Stephen’s Posterous

The Wall Street Journal reported that Wal-Mart is launching a price war with Amazon.com. On October 15, 2009, Wal-Mart said it would sell 10 top selling book titles for $10 a piece on it's website, Walmart.com.

A few hours after reporting this, Amazon.com matched the price at $10. Wal-mart then followed up with $9 a book.

The Wall Street Journal said that the price war sent shivers through the publishing world.

Will readers now expect to pay only $10 a book? The $10 price tag comes close to the $9.99 price that Amazon.com charges for its Kindle e-reader best-sellers.

Wal-Mart is most likely losing money at these price levels as retailers typically pay half the list price for a hardcover book. Wal-Mart is world's largest mass merchant with annual sales topping $400 billion.

Amazon.com on October 15, 2009, launched a local express delivery program that offers same day shipping to customers in seven cities, including New York, Boston and Washington, D.C.

On Walmart.com, you can pre-order Steven D. Levitt and Stephen J. Drubner's SuperFreakonomics for $14.50, a 52% savings. Amazon has the book for pre-order for $16.19, a 46% savings. Of course, no sales tax is due for the Amazon order, but for Walmart.com, there is sales tax. Wal-mart may also not provide the service to all 50 states.

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Hedge fund guru Bill Ackman is still fighting with Target Corp. as reported by the Wall Street Journal, Mr. Ackman has called a meeting in Manahattan on May 11, 2009, to introduce his five directors, which includes him, for election on May 28.Editing a post - Posterous

Target's stock has dropped 58% from September 2008 to March 2009, and rebounded recently with other stocks, but is currently down 39% from its peak of $70 in July 2007.

Target is prepared to fight Mr. Ackman and may spend around $11 million fighting this battle. Mr. Ackman was successful in pushing Target to sell a stake in its credit card portfolio and wants the company to sell more. Mr. Ackman estimates he will spend about $15 million fighting this battle as written in the Financial Times.

The Financial Times also reported that Mr. Ackman's Pershing Square hedge fund owns about $1bn in Target common stock along with options on another $280 million. The company's fund, Pershing Square IV, consists entirely of call options on Target stock. Mr. Ackman also said in an interview with the Financial Times that his agenda is also to fix corporate elections.

Mr. Ackman was not successful earlier in convincing Target management to spin off land it owns under its stores to create a public traded real estate investment trust, REIT.

Shareholders may be somewhat receptive to Mr. Ackman's offer seeing that  Walmart has been able to have strong growth despite the recession while Target's sales have been trailing Walmart's by up to 6 percentage points. In the past, Target has trailed Walmart's sales by only 1 or 2 precentage points as pointed out in the Wall Street Journal article.

Although somewhat hipper and cooler than Walmart, Kmart, or Sears, Target is about one sixth the size of Walmart in terms of market capitalization. In the first quarter of 2009, Target had an operating margin of 4.82 percent while Walmart had an operating margin of 5.84 percent.

Seeking Out Recession-Proof Stocks by Teresa Rivas, Barrons.com

The recent rally has bought comfort to many investors, but Walter Gerasimowicz isn't ready to celebrate just yet. Gerasimowicz warns that the market remains volatile, but that uncertainty also creates opportunities.

Many stocks are currently undervalued, he argues, making today's market a buffet for value investors. However, with the recession still very real, investors must also focus their picks on earnings growth in recession-resistant areas, and be willing to move quickly to adapt to changing conditions.

Gerasimowicz has a history to back up his theories. He formerly headed international portfolio advisory groups at JPMorgan and Lehman Brothers, before founding Meditron Asset Management in 2003. As chairman and CEO, he overseas the firm's wealth-management and private-equity businesses, and its hedge fund.

Since Meditron Fundamental Value/Growth Fund's 2003 launch, the hedge fund is up a cumulative 36.1%, compared to the S&P's negative return over that period.

Below are some excerpts from his conversation with Barrons.com.

The stock market has seen a remarkable rally recently. How do you view the market recovery and the possibility of the end of the recession?

With respect to the current market, we are in a rather volatile situation. Not only from the equity markets, but from the economy. We still have a host of economic data suggesting that we are in a market decline, although of late the contraction itself appears to be moderating.

I feel that not only the U.S., but the entire world is still facing these one-step-forward, two-steps-backward type of announcements that seem to come every other day. And one could ask, are we now, through the bottom of the bear market?

