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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Bloodshed at Borders
Investors got massacred at the border... eh, the Borders Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGP)") else Response.Write("(NYSE: BGP)") end if %>... this morning as shares of the nation's still #2 book retailer got whacked for a 23% loss to $19 1/4, down $5 13/16, after the company said all-important Q4 earnings would slightly miss their mark. As a result, FY98 earnings are now expected to come in at between $1.14 to $1.18 per share, below the consensus earnings estimate of $1.22. Though such bloodshed might remind one of Napoleon's retreat from Moscow in Tolstoy's War and Peace (okay, maybe not), the tome that clobbered Borders today had the unmemorable title Major Storms in Key Markets.
Bad weather over the past few weeks and unexpectedly strong sales of its gift certificates accounted for the Q4 shortfall. Though Q4 comp-store sales for Borders stores will increase 2.0% to 2.5% while they fall as much as 0.5% at the company's mall-based Waldenbooks units, bad weather is expected to trim 100 basis points (1% point) from overall same-store sales gains. Meanwhile, some customers decided not to give the latest brainless bestseller this Christmas, opting instead for a gift certificate: Borders' new electronic certificate efforts paid off with a 40% gain in certificate sales. The problem is that certificates don't get reported as sales until they're redeemed, and only about 30% of certificates dispensed in December are redeemed in January. Without the blizzard or the unexpected gain in these deferred sales, the company said Q4 same-store sales would be on track for a 4.5% to 5% increase, or about in line with expectations.
While Borders has a good track record both for making its earnings targets and for talking straight with investors, the lingering doubt raised by the bad weather excuse is that Borders is already being hurt by Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> and the whole move to online retailing. If bad weather of late hurt Borders, why didn't good weather throughout most of the holiday season help sales? While the company's website has generated awards for its customer service, design, and prices, Borders remains a distinct also-ran in online sales behind Amazon and Barnes & Noble's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> barnesandnoble.com.
Borders also announced late yesterday that losses from its Web operations will cost it $0.12 to $0.14 a share for FY98. By contrast, its stores will generate a 21% to 25% EPS increase to $1.27 to $1.31 for the year. That means the company's core business is now trading for less than 15 times earnings, or far below its recent growth rate. The question is how you value Borders' Web operations. One could argue that the website is simply necessary to protect Borders' core business from losing those marginal sales that keep same-store sales growing. In that case, Borders.com could be seen as a bit of a liability given that the company clearly will need to spend a lot more on advertising and marketing if it hopes to be a real contender online. On the other hand, it's hard to find any rational explanation for why even Books-A-Million <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAMM)") else Response.Write("(Nasdaq: BAMM)") end if %> is afforded a $180 million premium simply for launching a website while investors seem to be valuing the far better positioned Web operations of Borders at less than zero.
Two brokerages moved ahead this morning after reporting fourth-quarter earnings that beat the market's expectations. Lehman Brothers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> rose $1 3/8 to $55 on news of EPS of $0.51, well above First Call's $0.21 projection but off last year's $1.30 mark. Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %>, meanwhile, moved ahead $3 7/16 to $84 1/8 following its announcement of EPS of $1.49, smashing First Call's $0.96 consensus estimate.
Web address registrar Network Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSOL)") else Response.Write("(Nasdaq: NSOL)") end if %> shot up $29 3/16 to $201 3/16 after Prudential Securities boosted its rating on the company to "strong buy" from "accumulate," raising its 12-month price target to $250 from $76.
Vitamin and supplement retailer General Nutrition Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNCI)") else Response.Write("(Nasdaq: GNCI)") end if %> popped up $4 1/4 to $19 5/8 following news of an agreement with drugstore giant Rite Aid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %> to open 1,500 GNC stores within Rite Aid locations over the next three years. The companies will also market a new proprietary line of vitamins.
Home improvement retailer Lowe's Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> hammered out gains of $2 1/2 to $54 3/4 after it announced a 10.2% same-store sales increase for December. Total sales for the month improved 23.7% to $1.21 billion from $978 million last year.
