Fed’s expected pause not convincing the market
April 30th, 2008 | Posted by stockThe Federal Reserve pretty much did as expected today, cutting the benchmark fed funds rates to 2% and signaling a lessening desire to cut rates much more. Right? At least that’s the media spin. And the stock market, which had rallied ahead of the much anticipated actions, initially took the news in stride and rallied a bit more. But the rally quickly topped off and all the major indexes finished the day with losses. The S&P 500, which closed around 1391 on Tuesday, hit a high water mark of 1404.57 before tumbling back to 1385.59 at the close. That’s a 1.4% drop in the last hour or two of trading. Ouch.
But if the Fed did just what everyone expected, why the sell-off, why the disappointment? Start by looking at the evidence. What sold off and what didn’t? A quick check of the Wall Street Journal’s sector watch shows energy and basic materials stocks ended the day with gains. Retailers, homebuilders, financials and tech stocks got smooshed. Gold stocks were particularly strong, up 3%, as the dollar fell against all major currencies. Yields on bonds also declined. So what didn’t add up in today’s Fed move? The big pause signal seems to have gotten obscured by some static.
If the Fed isn’t pausing and may cut rates again soon, inflation could rise further and fewer investors will be attracted to keep their money stashed in dollar deposits. That seems to be the message of higher prices for gold and stocks of materials and energy producers. A weaker dollar and lower bond yields also signal anticipation of further rate cuts. The market’s also not showing much confidence that the Fed has a handle on the financial sector, though news and earnings reports from banks and brokers were mostly bad throughout the day.
April 28th, 2008 | Posted by stockQ1 2008 S&P 500 operating earnings as of the close of 4/25/2008
263 issues reported (52.6%), representing 61.07% of the market value
43.5% beat their estimate and 53.1% did not -> historically over 60% beat their estimates
60.1% beat last years value, 38.0% did not
25.9% of Financials posted earnings gains; 69.8% of non-Financials did
49.8% of the non-Financials are expected to post at least a 10% earnings gain (27.2% so far and another 22.5% are expected to do so)
Expect quarter to post a -12.6% decline over Q1 2007
Ex/Financials the index is expected to post a 10.8% gain
The good news is that there was no major negative news; optimism lives
Earnings Shift:
Q1 2008 20% is coming from Energy and 11% from Financials
Q1 2007 14% was from Energy and 30% from Financials
Q2 expected to be down 5.1%, and Q3 & Q4,’08 are expected to show strong increases (very weak comparisons)
2008 estimated to increase 11.8%, but is due to poor 2007 and Energy’s increased contribution
2009 estimated to increase 21.5%, but estimates lack charges and there could be gains due to reversals of prior charges
21 unreported Energy issues are expected to report 14% of the S&P 500 earnings, with their average year-over-year gain averaging 30% (11 of them are expected to post at least a 30% gains); Q1 energy will contribute 20% of the S&P 500 earnings and Q2 is estimated to contribute 19.6%
Wednesday is the Fed meeting and Q1 GDP (S&P expects a 25 point cut and a 0.5% gain) and Friday is the employment numbers (down 50,000 jobs with 5.2% unemployment), since we have nothing for Thursday, XOM will announce their earnings. Street numbers point to another world record in quarterly sales, and a tad under the $11.66B world quarterly earnings record, which was set by XOM in Q4 of 2007 (with any positive surprise setting a new world earnings record, and don’t forget about their current 30 consecutive quarters of share count reduction, courtesy of the buybacks – they spend the most, $80B over the last 3 years).
Nintendo (NTDOY) President Satoru Iwata didn’t have much time to savor his success. On Apr. 25, a day after the Japanese video game maker reported its best-ever earnings and forecast another impressive year ahead, the company’s shares were down more than 2%. And in Tokyo, several hundred kilometers north of the company’s Kyoto headquarters, Iwata was being grilled by financial analysts and journalists who seemed skeptical that the good times could last for long.