I say by their very nature, bear markets are very difficult to fathom and understand, and I'm not certain that we are not going to retrace over the summer. We will have pullbacks. If you take a look at where it all began with the U.S. housing market, the consumer, the banking system, they are intact in the U.S.; however, we still are only beginning to see very small positive momentum in those area.

The housing market appears to be recovering, but much of that is still due to the purchase of real estate that is for sale at fire-sale or foreclosure prices, and consumers continue to be cautious. Bank balance sheets remain somewhat questionable, although the Federal Reserve, the Treasury and Congress are all attempting to stabilize bank balance sheets, so we are seeing some improvement.

Globally speaking, the treasuries of various countries and the leaders therein are actually being forced to increase the size of their budgets to further stimulate their own economies with injections of money. There's also quantitative easing that is ongoing, a terse economic term for printing money, which the U.S. and British authorities have been doing.

On the other side of it, you have deflation, beginning to rear its ugly head, and we could begin to see greater acceptance of monetary stimulus, quantitative easing, as there is no further room to cut interests rates. Just as the U.S. was the first economy to go into a decline, based on the fact that we have acted quickly, we will be the first to begin to come out of this.

Perhaps China will beat us out of the recession, because they have the ability to react much more quickly. We need to see freer credit, not only for the consumer but for business, and as we begin to see the credit markets free up, so then we will begin to see an expansion. I feel comfortable indicating that toward the last quarter of 2009 and into 2010 we will see a positive but barely gross domestic product number, perhaps at the 1% or 1.5% level.

How can investors navigate this kind of market?

You cannot be just an asset allocator or a buy-and-hold investor in this market. You have to do the fundamental analysis and deal with capital preservation instead of chasing returns. The fact is that just because a security is cheap, doesn't mean it is of good value.

You still have to examine balance sheets of companies, earnings growth, and ask: Are they well diversified? Do they have low debt? Are they in sectors that are recession-proof or those that will lead us out of a recession? And then, should the company decline, you have get out.

You have to not only deal with the discipline of a stop-loss mechanism, but at the same time make certain you execute. That is where most investors fall down, they don't want to sell in a disciplined way. And then when they finally do, the stock has gone so far away, they're selling at a bottom.

Can you name a company you like now, that fits these criteria?

Gilead Sciences (ticker: GILD) is a biotechnology company that deals with three areas: cardiovascular, respiratory, and the treatment of HIV/AIDS. Unfortunately, it appears that even in the U.S. HIV infection is rising again. We have about a million HIV-positive people in this country and 30 million worldwide.

About 55%-60% are being treated with HIV drugs, and if they aren't treated, then it progresses to become AIDS. With proper drugs you can live for a number of decades, and the earlier the treatment, the better. The number of patients on HIV-related drugs continues to grow. Gilead is the primary player in this field.

Four out of every five patients with HIV take one of Gilead's drugs. Their sales come mainly from the U.S., Europe and Japan. In Africa Gilead licenses their drugs to third parties, which sell at a lower price. Their profits for the first quarter jumped 21%, with a 22% increase in revenues.

They beat all estimates and reiterated 2009 forecasts. They have an excellent pipeline for hepatitis, hypertension and new classes of HIV drugs, and a solid balance sheet. Their shares should trend sharply higher.

Ralcorp Holdings (RAH) is another one of your picks.

Ralcorp is a leading food company that offers nearly everything: cereal products, salad dressings, jelly, corn chips. They also now own Post and they sell their products in virtually every retail outlet as well.

One of the things about the company is they are heavily involved in the private-label business, so if you go into a supermarket or a Wal-Mart that has a lot of its own store brands, most of them are produced by Ralcorp through private-labeling agreements. And those private-label sales should only increase.

Their earnings growth has been phenomenal, along the order of 40%, a lot of that is the Post integration. They continue to grow through acquisitions, they bought over 20 companies in recent years, and we believe their margins will continue to increase. Currently their price to earnings is only about 11 times, which is wonderful. Even during times like this, people love to eat. We think the company will advance in terms of earnings, and remain recession proof.

Q: Thanks for your time.

Source.

Though it's the largest packaged-food manufacturer in America, Kraft Foods (ticker: KFT) doesn't seem to get much respect from investors. The company boasts brands that are entrenched in American culture, from Nabisco crackers and Oreo cookies to Maxwell House coffee and Oscar Mayer processed meats.