In-flight retailer SkyMall Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SKYM)") else Response.Write("(Nasdaq: SKYM)") end if %> shot up $4 3/16 to $21 13/16 on its announcement that it formed a new subsidiary, skymall.com, to manage its online business as of Jan. 1. The company hopes to broaden its product offerings online and become a "premier Internet destination."
Maternity retailer Mothers Work <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWRK)") else Response.Write("(Nasdaq: MWRK)") end if %> received $1 15/16 to $13 7/16 after it said December same-store sales were up 16.4% from year-ago levels. The company also announced the launch of MaternityMall, its online sales division.
Casual apparel retailer American Eagle Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEOS)") else Response.Write("(Nasdaq: AEOS)") end if %>, one of 1998's big winners, flapped up $1/2 to $66 1/2 after its sales soared again in December, jumping 20.9% during the all-important holiday shopping month. Total sales increased 35.3% to $116.9 million during the month.
Among other companies moving on comparable sales news, Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> took on $1 11/16 to $84 5/16 after it posted a 9.4% rise in December comp-store sales -- 9.1% at Wal-Mart stores and 11% at Sam's Club. Specialty and gifts retailer Sharper Image Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHRP)") else Response.Write("(Nasdaq: SHRP)") end if %> grabbed $3/4 to $13 1/8 on news that same-store sales climbed 8% while total sales rose 13% on a 20% increase in mail-order sales and a 444% gain in online sales. For more same-store sales numbers, head back to today's Breakfast with the Fool.
Specialty finance company Sirrom Capital Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SIR)") else Response.Write("(NYSE: SIR)") end if %> rose $1 11/16 to $7 11/16 after FINOVA Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNV)") else Response.Write("(NYSE: FNV)") end if %> agreed to buy the company for about $379 million in stock. Sirrom shareholders will receive 0.1634 shares of FINOVA common stock for each of their shares, which after accounting for various charges expected by both companies in Q4 will represent a small premium to book value per primary share
Equine branded apparel designer Polo Ralph Lauren <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RL)") else Response.Write("(NYSE: RL)") end if %> cantered ahead $1 5/8 to $21 7/8 after Morgan Stanley Dean Witter upgraded the stock to "strong buy" from "outperform," boosting its price target to $30 per share from $28 per share.
Consumer products marketer Sel-Leb Marketing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SELB)") else Response.Write("(Nasdaq: SELB)") end if %> advanced $5 1/2 to $8 following last night's announcement of a new financing agreement with a Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> subsidiary. The company's statement said the new pact represents a 25% increase over its previous deal with a commercial bank; according to Sel-Leb's most recent quarterly report, a $2.5 million credit agreement expired Nov. 30.
Trident International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRDT)") else Response.Write("(Nasdaq: TRDT)") end if %>, which markets proprietary impulse ink jet technology, rocketed ahead $7 to $16 1/4 on news that Illinois Tool Works <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITW)") else Response.Write("(NYSE: ITW)") end if %> will buy the company for $16.50 per share, a 78% premium over yesterday's closing price.
Data transfer rate booster Adaptec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> jumped $5 3/16 to $24 3/4 following an upgrade to "attractive" from "neutral" by Bear Stearns on the heels of yesterday's news of fiscal Q3 EPS of $0.20, beating the Street's $0.14 estimate. The Fool's Alex Schay looked inside Adaptec in a column on Monday.
Electronics manufacturing services provider Solectron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> gained $5 1/16 to $91 1/8 after agreeing to buy IBM's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> electronic card assembly and test operations in Austin, Texas for an undisclosed sum. Solectron will also provide fully integrated printed circuit board (PCB) assembly manufacturing services to IBM for the next three years. Solectron is also the featured company in today's Daily Double.
Commercial laser company Spectra-Physics Lasers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLI)") else Response.Write("(Nasdaq: SPLI)") end if %> zinged ahead $1 11/16 to $10 5/8 after reporting that Thermo Instrument Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: THI)") else Response.Write("(AMEX: THI)") end if %>, which owns more than 80% of its common stock, has made a tender offer for the remainder of its shares for approximately $20 each. Spectra-Physics' board is recommending the offer, which represents a 124% premium on yesterday's closing price, to its shareholders.