Nintendo’s record would appear unassailable. In the fiscal year through March, the Kyoto company’s operating income more than doubled to $4.7 billion, thanks to the popularity of the Wii gaming console and its multitude of software titles, which helped to boost sales a whopping 73%, to $16 billion. Even net profit, which took an $880 million hit from the yen’s recent surge, rose 52%, to nearly $2.5 billion. This year’s numbers are expected to be even better, with new record highs across the board.
So why the doubts about Nintendo? For starters, it foresees modest earnings gains this year. Operating profit is expected to grow just 8.8% on a 7.6% sales gain. What’s more, its portable DS console, which has topped 70 million units globally, is starting to show its age after four years on the market, and DS game software sales are likely to be flat.
Temporary Dip?
In Japan, even sales of the Wii living-room console have tapered off a bit. From January to mid-April, Nintendo sold roughly 1.19 million Wii machines in Japan, 4.6% fewer than in the same period last year, according to Tokyo market researcher Media Create. “Nintendo is doing extremely well overseas, and that’s fine for the short- to medium-term outlook,” says KBC Securities’ Hiroshi Kamide. “But in Japan, things are tailing off at the moment, and this country is often a leading indicator for what happens overseas.”
Many analysts think the dip will be temporary. But it’s a concern, nonetheless. This summer, Nintendo plans to ramp up Wii production to meet its target this fiscal year of 25 million units globally. The 24.5 million it has sold since the Wii’s launch in November, 2006, already put it ahead of both Sony’s (SNE) PlayStation 3 and Microsoft’s (MSFT) Xbox 360. But some say it’s only a matter of time before the PS3 starts to narrow the gap after Sony rolls out a new video download service and an online 3-D world dubbed ‘Home’ for chatting and finding partners and opponents for multiplayer games later this year.
The impact of an economic slowdown is harder to judge. Traditionally, diehard gamers have reacted to tough times by eating out less and taking fewer trips, but not by cutting back on game purchases. These 18- to 34-year-old males have viewed the average $50 to $60 per game as a small price to pay for hours of entertainment. “Do I think games are recession-proof? Proof is a strong word, but essentially yes,” says Wedbush Morgan Securities’ analyst Michael Pachter.
If this were Nintendo’s only audience it might have little to worry about. But Nintendo’s gaming machines have been a hit because they have attracted a following among kids, women, and the elderly with the DS’s easy-to-use touchscreen and the Wii’s pick-up-and-play motion-sensing controller, which can be swung like a baseball bat or pointed at the screen and shot like a gun. If these so-called casual gamers are worried about a recession, they might hold onto the extra cash rather than splurge on the new Mario Kart game.
One Hit Game Can Change Everything
Iwata disagrees. In the U.S. and Europe, Nintendo’s Wii consoles and games have been selling at a blistering pace so far this year, he says. In the U.S. during March, Nintendo sold more than twice as many Wiis as Sony and Microsoft sold PlayStations and Xboxes, after brisk sales in January and February, according to NPD. And retailers are already getting pre-orders for Nintendo’s Mario Kart Wii racing game, slated for release this month, and the Wii Fit in the U.S. and Europe, for the coming weeks. “Historically, video game sales haven’t been influenced much by economic trends,” Iwata says, adding: “We look at the sales figures from week to week and haven’t seen anything to indicate that the economy is affecting our products.”
Iwata says he faced this kind of skepticism before. Five years ago when he and other Nintendo top executives began talking about their strategy of reaching a gaming audience “ages 5 to 95.…Industry insiders told us it was impossible,” he says. Nintendo proved them wrong twice—first with the DS and later the Wii.
As for the DS’s shrinking sales in Japan, Iwata doesn’t think he’ll have to retire the console anytime soon. “Just because the life cycle for the last portable console was four or five years doesn’t mean that will hold true this time,” he says. To illustrate his point, he shows a slide with a year-by-year sales graph comparing the portable Game Boy Advance console, released in 2001, to the DS. By its fourth year, the Game Boy Advance’s sales had dropped off. The DS, now in its fourth year, is not far off its peak. “In our business, one hit game can change everything,” he says. To keep DS hardware and software sales firm, Nintendo has several ideas in the works, including one for later this year that will be aimed at giving DS users a place to congregate—in public.