For years Kraft was beleaguered by a bureaucratic operating structure and a stagnant pipeline. Many attribute these flaws to the corporate culture at former parent Altria Group (MO). Kraft went public in 2001 and Altria fully divested its stake in 2007. Kraft has been undertaking a massive turnaround to revamp its pipeline and create a more nimble corporate structure.

However, these gains have been offset by the run-up in the costs of the food maker's raw ingredients in the previous two years. And if that weren't bad enough, Kraft's move to raise prices to offset those costs hit store shelves as the economic situation significantly deteriorated in the second half of 2008.

As a result, Kraft shares have fallen 27% over the past 12 months to $22.87. By contrast, brand-name peers Kellogg (K) and General Mills (GIS) are down 25% and 19%, respectively in the past year.

Although it shares have underperformed its leading competitors, Kraft is a more compelling defensive play than the competition for one major reason: It carries a 5.2% dividend yield that is nearly twice the yield offered by the 10-year Treasury. As cash flow improves, Kraft could raise this payout. The yields at Kellogg and General Mills are in the mid-3% range.

Kraft "offers an appealing total return potential" with shares priced at around $20-$22, says Alan B. Lancz, president of Toledo, Ohio-based investment money-management firm Alan B. Lancz & Associates. The stock is trading "at a historic low, the yield is at a historic high and the expectations are low," he adds.

The stock is trading 12.1 times forward earnings estimates. Its norm is 14.5-16.5 times. Lancz has been shifting to a more defensive portfolio after successfully playing the rally in more cyclical names in recent months. He is expecting a slow, prolonged recovery and Kraft "is definitely more defensive" in this environment.

It doesn't hurt that Warren Buffett's Berkshire Hathaway (BRKA) is Kraft's largest shareholder, owning a 9.4% stake at the end of 2008. But you don't have to drink the Kool-Aid, which by the way is a Kraft product, to see the upside potential in the company's shares. Kraft has been making strides under its three-year turnaround plan started in 2007, which includes cutting costs, divesting assets such as Post cereals and creating synergies from acquisitions (of biscuit maker LU in Europe).

Notably, Kraft has carved out 20 business units with decentralized decision making. "We've taken off their shackles by blowing up the bureaucratic matrix," Chief Executive Officer Irene Rosenfeld said at a consumer conference earlier this year. Alexia Howard, an analyst at Sanford C. Bernstein, says the pipeline is starting to improve after it "was starved for years under Altria."

She names Kraft as her top pick in 2009 with an Outperform rating and $34 price target, pegging it as "a margin recovery story."

A recovery in operating margins, which had fallen from 21% in 2002 to 12.5% last year, along with the 230 basis-point improvement in gross margins in the fourth quarter excluding the impact of commodity hedging losses shows that Kraft is "already starting to see a turnaround," she adds. This turnaround will take time. Lower commodity costs will help ease margin pressure, particularly for dairy products.

Meanwhile, Kraft has talked candidly about its challenges. The company expects to earn $1.88 in 2009, in line with 2008 results, after taking into account a 40-cent headwind from a stronger U.S. dollar and pension costs. Nearly 60% of Kraft's sales are from the U.S., 25% from Europe and the rest from other regions.

The company's sales volume fell 5.2% in the fourth quarter of 2008 (from a year earlier), and management projected further declines in the first quarter of 2009, which will be reported in May, but these weak numbers are misleading. More than half of the fourth-quarter drop in the sales volume was due to a deliberate move by the company to get rid of underperforming brands.

Higher supermarket prices as Kraft passed on commodity prices have hurt sales volumes more than cash-strapped consumers trading down from premium priced goods to private-label alternatives, Howard notes.

Private-label products have a 21% share in categories where Kraft brands hold a No. 1 or 2 market share by a wide margin, compared to the industry average of 20%. Kraft is benefiting a bit from consumers trading down from premium products, says IBISworld industry research analyst George Van Horn. For instance, Maxwell House coffee gained market share for the first time since Kraft started tracking this data more than a decade ago.

About 40% of Kraft's U.S. sales are from products that have triple the market share as their next competitors, and 50% of its global sales are from products that have twice the market share of their largest competitors, says Howard.  Kraft has nine brands that each generate more than $1 billion in annual revenue and at least 50 brands each raking in greater than a $100 million a year.

The company has been strengthening its relationship with its major customers, Carrefour, Tesco and Wal-Mart Stores, and sharing marketing costs. As stores reduce inventory and cut shelf space, it is the middling players between Kraft and private-labels that are getting cut, notes Howard.

