29 May, 2008

Retail Pressure hurting Sears Holdings, Posts loss

Another quarter in the books for Sears Holdings (SHLD), and another lackluster effort on the retail front. These days it seems hopes for profit come only from the Holdings rather than the Sears as Hedge Fund manager turned executive Ed Lampert has been unable to turn around the retail division with any amount of success in recent quarters.

It was during the difficult retail sales quarters in the past years that Lampert was able to keep the company generating profits by using the Holdings cash reserves seemingly as a large hedge fund, but with the current quarter in the books, Sears has swung to a loss. Sears posted a net loss of $56Million ($0.43/share). On the top line, Revenue fell almost 6% to $11.07Billion. Compared to expectations it does not paint a bright picture, as analysts were hoping Sears would deliver $11.4Billion in Revenues and a profit of $0.15/share.

The ever important margin question has to be posed here. How fast are margins actually shrinking at Sears? In fact gross margins declined by 1% to 27%. As the economy weakened in the United States, it became clearer that bigger ticket items would have a hard time generating sufficient demand. Sears noted its highest sales rate drops in items such as Home Appliances and Lawn and Garden items. With Sears sales down in the US by almost 10% and K-Mart sales down by 7% it brings up another question, can Lampert turn this around, or will the weakening economy further deteriorate Sears margins and in turn earnings (losses)?

As they say, 1 things for sure, 2 things for certain, Sears is struggling amidst a declining economic picture domestically, and secondly any plan that involves simply buying back more stock will not lead to sustainable turnaround in "core-business". Sears was "Suffering Retail Blues" back in its November quarter and nearly 6 months later, the picture hasn't gotten any clearer, and may have in fact, with this latest posted loss, gotten more polluted.

Disclosure: Author does not own SHLD

26 May, 2008

With Americans on Holiday staying home, Canadian markets post slight gain

The Memorial Day Weekend had many Americans staying home or staying local due to high gas prices. While Markets in the US were closed Monday, there was plenty to do this long weekend, with the NHL Stanley Cup playoffs starting and the NBA Conference Finals in full swing.

It has been reported (Link) that Americans are driving at historic lows, and who can anyone really blame them with $130 Oil and gas prices over $4/gallon. Perhaps some of those long weekend trips were cancelled and instead nights were spent enjoying the latest antics of Indiana Jones. The Paramount film, a subsidiary of Viacom Inc. (VIA), enjoyed a, not record-breaking but still, highly successful opening for the film, with a 5 day domestic gross of $150Million and a worldwide take approaching $300Million.

Canadian markets were up slightly on Monday, with the benchmark TSX index gaining 35 points, or a quarter of 1 percent.

23 May, 2008

Viacom, Paramount look to capitalize on Indiana Jones

Viacom (VIA) is most certainly a giant media conglomerate, but now and again an event within one business division becomes a rally cry for consumers, shareholders and potentially traders. Viacom hopes that Paramount, George Lucas and Steven Spielberg can deliver theatrical box office records with the latest installment of the Indiana Jones film franchise.

The 4th film in the series, Indiana Jones and the Kingdom of the Crystal Skull opened Thursday and is aiming for box office records over the American Memorial Day long weekend. A 5 Day domestic gross north of $150Million would be a great start for the film. Some analysts are hopeful for over $170Million. Considering the budget for Dr. Jones was around $180Million, with by most estimates, about as much spent on marketing, Paramount needs the box office to come through in a big way! If anyone can do it, it's George Lucas, as his string of successes rank very highly with cinema history's best and most lucrative filmmakers.

The worldwide theater push for the first Indiana Jones film in almost 20 years appears to have set Paramount on the right track to continue its 2008 Summer movie blitz. Paramount was the distribution partner for Marvel Studios (MVL) Iron Man, the biggest film so far this year. While Marvel gets to keep the bigger piece of the pie for Iron Man, Paramount is alone in profiting from the latest escapades of senor Indiana. Can a company as big as Viacom really move off the strength of 1 movie? Absolutely! Will it? Time will tell.

In the past, movies that have captured the imagination of the general public, and created a media frenzy, as has been seen lately with Indiana Jones, certainly have the potential to spread into the trading floors. A good start to Indy, will mean big business for Paramount Pictures and in turn its parent Viacom. Critically the film has done decently well, and it'll be repeat business that will really drive profits. While first week box office records would dominate the headlines, the real profit driver will be the first month.

That is of course, if average folk across the United States want to get into their SUVs, drive to the theatre paying over $4/gallon for gasoline. If one film had the potential to make people forget about economic troubles, it would be the adventures of Indiana Jones.

Disclosure: Author does not own VIA, does own MVL

20 May, 2008

Home Depot Feeling the Effects of an 'ill consumer'

America's cornerstone home-building-renovating retailer Home Depot (HD) released quarterly earnings numbers pre-market but most of the damage had already been done through lowered expectations as the housing and credit mess in the United States started to spill over into the general economy.