Don’t say you weren’t warned: newspapers crushed again in Q1
April 25th, 2008 | Posted by stockWhat a horrendous earnings season it’s been in the dying newspaper business. It’s worth taking a closer look as some people still don’t seem to get it. This piece by the usually sharp Chris Anderson made me chuckle, for example. (Hey Chris, before you go citing a 2-year-old anecdote about the Yellow pages business, you might want to check in on more recent results). The combination of the weak economy, long-term falling readership, the advertising shift to competing online platforms and consolidation among department stores continues to crush the industry. Investors, get out while you still can.
Newspaper true believer Gary Pruitt’s McClatchy (Symbol: MNI) showed a loss of almost $1 million for the first quarter as overall revenue plummeted 14%. That was mainly thanks to a drop in newspaper ad revenue to $404 million from $477 million a year ago. But, hey, online ad revenue increased 11%. Unfortunately, it’s still only 11% of all ad revenue. So that 11% increase is just $4.6 million, or slightly more than 1% of total ad revenue.
The Grey Lady (NYT) said ad revenue fell 9% in the first quarter even as Internet ad revenue increased 12%. Again the overall drop was $46.6 million in real life while the Internet ad boost was just $8.6 million. Media General (MEG) reported a net loss and said newspaper ad revenue fell 19% helping overall revenue fall 11%. The company’s interactive media division saw revenue fall 3%. A.H. Belo (AHC), the sinking ship, errr, newspaper group spun off from Belo (BLC) this year pre-announced that its first quarter results would be “substantially below” expectations, too.
At Gannett (GCI), publishing ad revenue dropped 10% and circulation revenue fell almost 3%. The company gave precious little information about online activities in its press release, saying online revenue company-wide “contributed” to results for the quarter, whatever that’s supposed to mean.
It was kind of a ridiculous spectacle on Thursday, then, when a company that owns newspapers and cable networks, E.W. Scripps (SSP), sparked a mini-rally among publishers thanks to its better than expected results not at all related to the company’s dead-tree publishing arm. Revenue from newspapers declined 8% from a year ago while cable channel revenue increased 15%, leading to the overall 7% revenue improvement. Scripps is also one of the few media companies with its own major web site division (owner of Shopzilla and uSwitch), which showed a 23% revenue increase. Key sentence for the future of newspapers in even this positive earnings report: “Newspaper online revenue was $10 million, which was flat relative to the prior-year period.”
Online is not going to bail out these dinosaurs. People like to say that TV didn’t kill radio, but there are a lot fewer radio companies than there used to be (not to mention that radio has been one of the worst performing stock sectors for years). Maybe there will be news articles disseminated on dead tree pulp for years to come but all these public companies aren’t going to survive.
(Earlier coverage: Newspaper stocks face ugly, wide chasm, Betting on a newspaper wipe-out, Newspaper stocks are actually hot outside of the U.S., Olstein reveals why he tossed old media stocks, Another smart guy dumping newspaper stocks, No good news for newspapers in KRI deal)
Finding Your Company’s Great Thinkers
April 24th, 2008 | Posted by innovThe people on the front lines are right, until proven otherwise.”
—Colin Powell
As we mentioned previously, the best, most innovative, companies (BusinessWeek.com, 4/10/08) are discovering the incredible return on investment that comes from using outside experts in their internal innovation process.
It just makes sense to tap the intelligence of people who offer a product that shares certain characteristics with yours. You sell your product through insurance agents? Great. Talk to people in travel, publishing, Hollywood, real estate, and everyone else who uses agents. You’ll discover they have solved many of your challenges in ways you haven’t considered.
As fast as the world is changing, it’s hard to argue with the premise that a company’s capacity to create industry-changing products and services is directly tied to its ability to forge connections efficiently among big brains around the world and throughout your company.
In our last column we talked about how to forge external relationships. Today, let’s look inward: How do you identify and enlist your company’s best and brightest in the innovation process, even if they are not usually part of your company’s marketing efforts? It’s easier than you may think.
1. Encourage Fun and Games. Your first challenge is to attract the “ideators,” the people who traditionally come up with the biggest ideas, regardless of the topic.