Kraft's turnaround won't be an overnight sensation. But until then, an attractive valuation and fat dividend will feed investors looking for a tasty return.

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Finally victorious over longtime archrival Circuit City Stores Inc., Best Buy Co. is now gearing up to fight an even more powerful foe: Wal-Mart.

Leading the challenge will be Brian Dunn, the company's chief operating officer, who takes over for retiring Chief Executive Brad Anderson in June. His new strategy is to head off Wal-Mart Stores Inc.'s brutal price competition by giving consumers something the discounter cannot: more interactive stores, where customers can step into the world of a new videogame or see their faces captured by a high-definition video camera, instead of trolling aisles stacked with merchandise.

Analysts expect Best Buy to pick up at least half of the business of Circuit City, which closed its doors earlier this month, a victim of management and sales miscues as well as the recession.

Mr. Dunn won't have time to celebrate. Wal-Mart has ratcheted up its once-tiny selection of big-brand television sets, videogames and mobile phones to become a fierce contender. The Bentonville, Ark., giant recently said brisk electronics sales fueled a market-leading 5.1% February rise in same-store sales, or sales at stores open at least a year.

Best Buy remains well ahead of Wal-Mart in U.S. electronics sales, but Wal-Mart is gaining in critical growth areas such as flat-panel TV sets, according to the Stevenson Co.'s TraQline service, which estimates market share. By contrast, Best Buy's sales have shrunk during the recession, and it has cut inventory to compensate, perhaps too sharply.

Best Buy same-store sales fell 6.5% in December 2008, and the company projects that fourth-quarter sales dropped 5% to 15%. Analysts expect Best Buy to report about a 20% decline in fourth-quarter earnings March 26, to $1.36 a share from $1.71 a year earlier, according to Thomson Reuters.

At a meeting of store managers from the Southwest earlier this month, managers complained to Mr. Dunn that they had lost sales of flat-panel TVs because of a lack of inventory, a sore point for the chief operating officer.

The 49-year-old Mr. Dunn hopes to leapfrog growing competition from Wal-Mart by transforming the retailer's stores into lively showrooms for the latest gadgets. A onetime Best Buy stereo salesman who has spent 24 years climbing the company's ranks, Mr. Dunn said he still believes that the best retail innovations come from front-line workers.

So before he succeeds Mr. Anderson, he has embarked on a tour of stores in search of inspiration for his remodeling plans, which he sees as a way to differentiate Best Buy from competitors such as Wal-Mart and Amazon.com.

"We want our stores to morph into a series of experiences," he said as he walked through a Dallas-area Best Buy directly across the street from a Wal-Mart and Sam's Club. "To do that, you have to go where the rubber meets the road, the sales floor," he added.

Focusing on showmanship and service to combat Wal-Mart's low-price draw is risky in a recession where consumers are clamoring for no-frills bargains. But Mr. Dunn said he intends to win customers by matching Wal-Mart on prices, and then offering something more, building on Best Buy's existing strategy of helping customers navigate increasingly complicated technology. The key will be making the most of Best Buy's tech-savvy sales force, he said.

"Wal-Mart is trying to copy us," Mr. Dunn, who had visited some of Wal-Mart's new prototype stores in Arkansas days earlier, told the store managers' conference. "But there is one thing nobody can copy, and it's this," he said, grabbing a Best Buy employee who was wearing one of the company's blue polo shirts.

Mr. Dunn, who never went to college and jokes that he was schooled at the university of retail, joined Minnesota-based Best Buy in the Twin Cities in 1985, and quickly caught the eye of superiors by using the soundtrack from "Miami Vice" to help sell stereos and Zenith television sets.

Mr Dunn was promoted to store manager in 1989, to district manager a year later, and to vice president of East Coast operations in 2000. He was named head of North American retail in 2002 and COO in 2006, making him the anointed successor to Mr. Anderson.

"Brian's particular gift is that he is genuinely interested in the blue-shirts as people, and they can tell," Mr. Anderson said. "What that gives you that a lot of leaders miss, is that you understand what is happening in an organization on a more granular level."

Mr. Dunn hasn't always agreed with some of the ground-breaking changes at Best Buy; most notably, he opposed the 1989 decision to do away with commissioned sales in favor of salaried staff, which was widely opposed by sales workers who feared losing income.

He now concedes it was the most important shift in company history, lowering worker costs and changing the core model of electronics retailing. Best Buy expanded across the U.S., and Circuit City eventually followed by eliminating sales commissions. Executives who have worked alongside Mr. Dunn said he can think broadly as well as deliver practical results.

