In last week's preview we took a peek at expectations for Campbell Soup earnings, but now the company is scheduled to report fiscal fourth quarter results this coming Thursday. With Krispy Kreme also among the handful of companies scheduled to report this week, we may yet see whether consumers are turning to comfort foods in these uncertain times.
Campbell Soup Co. (NYSE: CPB), the world's biggest soup maker, is still expected by analysts surveyed by Thomson Financial to post net income of 25 cents per share (up 44.0% from a year ago) on revenue of $1.7 billion (up 7.4%). The Camden, N.J.-based company has just missed earnings estimates in the past few quarters. Its long-term EPS growth forecast is 7.9%, which is less than the industry average, but about the same as rivals Kraft Foods (NYSE: KFT) and HJ Heinz (NYSE: HNZ). The analysts' consensus recommendation is currently to buy Campbell.
Hip, Canadian apparel retailer Lululemon Athletica Inc. (NASDAQ: LULU) is also anticipated to be a big earnings gainer when it reports this week. Net income is expected to come in at 13 cents per share (up 46.2% from a year ago) on revenue of $88.2 million (up 50.3%). Lululemon met expectations when it reported 12 cents per share in the previous quarter. Its long-term EPS growth forecast is a healthy 40.2%, which is better than the industry average and that of rival Under Armour Inc. (NYSE: UA). The analysts' consensus recommendation is currently to buy Lululemon.
Here's a peek at what analysts surveyed by Thomson Financial are expecting from companies scheduled to report quarterly results in the first week of June, 2008.
The following companies are expected to post earnings growth, compared to the same period in the previous year:
Take-Two Interactive (NASDAQ: TTWO) up 136.6% (from a loss) to $1.12 per share, on $499.1 million in revenue
Lululemon Athletica, Inc. (NASDAQ-LULU), a yoga-inspired athletic apparel company, is scheduled to report Q1 EPS on June 2:
LULU call option volume of 1,935 contracts compared to put volume of 2,577 contracts. LULU June call option implied volatility was at 80; put implied volatility was at 90; above its 26-week average of 73 according to Track Data, suggesting large price movement. Puts are priced higher than calls because LULU is difficult to borrow.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
MOST NOTEWORTHY: Lululemon, National City and Devon Energy were today's noteworthy upgrades:
Thomas Weisel upgraded shares of Lululemon (NASDAQ:LULU) to Overweight from Market Weight as they believe the company's momentum continues following the strong results; the firm maintains a $43 target on shares.
Bear upgraded National City (NYSE:NCC) to Outperform from Underperform citing favorable risk/reward following reports is is considering a transaction with KeyCorp (NYSE:KEY).
JP Morgan raised Devon Energy (NYSE:DVN) to Overweight from Neutral citing solid organic growth with high rates of returns.
OTHER UPGRADES:
Micron (NYSE:MU) was upgraded at Goldman to Neutral from Sell.
Merrill raised eBay (NASDAQ:EBAY) to Buy from Neutral.
MOST NOTEWORTHY: DiamondRock Hospitality, Pzena Investment and Vodafone were today's noteworthy upgrades:
DiamondRock Hospitality (NYSE: DRH) was upgraded to Outperform from Neutral at Baird, citing the newly-announced 4.8M repurchase plan, strong balance sheet and valuation.
Keefe Bruyette upgraded shares of Pzena Investment (NYSE: PZN) to Market Perform from Underperform after the company announced February ending AUM.
Goldman added Vodafone (NYSE: VOD) to its Conviction Buy List following the recent weakness as they expect the company to benefit from growth in wireless data.
One of the first things you learn in economics is that incentives matter -- and that if you get the incentives wrong, the results can be, well, interesting. Exhibit A: the subprime mess.
In an interesting column in this weekend's Wall Street Journal, Herb Greenberg writes (subscription required) about Lululemon (NASDAQ: LULU), where the terms surrounding options grants put top executives in a position to serve the private equity backers rather than other minority shareholders who bought the shares during or after the IPO -- at a much higher price.