Great ideators tend to be a bit competitive. Tap into that. Post challenges—through your intranet, bulletin board, or e-mail system—on behalf of clients, and offer prizes for anyone who can come up with the answer within a set period of time. Competitive, inventive people will respond with novel ideas that you can adopt. The prize can be simple: a free lunch or sports tickets. If you have cash in the budget, even better.
And if you don’t have a current client project in need of solving, you can make one up. For example, if vacuum cleaners did not exist, how would you clean floors? The question isn’t as important as the answers. The responses you get will give you a great list of innovative thinkers.
Not only will you have a great technique for solving many of your most daunting challenges, you will also have the makings of an innovation roundtable to draw from in the future.
2. Encourage Graffiti. Want a simple way to foster a culture of innovation and find out who has hidden strengths? Allow people to draw on the walls.
One thing that works particularly well for our firm when we are looking for new insights, or ways to tweak a product or service offering, is to paper the walls of a room with flip chart sheets. We write thought-starters and headlines that relate directly to the challenge at hand. For a vacuum project, we might post headlines like “things that pick stuff up,” or “the cleanest surfaces in your house.”
Then we ask everyone—no matter where they are in the organization, or what their title—to drop by the room a few times and have some fun. Build on others’ ideas. Cut out pictures. Draw. Make connections.
Once the walls are filled, schedule mini-meetings where you moderate a discussion among small groups of participants to take the ideas further.
Here’s the best part. You won’t have to sell this idea. The room becomes a magnet. You will quickly get new ideas and you’ll see who has the ability to connect, build, and reinvent. This costs nothing but time, and often results in astoundingly fresh thinking.
3. Raise Your Profile. The great thing about taking either or both of these approaches is that not only does the company benefit but it also gives those who would like to be seen as experts opportunities to raise their hands in a nonthreatening atmosphere.
If you’re one of those people who is looking to raise your profile, participate in these exercises every chance you get. That will get you noticed. You will be seen as an idea catalyst, someone whose ideas, enthusiasm, and energy causes others to be more energetic and engaged.
People who help organizations identify and engage great thinkers are prized. And so are the great thinkers.
Loneliness as the bottom approaches for Starbucks
April 24th, 2008 | Posted by stockLots of moaning today about Starbucks (Symbol: SBUX) and how the company’s business model is broken or forever condemned to stink or whatever. So much pessimism, so little time. Pop quiz: here’s a write-up about a company announcing weak results with the name and date removed. Can you name the company?
NEW YORK (CNN/Money) – XYZ Corp. slashed its fourth-quarter guidance Tuesday, saying it expects to post its first-ever quarterly loss after taking a multi-million dollar charge to pay for job cuts. It also plans to close underperforming restaurants. Shares of XYZ, the most actively traded stock on the New York Stock Exchange, fell $1.39, or 8 percent, to $15.99, widening its year-to-date losses to 39 percent. More than 35 million shares changed hands.
Trying to save money, XYZ said it will take a $435 million charge to close underperforming restaurants and cut jobs, forcing XYZ to lose 5 to 6 cents a share in the fourth quarter ending this month. XYZ and other [companies in the same subsector] have become entangled in a price war in recent weeks, trying to outdo one another with dollar-menu items, which at least in XYZ’s case, has had a minimal impact on sales and has cut into margins. Peter Oakes, who covers XYZ for Merrill Lynch, downgraded the stock and cut his price target to $25 a share while lowering his profit forecasts on the company. “The news was not encouraging,” he told clients.
Who could it be? Not too hard — McDonald’s (MCD) back in December 2002 at the tail end of one of the fast food giant’s worst years in recent memory. And guess what else? That wasn’t the worst of it for the stock, which sank as low as $12 within a few months. As the bottom approached, talking heads and pundits everywhere declared McDonald’s business model expired, complaining that the company had opened too many outlets. They pointed to increased competition and McDonald’s lack of focus on what its customers really wanted on the menu. Sound familiar?