Right now, retailing needs leaders who can guide companies through troubled times, not visionaries, said Advance Auto Parts Inc. Chief Executive Darren Jackson, a former Best Buy vice president who worked with Mr. Dunn. "Brian is someone who can still command respect from the rank and file."

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Facing the worse year for stock dividends since World War II, Judith Saryan holds firm to her mantra, "Dividend-paying stocks are good, but dividend-growing stocks are even better."

Finding them, however, means digging into a lot of balance sheets and debt covenants, says the 54-year-old co-manager of the Eaton Vance Dividend Income Fund (EDIAX).

Saryan says fewer companies will increase cash payments to shareholders in this year, choosing to conserve cash. In fact, Standard & Poor's predicts that dividends paid by companies in the S&P 500 index will plunge 22% in 2009.

Already this year, Pfizer (PFE), General Electric (GE), Dow Chemical (DOW), U.S. Bancorp (USB) and other venerable dividend payers have announced dividend cuts totaling $35.9 billion.

Still, income-hungry investors can find "good dividend plays in every sector," Saryan says.

Founded in 2005, Saryan's fund has fallen 20% in value so far this year. Still, its annualized performance has beaten the S&P 500 index for each of the last three years.

Here are some excerpts from our recent conversation with Saryan:

Barrons.com: Given all the turmoil over the last year, are dividend-paying stocks still good investments?

Saryan: Traditionally, a dividend strategy lowers the variance and the volatility in any portfolio, and provides investors with a consistent income. That's a nice feature in this sort of environment. But while dividend-paying stocks are good, dividend-growing stocks are even better. Companies that hike their dividends send out a strong signal about their financial health.

Q: Many high-profile companies have cut or eliminated their dividend. What do you expect in the coming year?

A: The environment remains a tough one, especially in the financial sector. Companies will trim dividends because they need cash and want to avoid the capital markets. Even companies with lots of cash, and the ability and wherewithal to increase their dividend will take their time before making a decision. Plenty of companies will continue paying dividends, and some will hike them, though fewer than we've seen in past years. Finding these names requires looking at income statements, and balance sheets.

Q: What specifically do you look for?

A: The easiest thing to find on a balance sheet is cash. Also important is the amount of cash generated by the business, or cash flow. But we also look at the amount of debt, and then drill down into the debt covenants to see when the bonds are due to mature. If a lot of debt is maturing soon, the company may choose to hoard cash.

Q: Do you prefer high yields?

A: Don't look for the high yields because they can be the most distressed companies. We prefer names with lower yields and good prospects for hiking dividend payments. We try to avoid cyclical companies with yields of 6% or higher, though we will look at companies with steady, recurring revenue streams, such as utilities, that yield over 6%.

Q: Should a company raise its dividend if profits aren't growing?

A: It can be a reasonable decision if the company has hit a temporary pothole caused by the economy, if there's lots of cash on the balance sheet and management has reason to remain confident in its future. Rewarding shareholders in tough times is a particularly good idea because it may be the only return an investor gets. One note of caution: If a company borrows money to pay a dividend, it's a red flag.

Q: How has your portfolio changed in the current environment?

A: We reduced our exposure to financials in the last year. We do hold financial stocks, primarily insurance companies with business models that have gained our confidence. But our exposure to banks is limited due to worries about the earnings and cash flow, the balance sheet and assets on the balance sheet.

Northern Trust (NTRS) is our biggest bank holding, and it has a very defensible business model. It doesn't lend money or invest in questionable mortgage securities. Instead, it receives fees for managing investment portfolios, and thus has managed to circumvent the balance-sheet problems facing many banks.

Northern's decision last month to return $1.6 billion in TARP funding is a good sign because it means that they don't need the capital. The company hasn't raised its quarterly dividend since October of 2007. But the payment has remained steady at 28 cents a share and given time Northern will be in a position to hike it.

[Editor's Note: On Feb. 27, Northern Trust announced that it would repay a $1.6 billion federal bailout loan as quickly as possible, responding to lawmakers who criticized the company for sponsorship of parties and concerts at a professional golf tournament last month. Company officials said the bank acted within government guidelines by sponsoring the tournament and insisted no Troubled Asset Relief Program money was used to fund the event.]

Q: What financial stocks should investors avoid?