Simple fact: Lots of bad mortgages, and corresponding foreclosures mean that folks aren't likely to go out and buy that circular saw and loads of 2x4s for that 2nd story home extension. Expectations had been lowered tremendously for Home Depot on a year over year basis and the company only grazed by when using typical Wall Street accounting math.

Earnings fell over 60%, from $1Billion to $356Million ($0.21/share) and at the top line, Revenue fell from $18.5Billion to $17.9Billion. While Revenue was generally in line with expectations it took adjustments for Home Depot to match profit expectations. Since expectations were $0.37/share on a non-adjusted basis, HD revealed that it in fact would've had a more profitable quarter if it didn't take a charge for closing stores and filing away plans for future openings. Accounting for these charges, HD would've earned $0.41/share and would have beaten expectations by 4 cents. So why the 5% drop in the stock today? Investors surely can't blame oil's run to $130 a barrel for everything! Well, it's because of the fact that a company like Home Depot, which has an increasingly aggressive competitor in Lowe's (LOW) nipping at its heels, is closing stores (15 in the latest quarter) and putting the kibosh on new store plans (50 stores scrapped).

Investors are certainly spooked enough to think that the housing mess hasn't in fact bottomed and that these home improvement superstores will continue to be under pressure for some time in terms of profitability. So how does Home Depot win back some Wall Street love? By putting its name out there, into the minds of consumers. Yes the housing mess isn't in fact completely behind the market, and yes consumers are increasingly cash strapped due to high gas prices but that doesn't mean the Depot is allowed to sit on its hands and blame the economy.

Management needs to get on that soapbox and come up with some growth strategies beyong the tired "current economic climate is unstable". While all may not be well in the US, a place where Home Depot has almost 2000 of its 2200 some-odd stores, there are plenty of opportunities abroad. The company operates 12 stores in China, and it is very likely that its next wave of growth will significantly be tied to overseas expansion. A roadmap would do wonders to an increasingly skeptical Investment Community. Oh and of course it doesn't help when you shelve almost half of a remaining $22.5Billion share buyback progam.

Disclosure: Author does not own HD, LOW

15 May, 2008

Stocks rise Thursday, Carl Icahn takes on Yahoo board

Technology and Energy sectors made the biggest gains leading the Nasdaq (up 1.5%) and the S&P (up 1%) Thursday as the May Options expiration window winds to a close. Oil prices, still the brightest mark for the Energy sector stayed around $124, although they were unable to reach new peaks much past $126 a barrel.

It's an Oil price era in Stock and Futures trading right now and the commodity folks have been rejoicing the last couple of months virtually non-stop. Concerns over high oil resonate through many facets of the economy, with the biggest being the story of inflation. As high oil funnels itself through each and every sectors of the consumer business the increasing cost of manufacturing, transport and services will all have to be pushed onto the consumer, thus sparking increased inflation. Definitely an issue the Fed doesn't want to have to dive right into after seemingly only months ago steering the US away from a full blown recession by dramatically cutting Interest Rates.

In other news, technology related, Carl Icahn (shareholder activist/corporate wheeler-dealer) took a large stake in Yahoo (YHOO) and is prepared to enter into a proxy battle with current management. It is clear, several large shareholders were unhappy with the way the whole Yahoo-Microsoft (MSFT) situation went that the pressure was applied in order to unseat the current board at Yahoo, which for one will be more open to a buyout. The $33/share offer from Microsoft was substantial, and on the brink of completely overpaying, for the struggling Yahoo Internet outfit. On the one hand, the Internet is the future and Internet advertising is leading that future, but on the other, Yahoo is a struggling horse in the advertising game and can't seem to find any ways of putting together its huge customer base into meaningful and exciting new services. Carl Icahn thinks he can help though, and his track record for displacing management rings throughout Wall Street (see Motorola (MOT) for an example). Icahn is going to nominate his board members that will be more open to deal and hopefully get shareholders a fair price above $30/share. With Yahoo currently trading under $28 there's a potential there for an easy profitable trade, if Icahn is able to do as he wants.

Getting Microsoft back to the table will not be easy, as Microsoft's own shareholders jumped ship sending the stock to drift lower as the weeks to the potential alliance dragged on and on, so it is clear the deal isn't the most favourable from within the Software Giant's rank and file. Microsoft however, is desperate for an Internet presence and it can't seem to find the functionality and scale of web software and web services on its own. Windows Live is frankly unheard of in tech and user circles, Office Live, hasn't made any sort of dent and the Advertising division is losing money hand over fist as Google (GOOG) dominants Internet Search. Microsoft's biggest fear in this space has to be Google Apps (Google's free word processing, spreadsheet and presentation tools hosted on the web), and as such they have got to think that Yahoo's Internet service experience and scale will allow them to have viable online software tools when the game really changes.

Icahn will definitely use these points to re-open dialogue, and this along with Yahoo's profitable advertising initiatives should get Steve Ballmer talking again, which might at the end of the day reward those patient Yahoo shareholders.

Disclosure: Author owns GOOG, does not own MSFT, YHOO

12 May, 2008

Markets start week with gains

Trading Monday started with and ended with a broad-sector bullish attitude. While the beginning of the day was muted, buyers found their footing and sent all of the majors up about 1%. Led by the Nasdaq, which had gains on the day of 1.7%.