Now, sure, McDonald’s is a unique company and just like most promising tech start-ups won’t turn out to be the next Microsoft (am I dating myself? Should I say won’t turn out to be the next Google?), few restaurant chains will end up as successful as the Golden Arches. But I think the parallels to Starbucks are pretty compelling.
Both chains built a tremendously well-known and valuable brand in growing but competitive sectors of the food business. Both got stale and made missteps trying to expand and “improve” their menu of offerings to bring in more revenue. Both lost confidence with investors and saw their valuation multiples shrink. And both took a hard look at what needed to be fixed and got to fixing it. And, importantly, neither is selling a gimmicky product like hot donuts and neither is in a dying industry like newspapers or camera film. It’s never pretty at the bottom, especially when the economy is going soft, but that’s what makes value investing so tough.
April 24th, 2008 | Posted by stockWhenever the stock market looks shaky, the “perma-bears” come out of hiding.
These are the permanently, professionally skeptical investors or market strategists who can always be relied upon for a gloomy take on the stock market and the economy.
The obvious problem with these perma-bears? They’re way too consistent. Like a stopped clock, they’re inevitably right some of the time. But, because most of the time stocks move higher, they’re mostly wrong.
I recently interviewed retired Merrill Lynch analyst Stephen McClellan and wrote an article on his new book, “Full of Bull: Do What Wall Street Does, Not What it Says, To Make Money in the Market.” The book describes many of Wall Street’s biases and blind spots, which put individual investors at a disadvantage.
One of Wall Street’s big conflicts of interest, McClellan says: It has a huge incentive to be optimistic. Investment houses only makes money when people invest, so Wall Street tries hard not to scare off paying customers with doom and gloom.
He has a point, and that makes me more grateful for the few perma-bears that are around. Maybe we need more of them.
How much surprise in Starbucks’ surprise warning today?
April 23rd, 2008 | Posted by stockStarbucks (Symbol: SBUX) came out with its fiscal second quarter results a bit earlier than expected today and it wasn’t because folks were flocking to the six Clover s1 locations. Nope, instead plummetting consumer traffic, particularly in Florida and California, hit the company’s bottom line. Analysts were expecting 21 cents a share of net income for the three months ended March 30 but SBUX CEO Howard Schultz says it was more like 15 cents. Revenue climbed 12% versus the 17% analysts predicted. Starbucks was scheduled to release its results a week from today.
But, as noted previously a few times, this is one beat up stock, which, though currently suffering, still produces a lot of cash and has decent growth prospects overseas. In after-hours trading Starbucks shares fell only about $2 or so to $16.
Meanwhile, it’s looking like a disappointing afternoon across the market. Apple (AAPL) and Amazon.com (AMZN) reported excellent past quarter results but offered weaker than expected guidance about upcoming quarters. Both are trading down modestly in after hours dealing.
When Dividends Get Right-Sized
April 14th, 2008 | Posted by stockAbout the only thing financial stocks have going for them is their dividends. Banks’ stock prices have fallen so far over the past few months that their dividend payout percentages often have hit the double digits.
Today Wachovia (WB) showed once again why investors shouldn’t trust those high dividend yields. The bank cut its dividend 41%.
Cutting a dividend is a big deal — it robs investors of one of the main reasons they own a stock.
So I was amused by Wachovia CEO Ken Thompson’s description of his bank’s move.
In a talk with analysts Apr. 14, he called it “right-sizing our dividend to enhance the organic growth of our equity base.”
What’s wrong with the word “cut”? No matter how much jargon and euphemism Thompson uses, the reality is clear: The bank is worried about the housing crisis, so it’s slashing its dividend to hold onto capital. Wachovia can’t afford to be generous to shareholders at a time like this.
Advances in manufacturing technology and the global reach of the Internet have leveled the playing field in the product marketplace. It wasn’t long ago that time-to-market was two years, then 18 months, and then 12 months. Now, a competitor can knock off your “innovation” in six months or less. Many businesses understand that being “new” or “different” is no longer a differentiator. Countless companies are elbowing their way to the top with designs that are also “feature-rich” or “patent pending.” Innovation in product design has lost its meaning and, therefore, its value.