A: Be careful with European banks. Many have too much debt. In fact, looking across Europe, I don't think any banks have balance sheets that leave me feeling comfortable.

Q: Once, financials were a place to go for decent dividend stocks. What sector has taken their place?

A: Telecom has strong dividend potential thanks to strong balance sheets and a consistent revenue stream fueled by consumers who pay them monthly for their services. AT&T (T) and Verizon Communications (VZ) are two of the best names, generating consistent cash flow. AT&T hiked its dividend in January, while Verizon should hike its payment as much as 7% this year.

Vodafone Group (VOD) has an even better dividend-growth profile. We expect the company to raise its dividend 10% in June.

Q: What other names do you find attractive?

A: Wal-Mart Stores (WMT) is increasing sales in a very tough environment by luring shoppers with its low prices and a wide assortment of merchandise. The company just raised its dividend 15%, which is ahead of our expectations for operating earnings growth this year.

Q: What other sectors or stocks should dividend investors fear?

A: Aflac (AFL) worries our analysts. It's been a good dividend name. However, its balance sheet includes a lot of hybrid securities from European banks, which are fixed-income securities similar to preferred stock. We worry that many European banks will not be able to pay the dividend on these securities, and the securities will lose value.

Q: The fund has a high yield. Why?

A: In part, because we employ a "dividend capture strategy," which means we use a small percentage of the fund to purchase positions in companies that are about to pay their dividend and then we move on. It's a way to enhance the fund's yield. We have done it very judiciously, and will keep using the strategy. But I don't recommend it for ordinary retail investors. Success depends on properly timing the purchase and sale.

Q: Can you find good dividend-growing stocks anywhere?

A: I think every sector has a good dividend play, though the information-technology sector can be tough. The sector doesn't traditionally pay as much in dividends as other sectors. But we do like IBM (IBM). The company will raise its dividend about 20% this year.

Q: Thank you for your time.

Source. Subscribe to Barron's. Eaton Vance Dividend Income Fund.

Add another item to the list of daft ideas from the hedge fund boom: single-stock funds. The performance of Pershing Square Capital’s souped-up bet on US retailer Target should bury any argument for investments of this kind. They looked like silly ideas even when markets were rising. In a bear market they’re downright toxic.

Pershing Square, led by Bill Ackman, raised some $2bn two years ago to invest in a single company whose name was not disclosed. The fund then bought up to 13% of Target, including call options which would have ginned up returns had the stock risen.

But Target, like all retailers dependent on the American consumer, has been hard hit. Fold in the leverage provided by the fund's use of options, and Ackman’s investors have suffered an extra wallop. The fund sunk by a third last month and is down 93% since it was formed, Bloomberg reports, citing an email sent to investors.

Had the stock surged, investors would have enjoyed outsized gains. So would the fund manager by not having diluted the one-way bet with any others that might not have performed as well. In the perverse “heads I win, tails you lose” of the hedge fund industry’s boom-times, this was a big motivation for a single-stock fund.

But don’t cry for investors who foolishly abetted the Target fund. After all, they handed some $2bn over to Pershing Square in 2007 solely on the notion it would wager on a single iconic US stock. That’s not unlike the prospectus for a certain South Sea Company, which in 1711 solicited funds from investors for an undertaking of great advantage, but nobody to know what it is. 

Source.

Although its largest rival has bitten the dust, Bed Bath & Beyond could still short-sheet investors. The stock is down 50% over the last two years as the recession and a busted housing market dragged down profits. But it could easily fall further in the months ahead.

To be sure, Bed Bath is a well-run retailer, with plenty of fans on Wall Street who expect the housewares emporiums to inherit many customers from the now bankrupt Linens 'n Things, which finished closing stores last month. It's clear that analysts have overestimated how much business Bed Bath will actually gain from its fallen competitor. And that could dash widely held hopes that profits will start growing again later this year.

"This is a great company, but not a great stock," says Christopher Horvers, an analyst with J.P. Morgan Securities. "The valuation is expensive. The Street's earnings for the coming year are still too high, and they expect too much from the demise of Linens 'n Things."

His is not the only cautious voice on the stock. Goldman Sachs cut its rating to Neutral last month. Piper Jaffray expects the share price to drop 25% over the next 12 months to $16. As of Feb. 13, the short position exceeded 31 million shares, or 12.6% of Bed Bath's float.

"I wouldn't buy right now," says David Abella, a portfolio manager for Rochdale Investment Management. "Retail sales could get worse. Meanwhile, consumers are trading down, and Bed Bath is not where shoppers go for deep bargains."

Founded in 1971, Bed Bath is the nation's biggest merchant focused on home furnishings, a fragmented $124 billion retail market that includes Pier 1 Imports, discount giant Wal-Mart Stores, home-improvement emporium Home Depot and department stores like Macy's and J.C. Penney.

Bed Bath also runs the Christmas Tree Shops chain of stores, the Harmon and Harmon Face Values beauty-supply stores and a string of baby stores. The company gets 90% of its revenues from its more than 900 flagship Bed, Beth & Beyond stores and controls 6% of home-furnishing sales, according to J.P. Morgan's Horvers.

For years, it was a success story. New stores, enviable margins and a strong housing market fueled double-digit profit growth. Bed Bath lured shoppers with coupons offering up to 20% off a single item in stores. And customers often spent more than they initially planned, says George Van Horn, a senior analyst with IBISworld, a market research firm.

Cash-strapped consumers are now focused on buying basics and hunting for bargains. That's been a big boon for Wal-Mart and other discounters. But Bed Bath has never cultivated an image as a place to find bargains, says Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm.

Department stores, meanwhile, are discounting like mad. And liquidation sales at Linens 'n Things last year lured lots of shoppers away from Bed Bath. As a result, same-stores sales are expected to fall around 2.5% during the fiscal year scheduled to end on Feb. 28 (this Saturday). And profits should fall for the second consecutive year to $1.53 a share.

Bed Bath has assured investors that it will gain market share now that Linens 'n Things has closed its doors. The Street expects profits to stay almost flat in the coming fiscal year, which ends in February 2010, with quarterly earnings finally starting to climb again later this year.

Neely Tamminga, an analyst at Piper Jaffray, says those estimates imply that Bed Bath will gain 46% of the $1.7 billion in sales that belonged to Linens 'n Things. That accounts for about $786 million, out of the $7.4 billion in revenues Bed Bath is expected to generate in the next 12 months.

However, if shoppers instead flock to discounters, Bed Bath stands to gain just 10% of Linens 'n Things' sales, or $170 million, Tamminga says. If that's true, Bed Bath's same-store sales could fall 1.6% in the coming year and operating profits could fall to $1.42 a share, she adds.

Either way, the stock is no bargain. Based on consensus earnings estimates for the next four quarters, the stock trades at 13.7 times forward profits, a 13% premium to the broader stock market. And based on Tamminga's estimates, the stock trades at 15 times forward earnings.

Bed Bath's prospects could be stronger than we think. Thanks to conservative management, the company has no long-term debt and a pile of cash. It's still opening new stores, though at a slower pace, and controlling costs.

The stores are popular. And bulls say that if the economy and housing market turns around, the company remains well positioned to cash in when shoppers loosen their purse strings.

Those are very big ifs. Investors could end up getting soaked. So to avoid buyer's remorse, leave Bed Bath for another time.

Source.

On commercials, Target (TGT) promises its customers: "This is a brand new day." With the stock down 58% since July 2007, the retailer's shares may eventually deliver on the same promise.

Once fueled by shoppers looking for "cheap chic," Target's sales and earnings have fallen victim to the recession, causing heartache for fans of the stock including hedge-fund manager William Ackman, whose Pershing Square Capital Management suffered losses betting on the stock in 2007 and 2008.

Though it's the nation's largest discount retailer behind Wal-Mart Stores (WMT), Target isn't viewed by shoppers these days as the place to go for the cheapest prices. Wal-Mart, by contrast, has been a solid performer in this recession: Its stock has bested most retailers over the past year. But with multiples bouncing off five-year lows, Target offers a compelling opportunity for patient investors with a long horizon.

"Rarely do you see a best-of-breed retailer with a brand and operations like Target's at this kind of a value," says Robert Drbul, an analyst with Barclays Capital. "Their weakness is entirely due to the economy. They are taking steps to mitigate the downside of the recession. So at these levels, the stock looks attractive." At $29.46, the share price already reflects a bleak year ahead. And if falling profits start climbing again in 2010, as expected, Target's share price should climb nicely in the next few years.

Even Ackman seems willing to bet on the stock's long-term prospects, despite the embarrassing performance of Pershing Square IV, a hedge fund that invested solely in Target, mostly using stock options to wager that the share price would rise. According to a recent regulatory filing, Pershing Square has a 9.7% stake in Target, and Pershing Square IV's portfolio was recently restructured using longer-dated options that expire in January 2011.