In the case of Lululemon, CEO Robert Meers saw some of his options vest based on when the private equity backers cashed out. According to Greenberg, "The vested amount would immediately leap to as much as 40% if private-equity investors sold; the actual amount was based on a sliding scale tied to how much they actually made."
Options that vest based on some sort of performance are great. But I'm skeptical of options that vest based on when private equity backers who paid a tiny fraction of what other investors paid for their stake in the company cash out.
I'm wary of companies taken public by private equity firms in general. The buyout shops are masters of the art of "buy cheap and sell dear," and "buying dear" tends to be a great way to lose money in the stock market.
Berkshire Hathaway (NYSE: BRK.A) vice chairman Charlie Munger once said that "It's a finite and very competitive world. All large aggregations of capital eventually find it hell on earth to grow and thus find a lower rate of return ... The one thing we've always guaranteed is that the future will be a lot worse than the past."
An apparel company with a red hot product line and booming growth would appear to be a prime target for Munger's wisdom, and the wolves appear to be circling around Lululemon's (NASDAQ: LULU) high-margin business.
According to the Globe & Mail, companies including Roots, La Senza, Nike and, most recently, Calvin Klein, are all trying their hand at high-performance yoga clothing. The piece quotes Robert Gibson, head of research at Octagon Capital Corp.: "Look out, Lululemon. Everyone is getting into the act." Lululemon's success "has made everyone realize there is money to be made in 'performance' clothing. Anyone who can will get into the act. ... More competition is not a good thing."
Whether Lululemon has the chops to stay ahead of very savvy, well-funded competitors remains to be seen. But this is probably the biggest risk factor that the company's shareholders need to be on the lookout for.
Fellow writer Zac Bissonnette highlighted the interesting (but somewhat controversial) story in American Apparel (AMEX: APP) about a week ago. He did a good job of explaining the company itself as well as the perverted CEO.
Although I think the questions surrounding the CEO's "lifestyle" are pertinent, I think they should be overlooked in favor of getting a piece of this high growth name at such an opportunistic time to buy. In short, I think the stock makes sense after a recent pullback.
Fundamentally, American Apparel appears very confusing at first. The older generation of readers is probably very baffled as to why a company that sells light-colored, tight fitting clothes is in the middle of a humongous growth cycle, understandably so. However, I'm more aiming this post towards those members of the younger generation who know just how powerful this concept is.
Brenda Buow of the Globe and Mailtakes a look at the company: its rapid growth, unique products, and unique corporate culture that incorporates New Age concepts like the Law of Attraction. The main challenge for Lululemon seems to be converting its huge success in Canada into the U.S. market -- a move that many companies have failed at.
To be sure, there's a lot to like about Lululemon; the clothing is wildly popular and the company appears to be carving out a strong niche.
But what about the bear arguments? Many Lululemon shareholders have dismissed the red flags Herb Greenberg has raise about resumes as immaterial. And they're absolutely right: Whether Meers left Reebok in 1998 or 1999 will have no effect on Lululemon's future growth.
But with a fast-growth company, management integrity is of paramount importance -- material importance. There appear to be good reasons to doubt Meers' integrity, and his apparent deflection of Greenberg's questions is another red flag.
Citigroup Incorporated (NYSE: C) recently received an unexpected call from a "prominent investment banker" inquiring about a merger with Bank of America Corporation (NYSE: BAC); it was rejected outright, and Citi instead turned to the Abu Dhabi Investment Authority, a part of the Abu Dhabi government, for a $7.5B cash infusion, the Wall Street Journal reported.
As ethanol demands forced up food prices, and with questions about its capacity to be a significant oil substitute, demand has slowed, according to the Wall Street Journal, which doesn't help the prospects of newly public companies such as VeraSun Energy Corporation (NYSE: VSE) and Pacific Ethanol Inc (NASDAQ: PEIX).