There is still one frontier that remains wide open: experience innovation. This is the only type of business innovation that is not imitable, nor can it be commoditized, because it is born from the specific needs and desires of your customers and is a unique expression of your company’s DNA. Yet the design of an experience is often overlooked in the rush to market.
Companies intending to be relevant today must learn the art of creating experiences that genuinely engage their customers. Choice-fatigued consumers are not looking for another product that hasn’t taken their true needs and desires into consideration. They are looking for companies in which to believe and give their allegiance. They are looking for experiences that cater to their deep-seated desires. This type of engagement requires much more than the latest technological breakthrough: It requires emotional engagement.
This has the highest value to customers because it has meaning. And it even allows companies to reimagine an old idea: The product or service itself does not have value, but the way in which it is experienced makes it fresh. That means you can even charge a premium for it. At over $100 a pair, Lululemon Athletica’s (LULU) yoga pants aren’t popular simply because of an advance in athletic apparel design. The brand’s promise of well-being and its promotion of conscious living permeate every aspect of its business, creating an experience that customers are willing to pay top dollar for. Lululemon’s sales at its retail stores doubled in the fourth quarter of 2007.
Creating a meaningful experience requires thoughtful attention to your customers at every point of contact—what I call the 360-degree experience. There are four components to consider when designing the 360-degree experience:
Know where you are in the innovation cycle. There are three areas of innovation: technology, product, and experience. Companies such as Intel (INTC) or Texas Instruments (TXN) offer technology products, such as a semiconductor or wireless data transmission, which can be broadly adapted for many uses. A company such as Sony (SNE), meanwhile, has commercialized a technology and created physical products. Then there are companies that create an experience for customers; engage them and tell a story. Starbucks (SBUX), for instance, took a simple product—coffee—and turned it into a complete experience that satisfied the previously unmet need for café culture in the U.S. Understand where your mindset lies in this innovation cycle, and know what it takes to participate and perform in the other spaces. Migrating to a different area is possible but extremely difficult, and one which requires an alteration of thinking, measurement systems and, eventually, a company’s DNA.
Know your DNA. The only way to attract your true tribe is to authentically be yourself. Take a stand. Do what is natural to you and you won’t have to fake it. Understanding your company’s DNA is central to experience design.
The athletic apparel company Nau is a great example (BusinessWeek.com, 1/31/07) of a company that knows what it stands for and what it is good at. With roots in the outdoor apparel industry, executives creating the company didn’t just produce another label to compete in a glutted market. Instead, they established a mission based on their personal values for conscientious business practice and built a business that reflects these values. That ranges from a product line based on sustainable product innovation to a “partnership for change” program whereby 5% of every sale is donated to an environmental, social, or humanitarian organization.
Make emotional connections. Understand your customer well enough to know the difference between what they need and what they desire. In the Western world, businesses meet customers’ functional needs with ease, but often seem to have forgotten how to connect with them emotionally the way, say, the corner grocer in a small neighborhood knows what products each of his customers loves. While it may not be possible to know each customer individually, we can delve much deeper than customer research statistics usually allow to create highly contextual experiences that reflect values, behavior, attitudes, and motivations. Ferrari is a wonderfully innovative brand in this regard—not only has it designed a thrilling racecar, but it tapped into the desires of those people who secretly dream of being a racecar driver. From the sound of the engine to the design of the fire extinguisher that is affixed to every interior, Ferrari found a way to put the racing car experience in the hands of a layman.
Design for the complete experience. There is no experience killer worse than a story being told in only one place. You may have a great product, but if customer service or your Web site don’t reflect the story you are telling, the experience is invalidated and you run the high risk of losing the relationship with your customer. Every aspect of your business must reflect your company’s DNA—and what you have learned about the desires of your customer. American Express (AXP) is a good example here—from the breadth of its product offering to the detailed level of service, its thorough approach provides customers with a feeling of security, empowerment, and being well-cared for—a feeling for which customers will pay a premium.
Competing in the market today demands innovative, emotional engagements. Creating complete, 360-degree experiences is the only way to be relevant in a glutted marketplace.
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