Ackman declined to comment for this story, but assured investors in a recent letter that "We will ultimately be successful in our investment in Target." Since the first store opened in 1962, Target has grown into a chain of 1,681 stores that control 1.9% of U.S. retail and food sales.That's a far cry from the 7% controlled by Wal-Mart.

But under former Chief Executive Bob Ulrich, Target reinvented the discount store. Employing "upscale discounting," Target became a purveyor of well designed, trendy merchandise. And with its slogan "Expect More. Spend Less," it lured more affluent shoppers, and grew profits fast. But changing shopping habits have hurt Target, which gets 40% of its sales from clothes and home décor.

Now, consumers are buying basics and bargain hunting. But the perception that Wal-Mart has cheaper prices is inaccurate, says Mark Cohen, a retail expert and marketing professor at Columbia Business School.

"Wal-Mart has always marketed aggressively that it's the lowest price in town, while Target has just started focusing on cheap prices," Cohen says. "But in market-basket comparison, the two retailers are competitive." Target's credit-card portfolio continues to suffer amid rising delinquencies and net charge-offs.

The result i that the Street expects a 14% drop in profits generated during the fiscal year that ended on Jan. 31, and sees another 11% decline this year to $2.56 a share. Target has shifted its advertising to emphasize value, enlarged its food section and tightened the availability of credit. It's opening fewer new stores, and recently announced job cuts. Late last year, the company suspended stock buybacks.

And under pressure from Ackman, the company sold half of its credit-card receivables to JPMorgan last year for $3.6 billion. Target, however, rejected a proposal to free up cash by placing the land under its stores into a spinoff real-estate investment trust that would then lease it back to the retailer.

"It was the right decision," says Cohen, the former chief executive of Sears Canada, arguing that adding to operating expenses "without knowing if they are going to face one, two or three years of operating difficulties is crazy." Analysts expect operating profits to rise 19% to $3.06 a share in the fiscal year that ends on Jan. 31, 2011. The stock, meanwhile, has fallen into the bargain bin.

At 12 times forward earnings, the stock trades in line with the Standard & Poor's 500, well below a historic average of 17 times forward earnings. And Chris Armbruster, a senior analyst at Al Frank Asset Management, recommends buying Target at its current price. He predicts the stock could hit $48 a share in three to five years. At that price, the stock would be trading at 13.7 times the $3.50 a share Target should earn in three years.

"The fundamentals won't look terribly positive for a while, but if you are buying with a long-term horizon, the value will bear out over time," Armbruster adds. Of course, like other retailers Target faces serious headwinds, and the stock could fall even more -- at least in the near term.

No one knows for sure when the economy will rebound. Consumers may cut back on purchases for longer than most people expect now, as they see the growing ranks of the recently unemployed. Bad credit-card loans remain a burden. But the old adage says that patience is a virtue. And at these multiples, investors willing to wait may find Target a well-tailored fit.

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Microsoft plans to open retail stores to peddle its wares in competition with Apple’s hip outlets. But the software giant’s focus on software, rather than cool gadgets like the iPhone, will make it difficult to generate the same level of buzz.

It’s easy to see why Microsoft wants to follow Apple’s foray into retail. Apple’s roughly 250 outlets brought in hefty average revenues of $30m per store last year. And they’re great advertising. Many Apple stores, like its flagship outlet on New York’s Fifth Avenue, have become tourist destinations.

Microsoft does produce the popular X-Box video game console and the struggling Zune music player. But these are sideshows to the company’s software business. Unfortunately, software is just less sexy than hardware – and Microsoft’s offerings are hardly exciting enough to draw in gawkers and computer nerds, the way Apple’s stores do. Also, most sales of Microsoft’s flagship operating system come pre-installed in computers. Selling PCs from manufacturers like Dell or Hewlett-Packard could hurt sales at the retail chains it currently depends on, like Best Buy.

Meanwhile, there are indications that the company’s grasp of “cool” is somewhat tenuous. It hired 25-year Wal-Mart veteran David Porter to head the retail venture. Apple’s retail boss, Ron Johnson, had been with Wal-Mart’s hipper competitor, Target.

Microsoft’s stores could aim for a different demographic than Apple and become a magnet for PC buyers. That would position it well for the much anticipated launch of Windows 7, its forthcoming operating system. But to succeed like Apple, the company will have to work hard to overturn its image as a dull monopoly.

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