During summers and winters in the early 1990s, I used to work for Williams-Sonoma (NYSE: WSM). In many ways, it was a dream job. I was paid to talk about cooking, learn about cooking and demonstrate cooking tools. One day, however, it occurred to me that, as much as I loved adopting a slightly condescending air when selling high-priced kitchen items, there really was a problem with the products that I was hawking. That afternoon, I talked an older woman into buying a "Tuscan grape drainer" as a gift for her niece's wedding. As the woman left the store, I realized that I had just convinced her to shell out $49.95 for what was, essentially, an earthenware bowl with holes in it and a couple of grape decals stuck on top.
As much as I like cooking, I have to acknowledge that nobody really needs a berry spoon, an asparagus peeler, a corn shucker, or most of the numerous other items that Williams-Sonoma hawks to its customers. The store is, in its own way, comparable to Sharper Image, Wilson's, or any number of the other specialty niche retailers that are finding it so difficult to weather the recession. Recently, in an attempt to lure shoppers into its premium stores, the retailer reduced prices massively, cutting into its profit margin and producing a 42% drop in fiscal first quarter profits.
As some analysts have noted, part of William-Sonoma's problem is that it is supporting an expensive catalog division that isn't really pulling its own weight. Moreover, as shipping prices continue to increase, it is likely that the company will see its catalog sales continue to decline. However, this is only half the issue: while most stores are feeling the recession pinch, it is hitting specialty retailers particularly hard. As Linens N' Things, Sharper Image, Wilson's Leather, and other companies could certainly attest, it's not a good time to specialize. Or, to put it another way, in this economic climate, people are using colanders to drain their grapes.
And who's next on the block? Well, have you taken a peek at the Gap (NYSE: GPS) recently?
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
How did we get here anyway? Housing and construction companies have been crushed as the bubble burst and now investors have to make a critical decision. Do you stay and hope for a recovery or bag it and move to another position that has the potential to provide better returns?
The problem is simple to explain: Most investors hate taking a loss. In fact, most investors will look to get "even" before they sell and this attitude usually leads to greater losses, anxiety and poor decisions. The truth is that much of this can be avoided with proper risk management techniques. If any of this describes you, then consider developing a plan for risk management and a discipline that will help to protect your hard earned principal. Now, more than ever, investors need a plan. We all need a plan that includes well developed risk management disciplines, which is why I dedicate a full chapter to it in my book, The Disciplined Investor.
Monday, June 2
The week begins with the 10 am release of construction spending and the ISM Index. Construction spending is expected to continue to be weak as is the ISM.
Then we have a few housing-related earnings releases that should be of interest. Watch NCI Building Systems Inc. (NYSE: NCS). This company is engaged in manufacturing and marketing of metal products for the nonresidential construction industry. Terrific! This is a company that is suffering along with the entire construction sector...that is for sure. In fact, they company lowered the outlook for the remainder of the year back in March. It stands to reason that not much is better. The ace in the hole is the recent trend of lowering expectations and then coming out with an earnings beat. Even so, this has too much potential for problems and the sideline is a good vantage point to watch the earnings announcement, which is expected to come in with a PROFIT of 31 cents per share on $365 million of revenue. (Uh...That I would like to see.)
MOST NOTEWORTHY: Motorola, Williams-Sonoma and Synchronoss were today's noteworthy downgrades:
Thomas Weisel downgraded Motorola Inc (NYSE: MOT) to Market Weight from Overweight based on the general uncertainty in the company's core markets and the likelihood that the spin off may not occur for several quarters.
Piper believes Williams-Sonoma Inc (NYSE: WSM) faces a challenging environment, and their checks reveal weakness at Pottery Barn. Shares were cut to Neutral from Buy.
ThinkPanmure downgraded Synchronoss Technologies Inc (NASDAQ: SNCR) to Accumulate from Buy. The firm expects a strong Q1 report but expects shares to sell-off following the Q1 conference call due to modest guidance and the lack of a major customer win announcement.
UBS initiated Interpublic Group (NYSE: IPG) and Omnicom Group (NYSE:OMC) with Buy ratings and an $11 target and $62 target, respectively. The firm views valuation as attractive.