The Financial Times reported that the SRM hedge fund increased its stake in British bank Northern Rock to 8.5% yesterday, probably in order to block Virgin Group from taking over the lender. SRM and RAB Capital, with a combined stake in Northern Rock of more than 15%, are backing a rival bid for the bank by British private equity fund Oilvant.
OTHER PAPERS:
A federal agency has subpoenaed Countrywide Financial Corporation (NYSE: CFC), in an attempt to determine whether the company abused the bankruptcy system in two Florida foreclosure cases, according to the New York Times.
WEB SITES:
MarketWatch's Herb Greenberg believes Lululemon Athletica Inc (NASDAQ: LULU) CEO Bob Meers may have "exaggerated a bit" about his job history. While it's true Mr. Meers was employed by Reebok International, he was not president and CEO of the brand for the length of time he stated, nor was he the president of the Rockport shoe and Greg Norman brands.
According to the New York Times, "Kmart said yesterday that it would remove all jewelry advertised as 'lead free' from its shelves after workers at lead monitoring programs who tested the pieces found that some actually contained high concentrations of the metal."
One charm labeled lead-free was 52% lead. What is interesting here is that it raises questions about how much responsibility companies have about products that they source from third-party manufacturers.
Lululemon Athletica Inc. (NASDAQ: LULU) ended up embroiled in a minor scandal after a New York Times piece found that products the company was selling (the material in question was manufactured by a third party) -- labeled as containing seaweed -- actually contained no seaweed. While it sent the stock down as much as 9%, the share price ended up closing higher on the day of the story. Lululemon has since put out a press release refuting the New York Times claim, saying that its products actually do contain what they say they contain.
The legal issues could be murky. But these companies know that consumers aren't going to want to shop at stores in which products are labeled in a misleading way, and so they're taking steps to evaluate manufacturers' claims -- before the New York Times does.
As Peter Cohan discussed earlier, shares of Lululemon Athletica (NASDAQ: LULU) awere down more than 8% [earlier] today. A New York Timesarticle mentioned that the seaweed content of Lululemon products, which are labeled as being made of 24% seaweed, is actually 0%.
According to newspaper, "The Times commissioned its test after an investor who is shorting Lululemon's stock - betting that its price will fall - provided Chemir's test results to The Times."
Short sellers get a lot of grief, but this story provides evidence of why I respect their research so much. Sell-side analysts operate on a research method based on trust; they generally parrot the claims made by management, and have well-deserved reputations for downgrading stocks after they lose most of their value.
The New York Times reports that a short-seller of Lululemon Athletica (NASDAQ: LULU) shares suggested that it test its clothes for seaweed content. The result -- 0% -- proved profitable for the short-seller. Lululemon Athletica shares have lost 10% of their value in premarket trading.
Why would the seaweed content of Lululemon Athletica's products affect the value of its stock? Because Lululemon claims that its clothes are 24% seaweed fiber. On being found out, Lululemon CEO Dennis -- call me Chip -- Wilson's comment was priceless: "If you actually put it on and wear it, it is different from cotton. That's my only test of it."
Due to accelerating losses at its American consumer-lending unit, HSBC Holdings PLC (NYSE: HBC) said it would take $3.4B in charges during its Q3, the Wall Street Journal reported. Despite the charges, the company said its Q3 operating income was up compared with the prior year due to revenue growth in the group.
Lululemon Athletica Inc (NASDAQ: LULU), a standout performer on Wall Street, is reportedly under fire for potentially false claims of its VitaSea clothing line, which the company says is made from seaweed fiber supplied by SeaCell. According to lab tests, the New York Times reported there was no significant difference in the mineral levels between regular cotton T-shirts and Lululemon's VitaSea fabric.
In last week's preview we took a peek at expectations for Campbell Soup earnings, but now the company is scheduled to report fiscal fourth quarter results this coming Thursday. With Krispy Kreme also among the handful of companies scheduled to report this week, we may yet see whether consumers are turning to comfort foods in these uncertain times.
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Fellow writer Zac Bissonnette 
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As Peter Cohan 
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