In Canada, the big news over the weekend was the split of Oil & Gas giant Encana (ECA). The company, in an effort to raise its multiple and thereby, raising shareholder value, decided to split the company into a gas company and an oil company. With record high commodity prices Investors have definitely favoured the "pure-play" names in the Energy sector. Encana's move is an attempt to turn the company from one Oil & Gas conglomerate, into two pure-plays.

So, Investors are happy with the move as shares opened higher and stayed relatively flat throughout the day, resulting in gains of almost 7%. How this move will effect the company going forward, is not yet known, but management seemed confident that the "pure-play" strategy will increase Encana's multiples and thereby increasing share prices for each piece.

Disclosure: Author does not own ECA

06 May, 2008

Technology News & Market Notes: May 6th

Techno-Superhero Iron Man delivered almost $100Million at the domestic box office for Marvel (MVL) over the weekend and brought with it a shift in Market News as Technology Stocks have been the focus. Trading started the day lower but drifted towards the green as the day went on, eventually keeping the Dow, Nasdaq & S&P all with gains on the day.

Although Microsoft (MSFT) over the weekend withdrew its bid for Yahoo (YHOO), over a pricing issue, the sentiment across the street is that this deal has may have legs. Microsoft offered to raise its bid to $33/share while Yahoo remained firm at $37. Yahoo shareholders felt the brunt of the pain as Monday the stock lost 15%. A 6% rebound Tuesday, is largely attributed to Yahoo executives reiterating to the press they are still willing to negotiate. Microsoft has a couple choices, and even though they refused to go into a proxy fight to overthrow Yahoo's board of directors once, Traders seem to think a 2nd go-round is likely.

The dance with these two historic tech names will likely continue in the coming weeks and for what its worth, how badly Microsoft needs an effective brand presence in the growing Internet economy makes it pretty certain that the company will continue to pursue Yahoo, hoping this initial backing-away will build shareholder angst at Yahoo and force more favourable negotiations.

Apple (AAPL) made more headlines and extended its recent stock run as it announced partnerships with a couple carriers to expand iPhone distribution. Both deals revolve around the "sometime later this year" time-frame, so the thinking is that the European partners are waiting for the ever-so-coveted 3G iPhone to make its debut at the WorldWide Developer Conference in early June. Apple made deals with Vodafone to distribute the iPhone in 10 counties including India, Australia and Italy. Apple changed its business model for iPhone distribution in Italy by also partnering with Telecom Italia in that region. Other countries on the iPhone slate include Czech Republic, Egypt, Greece, Portugal, New Zealand, South Africa, Turkey and Canada (based on recent announcements by Rogers Communications (RCI.B)).

Disclosure: Author owns AAPL

02 May, 2008

Entertainment in the spotlight post Fed with Take-Two and Marvel

While the market initially sold off moderately after the Federal Reserve Interest Rate cut the euphoria was back in full effect Thursday with substantial gains. The buying couldn't hold early Friday though, as American benchmarks drifted lower through mid-day. On the heels of a bullish Thursday, which saw the Nasdaq led gains with over 2% in the green, markets lulled going into the weekend.

It was a week where Entertainment was given the spotlight. One of the biggest video game franchises released its fourth installment, as the global phenomenon known as Grand Theft Auto, went back to its roots of "fake New York" Liberty City and released what is sure to be the biggest video game of all time, in terms of sales of course. Rockstar Games, which is a division of Take-Two Interactive Software (TTWO), saw this release also as the biggest in its tenure as a Video Games Maker. Shares of Take-Two are up substantially over recent months due to a buyout offer by Electronic Arts (ERTS). Take-Two has thus far been holding out for..... You guessed it, More Money! But as the first week and month results of GTA IV sales come back, Investors are expecting big things for the company and that franchise going forward.

Shifting entertainment forms now, from Video Games to Films, and its clear it'll be another Comic Book Summer. With no less that 3 major blockbuster films scheduled from now till mid summer based on popular comic book characters. The twist here is that Marvel Entertainment (MVL), after years of seeing the movie business capitalize and profit substantially on successful comic adaptations, isn't standing on the sidelines anymore. Now instead of licensing popular characters to the major movie studios and watching them collect profits from ever rising ticket prices, DVD sales, Rentals, iTunes revenue etc. Marvel put it's hand in the cookie jar and decided to start financing its own movies. And Marvel studios was born. With the first creation being the expected successful movie career of Iron Man.

The company's bold business model change years ago is bound to pay substantial dividends down the road as the worldwide box-office presents Marvel with a untapped resource of revenue. Their attention to the history of their own character creations will likely provide a movie platform that the outside studios could not and should provide years of additional story and movie script ideas. Marvel is set this summer with Iron Man and its second film The Incredible Hulk and if these prove to be as successful as most expect, then Marvel Studios will certainly expand and become a major player in the land of Hollywood.

Disclosure: Author holds no position in any aforementioned companies.