Williams-Sonoma, Inc. (NYSE: WSM), parent of the eponymous chain for discerning chefs and the Pottery Barn brand of home furnishings and domestics, roared to a 10% drop in Tuesday's session after reducing its fourth-quarter and full-year earnings outlooks.
It appears as though the malaise that washed over American consumers in the 2007 holiday shopping season had an impact on WSM as well. Same-store sales in the nine-week holiday shopping period ended December 30 were down 0.4%, with notable weakness in the home-furnishings area. The company now expects same-store sales in the fourth quarter to be flat to down 1.5%, down from an earlier expectation for an increase of 0.5% to 2.5%. Reuters reported that company CEO, Howard Lester admitted "...the macro environment did weaken and traffic slowed even further than we anticipated" in the fourth quarter.
Naturally, sales numbers have a profound impact on the bottom line, so these sinking figures trickled down to effect per-share earnings expectations. WSM reduced its projected range for the fourth quarter to $1.11 to $1.14 per share, on revenue of $1.36 billion to $1.39 billion. This is below earlier expectations for per-share earnings of $1.19 to $1.25 on revenue of $1.39 billion to $1.42 billion. Based on these previous targets, analysts were estimating per-share results of $1.20 per share on $1.39 billion in sales, according to Reuters.
Gap Stores (NYSE: GPS) is expected to report EPS on November 21. GPS December option implied volatility of 41 is above its 26-week average of 32 according to Track Data, suggesting larger price risk.
Williams-Sonoma (NYSE: WSM), a home-furnishings retailer, is expected to report Q3 EPS of 24 cents on November 15. RBCM says, "Macros very difficult; too soon for longs, but scarcity value could increase." WSM November 30 straddle is priced at $2.80. WSM December option implied volatility of 55 is above its 26-week average of 38 according to Track Data, suggesting larger price fluctuations.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
It is possible to pick up a few home furnishing accessories at most any department store, but the list of well-recognized chain store specialists in that arena is rather exclusive. There is a San Francisco outfit that very likely ranks near the top of any such list.
Williams-Sonoma (NYSE: WSM) is a specialty retailer of home products. The firm operates about six hundred North American stores, offering culinary and serving equipment, home furnishings, accessories for the bed and bath; and bridal and gift items. It works through five retail store concepts, including Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, and Williams-Sonoma Home. It also sells through seven direct-mail catalogs and six e-commerce websites. Bed Bath & Beyond (NASDAQ: BBBY) is a major competitor.
The company pleased investors last week, when it reported solid Q2 numbers, reaffirmed guidance for both Q3 and Q4, and offered in-line to better than expected guidance for FY08. The CEO said he was particularly encouraged about "the strong performance of our emerging brands and the improving trend we saw in Pottery Barn."
MOST NOTEWORTHY: VMware (VMW), Bed, Bath & Beyond (BBBY), Williams-Sonoma (WSM), Landstar System (LSTR) and Acadia Pharmaceuticals (ACAD) were the noteworthy initiations:
Robert W. Baird initiated coverage on VMware (NYSE: VMW) with a Neutral rating citing valuation.
Citigroup started Bed Bath & Beyond (NASDAQ: BBBY) with a Hold rating, and cited the increasing competitive environment, slowing square footage growth and the weak housing market.
Citigroup started Williams-Sonoma (NYSE: WSM) with a Sell rating and said the company has an inventory glut that could lead to markdown risk, there is raw material price inflation, and the weak housing market remains a material risk.
Wachovia is cautious on Landstar System's (NASDAQ: LSTR) near-term growth rates and difficult end markets, starting shares with a Market Perform rating.
Deutsche is positive on the potential of Acadia Pharmaceutical's (NASDAQ: ACAD) ACP-103 in schizophrenia, starting shares with a Buy rating...
MOST NOTEWORTHY: Netflix (NFLX), NiSource (NI), TiVo (TIVO), Williams-Sonoma (WSM) and KLA-Tencor (KLAC) were today's more noteworthy downgrades:
Netflix (NASDAQ: NFLX) was cut to Hold from Buy at Needham to reflect the lowered subscriber guidance and their belief that things can get worse before getting better. Shares were also downgraded at Cowen, to Neutral from Outperform, and Lehman, to Equal Weight from Overweight.
NiSource (NYSE: NI) was cut to Underweight from Equal Weight at Lehman based on the expected increases in interest expense and taxes.
TiVo (NASDAQ: TIVO) was downgraded to Short from Sell at SMH Capital and believes the current valuation now reflects 20% penetration of the Comcast Corp (CMCSK)-owned digital sub base for the joint venture product bundle, which the firm considers aggressive. In addition, the firm believes TiVo's new pricing structure doesn't add much value.
Matrix cut Williams-Sonoma (NYSE: WSM) to Sell from Hold on valuation and deteriorating operating results.
Citigroup downgraded shares of KLA-Tencor (NASDAQ: KLAC) to Hold from Buy on valuation as they see risk to 2H07 estimates due to slower near-term cost savings and higher integration costs...
OTHER DOWNGRADES:
Friedman Billings downgraded American Express (NYSE: AXP) to Market Perform from Outperform.
MOST NOTEWORTHY: Intel (INTC), Capital One Financial (COF), Nestle (NSRGY), Cisco Systems (CSCO), Liz Claiborne (LIZ) and Trump Entertainment Resorts (TRMP) were today's noteworthy upgrades:
Lehman upgraded shares of Intel Corp (NASDAQ: INTC) to Overweight from Equal-Weight as they believe Q2 sales will meet the high-end of guidance with Dell (DELL) and Hewlett-Packard (HPQ) restocking in preparation for an improved PC market.
Friedman Billings upgraded Capital One Financial (NYSE: COF) to Outperform from Market Perform based on expected cost savings on restructuring initiatives.
Deutsche Bank upgraded shares of Nestle (OTC: NSRGY) to Buy from Hold on valuation as they believe the stock has become the cheapest among the major European food companies.
Credit Suisse upgraded Liz Claiborne (NYSE: LIZ) to Outperform from Neutral expecting management at its July 11th investor meeting to have a significant announcement regarding strategic alternatives for a large number of its brands.
Merrill Lynch upgraded Cisco Systems (NASDAQ: CSCO) to Buy from Neutral as they believe Q4 expectations could be exceeded due to strong business demand. The broker finds shares inexpensive and also added CSCO to its U.S. 1 List.
Bear Stearns upgraded Trump Entertainment (NASDAQ: TRMP) to Peer Perform from Underperform on valuation...
OTHER UPGRADES:
Chittenden Corp (NYSE: CHZ) was upgraded to Sector Perform from Underperform at RBC Capital.
Micron Technology (NYSE: MU) was upgraded to Buy from Neutral at American Technology.
The firm's first-quarter net income slid lower to $18.2 million, or 16 cents per share, from $23.1 million, or 20 cents per share, in the year-ago period. On the plus side, the latest results were above analysts' expectations of 13 cents per share.
Sales edged up 2.7% during the three-month period to $816.1 million.
WSM Chief Executive noted that company officials remain cautious for the future, noting "higher inventory levels" among competitors and "rising raw material costs."
CIBC started Chemtura Corp (NYSE: CEM) with a Sector Underperformer rating and $11 target on valuation.
C.E. Unterberg started Altus Pharmaceuticals Inc (NASDAQ: ALTU) with a Buy rating and $12 target, believing the company's efforts to develop the first juvenile formulation of a pancreatic enzyme will be a key growth driver.
During summers and winters in the early 1990s, I used to work for Williams-Sonoma (NYSE: WSM). In many ways, it was a dream job. I was paid to talk about cooking, learn about cooking and demonstrate cooking tools. One day, however, it occurred to me that, as much as I loved adopting a slightly condescending air when selling high-priced kitchen items, there really was a problem with the products that I was hawking. That afternoon, I talked an older woman into buying a "Tuscan grape drainer" as a gift for her niece's wedding. As the woman left the store, I realized that I had just convinced her to shell out $49.95 for what was, essentially, an earthenware bowl with holes in it and a couple of grape decals stuck on top. 
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Gap Stores
Williams-Sonoma, Inc.
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