Telecommunications services provider MCI WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> slid $2 1/16 to $76 5/16 after a report in USA Today said the company is on the verge of submitting an estimated $55 billion bid for wireless services company AirTouch Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %>, opening a third front in a potential bidding war with fellow suitors Bell Atlantic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %> and Vodafone Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VOD)") else Response.Write("(NYSE: VOD)") end if %>. Separately, MCI WorldCom started its tender offer this morning for Australian Internet service provider OzEmail Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OZEMY)") else Response.Write("(Nasdaq: OZEMY)") end if %> at a price of $22 per American depositary share.
Department store retailer J.C. Penney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCP)") else Response.Write("(NYSE: JCP)") end if %> was marked down $2 1/2 to $43 13/16 after posting a 7.6% drop in December same department-store sales. The poor results, combined with lower gross margins from increased markdowns, will result in Q4 EPS between $0.70 and $0.80 and fiscal 1998 EPS between $2.12 and $2.22. Those figures are short of the First Call mean estimates of $1.06 and $2.73, respectively.
Advanced commercial and medical electronic instruments designer SeaMED Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEMD)") else Response.Write("(Nasdaq: SEMD)") end if %> sank $3 13/16 to $7 11/16 after saying delayed and cancelled projects will result in fiscal Q2 EPS between $0.15 and $0.17, short of the Zacks mean estimate of $0.21.
Health benefits provider First Health Group Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FHCC)") else Response.Write("(Nasdaq: FHCC)") end if %> fell $3/8 to $15 1/2 after saying it has lost a PPO and fee schedule services provider contract for a "significant potential workers' compensation service client," which will reduce the company's fiscal 1999 earnings forecast by about $0.13 per share. The effects from the lost contract, which will also reduce expected 1999 revenues by about $20 million, will be mostly felt in the second half of the year.
For-profit hospital operator Tenet Healthcare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: THC)") else Response.Write("(NYSE: THC)") end if %> dropped $3 1/8 to $23 7/8 after reporting fiscal Q2 EPS of $0.40, missing the First Call mean estimate by a penny. The company said Medicare reimbursement cuts, higher bad debt expenses, and dilution from its recently acquired Philadelphia operations were responsible for the shortfall. In fiscal 1999, Tenet expects earnings per share to be "flat to up 5 percent" from the year before.
Sunglasses and sneakers maker Oakley Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OO)") else Response.Write("(NYSE: OO)") end if %> was burned $15/16 to $8 5/16 after saying it expects Q4 EPS of around $0.05, even with a year ago, but below the First Call mean estimate of $0.09. The company attributed the shortfall to lower-than-expected footwear sales due to softness in the U.S. market as well as "slower-than-anticipated acceptance of our limited product offering."
Shareholders of family apparel retailer Stage Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGE)") else Response.Write("(NYSE: SGE)") end if %> exited stage left this morning, dropping the stock $1 11/16 to $7. The company reported that same-store sales slid 7.8% from a year ago during the nine-week "holiday period" ending Jan. 2 due to unusually warm weather. The company said it is "extremely disappointed" with the results, which will lead to Q4 earnings "significantly below" the current First Call mean estimate of $0.44.
Semiconductors distributor Avnet Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVT)") else Response.Write("(NYSE: AVT)") end if %> was knocked down $10 1/4 to $49 11/16 after saying a "significant" slump in December sales of core products in its electronics and computer marketing groups will result in fiscal Q2 EPS of about $0.75, missing the First Call mean estimate of $0.91.
Disposable specialty medical products maker Maxxim Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAM)") else Response.Write("(NYSE: MAM)") end if %> was trashed for a $1 7/16 loss to $25 5/8 after reporting fiscal Q4 EPS of $0.39, $0.02 higher than a year ago but a penny below the First Call mean estimate.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), another Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |