %> rose $1 3/16 to $28 after the desktop publishing software company reported Q3 EPS of $0.37 (before unusual items), compared with $0.55 in the year-ago period and analysts' expectations of $0.35. The company said it aims to achieve an annual revenue growth of 15% and an operating margin of 25% next year... Computer training company Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> picked up $1 1/4 to $7 1/8 after announcing that a fourth center, the one in South Plainfield, New Jersey, has been granted Title IV eligibility, which provides for federally funded financial aid programs... Home improvement retailer Eagle Hardware & Garden <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EAGL)") else Response.Write("(Nasdaq: EAGL)") end if %> harvested a $2 5/8 gain to $22 11/16 after Business Week's "Inside Wall Street" column speculated that the company could be bought by Lowe's Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> for $40 a share.
Computer security systems company Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %> jumped $3 3/16 to $37 11/16 after Lehman Brothers reiterated its "buy" rating with a 12-month price target of $75... Oil and gas services company Noble Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NE)") else Response.Write("(NYSE: NE)") end if %> gained $1 11/16 to $16 1/2 as it topped Fortune magazine's list of the fastest-growing U.S. companies. In the last three years, the company's EPS grew at an annual rate of 394%... Furniture maker La-Z-Boy Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LZB)") else Response.Write("(NYSE: LZB)") end if %> rose $3 5/16 to $57 7/8 after Business Week's "Inside Wall Street" column quoted an analyst from a no-name firm as saying that the company's shares could hit $30 this year after it effects a 3-for-1 stock split next Monday... Mortgage lender PacificAmerica Money Center <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAMM)") else Response.Write("(Nasdaq: PAMM)") end if %> advanced $2 3/8 to $7 1/4 on news that it will be acquired by insurer Fremont General Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMT)") else Response.Write("(NYSE: FMT)") end if %> for $10 a share in cash and stock.
Plastics maker Applied Extrusion Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AETC)") else Response.Write("(Nasdaq: AETC)") end if %> surged $1 3/8 to $9 1/2 after Huntsman Packaging Corp. raised its acquisition offer to $12.50 a share from an earlier bid of $10.50 a share that Applied rejected... Golf sportswear maker Cutter & Buck <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBUK)") else Response.Write("(Nasdaq: CBUK)") end if %> rose $1 1/2 to $25 after reporting fiscal Q1 EPS of $0.14, up from $0.09 a year ago and ahead of analysts' mean estimate of $0.12... Data storage devices manufacturing equipment maker Veeco Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VECO)") else Response.Write("(Nasdaq: VECO)") end if %> leapt $2 5/8 to $27 1/8 as SoundView Financial reiterated its short-term "buy" rating on the company's shares with a 12-month price target of $50, adding that the data storage market is expected to outperform over the next few quarters as companies move to next-generation technologies... Franchise restaurant operator Star Buffet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STRZ)") else Response.Write("(Nasdaq: STRZ)") end if %> gained $1 to $6 3/4 after announcing plans to buy back up to 500,000 shares.
Machine vision systems maker Cognex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CGNX)") else Response.Write("(Nasdaq: CGNX)") end if %> lost $5/8 to $12 1/2
after late yesterday warning that it expects lower-than-anticipated revenue
and net earnings for the remaining two quarters of this year due to a deeper
and more prolonged slowdown in orders from customers in the semiconductor and
electronics industries. The company expects a 20% to 25% drop in revenue this
year compared with last year. There are essentially two economic models for
companies in the machine vision business. One has the company focus completely
on the machine vision tool and sell it to original equipment manufacturers
(OEMs) who make the actual capital equipment that the machine vision tool goes
into. The biggest company of this type is Cognex, and historically its
customers are not the actual companies that end up using its devices, but
rather names like KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> that sell capital equipment to the
companies that use it. The other economic model is to make the stuff that can
go right on the factory floor. (However, Cognex's business mix is shifting
more toward the factory floor.)
Specialty chemicals company M.A. Hanna Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAH)") else Response.Write("(NYSE: MAH)") end if %> was cut $1 1/2 to $9 7/8 after warning it expects Q3 EPS (before a restructuring charge of $0.39 a share) of $0.20 to $0.23, compared with the $0.36 it earned last year and analysts' expectations of $0.31. Earnings for the year are forecasted to be 20% to 25% lower than last year. The company attributed the shortfall to the General Motors' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> strike, weakness in the industrial sector, economic difficulties in Asia, and slower sales in its plastics color additives business. In response to lower demand, the company has eliminated 110 jobs in its plastics and rubber compounding divisions. Last month, the company announced a "profit improvement plan" that will realign the company to a more market-focused structure and close down 5 of 17 manufacturing plants.
QUICK CUTS: Dole Food Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOL)") else Response.Write("(NYSE: DOL)") end if %> lost $5 3/4 to $34 7/16 after the fruit products company announced plans to acquire a 60% stake in Sweden's Saba Trading AB, Scandinavia's top fruit importer... Lehman Brothers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> slid $2 13/16 to $35 13/16 on speculation that the investment bank is in financial difficulty, which, of course, was denied by the company... Jewelry retailer Friedman's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRDM)") else Response.Write("(Nasdaq: FRDM)") end if %> sank $2 11/16, or 33%, to $5 7/16 after announcing the resignation of its CEO Richard Ungaro and the appointment of Bradley Stinn as the new CEO and president. Stinn previously served as the company's CEO from September 1992 to December 1997.
Supply chain management software developer Manugistics Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANU)") else Response.Write("(Nasdaq: MANU)") end if %> dropped $1 9/16 to $10 3/4 after reporting a fiscal Q2 loss of $0.15 a share (before charges), compared with earnings of $0.11 last year and analysts' mean estimate of a loss of a penny... Generic drug maker Schein Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHP)") else Response.Write("(NYSE: SHP)") end if %> tanked $12 to $11 3/4 after announcing that the Food and Drug Administration has filed to halt the production and distribution of products made at its Steris Laboratories subsidiary, which "account for a very significant portion of the company's sales and profits." The company hopes to reach a settlement with the FDA "within a matter of days" to allow production and distribution to resume.
"Ask Sherwin-Williams" <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHW)") else Response.Write("(NYSE: SHW)") end if %> was chipped for $1 7/16 to $22 1/4 after the paint maker warned it expects Q3 EPS to miss estimates and be flat or slightly higher year-on-year due to weak do-it-yourself paint sales in its coatings division... Milk and dairy products manufacturer Suiza Foods Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SZA)") else Response.Write("(NYSE: SZA)") end if %> dipped $1 5/16 to $40 7/16 after announcing it will buy Broughton Foods Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MILK)") else Response.Write("(Nasdaq: MILK)") end if %> for $123 million in cash and debt. Broughton gained $3/4 to $18... Semiconductors distributor Avnet Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVT)") else Response.Write("(NYSE: AVT)") end if %> tumbled $3 5/8 to $42 1/2 after warning it expects Q1 EPS to miss previous forecasts and fall in the range of $0.80 to $0.85, down from $1.02 in the year-earlier period. Analysts had been anticipating EPS of $0.99.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Shopping Costco, Part 2
Continuing with my look at Costco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %>, I should say right off the bat that one of the most informative articles on the company that I have read was Forbes' August 11, 1997 cover story on the company. Reading this article, one can't help but be reminded of Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>. Having recently read Sam Walton's Made in America: My Story, the Forbes article reminded me very much of the growth story of Wal-Mart and the single-minded devotion to creating value for customers that both of these companies share.
To wit, California lawyer and businessman Charlie Munger, Vice-Chairman of Berkshire Hathaway, effuses with praise for Costco. Telling Forbes that he broke his rules about sitting on outside boards of directors, Munger said, "It's hard to think of people who've done more in my lifetime to change the world of retailing for good, for added human happiness for the customer." "Including Sam Walton," the magazine asked. "Munger nods." In an article in Discount Store News earlier this year, Costco Chief Financial Officer Richard Galanti summed it up pretty neatly: "If we can't save customers money, we're not going to sell an item."
Saving people money -- big money over the course of a year -- isn't the entire part of a value equation. Value is the intersection between product satisfaction (which includes the service component of selling) and utility and price. You can sell junk to someone at a rock-bottom price or you can sell exclusivity at at a needless markup. Getting the highest quality to the customer at the lowest price has been something that Wal-Mart built its business on, but it appears to this casual observer that Costco is going that about ten steps better.
According to BT Alex. Brown retail analyst Barbara Miller, Costco's average store has about 3,500 stock keeping units (SKUs) in a 120,000 square foot store, "...miniscule relative to, for example, a supercenter in the same size box [store].... COST's merchandising is a key thing responsible for its success," Miller said. "Clubs are item merchants, hence each selection is important." Forbes focuses on this thread, as well: "By stocking only a few branded goods in each product category, Costco is in essence doing the customer's comparison shopping and demanding the best terms from the vendor." In other words, when you walk into a Costco, you're not faced with random piles of stuff you don't need or cheap knockoffs of stuff you do need. For those shoppers that aren't looking for an adventure in cheap, unknown substitute brands, they can feel comfortable walking into a Costco.
When it is the company's private mark, Kirkland Signature, the company is very serious about the brand equity it is building. Barbara Miller agrees, "Even its private label products, Kirkland Signature, compare themselves to the best (e.g. the luggage is compared feature by feature with Tumi) -- the chicken breasts are co-branded with Tyson." Forbes relays an interesting story on this point: "[Costco CEO Jim] Sinegal is careful not to abuse his customers' trust by using the signature label on something second-rate. Because Procter & Gamble came up with a superior paper towel, Costco won't sell it towel line as Kirkland, choosing instead a lesser private label. No easy hits on the customer -- that's the rule."
Some market forecasters think there's a ceiling on where this is going. I disagree that the market ceiling on this is only $10 billion in sales over where the warehouse club industry was in 1997. And I also disagree with Charlie Munger on this being "an absolute revolution." From the beginning of commerce, the merchant that has been able to deliver the best value -- remember, that's the intersection between price and quality -- has done well. That's a common element in the successful retail concepts of the century -- Sears, Roebuck; Montgomery Ward; Wanamakers; Larkin; Woolworth's; Hannaford Brothers; Kmart; Wal-Mart; and $24 million retailer Costco. The revolution is in form, not function.
Some investors might not believe a brand with staying power can operate on margins of less than 2%. Going on the idea that brand is about delivering value to a customer, whether it's Coke selling its product at a premium to no-names or Costco operating at about half the gross margin of a Wal-Mart, we have to orient ourselves to the concept that brand is about good returns on capital. In the capital management department, Costco's asset activity ratios are formidable, blowing away Wal-Mart:
Company WMT COST Inventory Turnover 5.79 11.71 Capital Turnover 4.14 6.41 Cash Conversion Cycle 32.18 7.93 Year/Year Inv. Cap. Growth 15.26% 13.67% Invested Capital Turnover 4.14 6.41 Gross Margin 21.75% 11.84% Operating Margin 5.52% 3.17% SG&A/Sales 16.24% 8.54% Net Margin 2.99% 1.82% Asset Turnover 2.88 4.15 Assets/Equity 2.40 2.20 PP&E Turnover 5.56 7.33 ROA 8.63% 7.54% ROE 20.68% 16.61% Net Cash from Operations $6,698.00 $732.61 NCFO/Reported Earnings 180.93% 171.68%Overall, this is the sort of company that I look for as an investor. It has a clear-headed approach to its business model and pursues the model like a hellhound. The headroom on the growth is not limited anytime within the next ten years, in my opinion, if one understands that the revolution here is not about a big box (store) but about delivering the absolute best value to a customer. As such, this is the sort of company that can invest capital in the business at double-digit yearly growth rates without diluting shareholders or unduly leveraging the business. In the growth phase, the company will earn its cost of capital and probably not get to the point where it absolutely crushes its cost of capital until a good part of its stores have reached a more mature phase. The model so far indicates that the economics of individual units improve as they age and take share away from traditional retailers.
Company WMT COST EV/Revenues 1.24 0.55 EV/Invested Capital 4.7 3.32 EV/Assets 3.32 2.14 Price/Book Value 7.32 4.26 PSR 1.11 0.51 EPS $1.64 $1.84 P/E 37.20 28.22 EV/Operating 22.39 17.42 EV/Net Income 41.29 30.38 EV/FCF 68.49 47.26 EV/NCFO 22.82 17.70
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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