Thursday, January 22, 2009
Elizabeth Arden Inc. and Estée Lauder Cos. cut their sales and earnings forecasts Friday and watched their stocks take a beating, as consumers -- already buying fewer sweaters and handbags -- begin to sacrifice their beauty regimens to the recession.
"The unprecedented global economic crisis produced one of the worst holiday seasons in decades," Estée Lauder Chief Executive William Lauder said. "Our business was no exception to the downturn in consumer spending."
Although a mounting number of high-end brands, from Tiffany jewelry to Coach handbags, have recently reported disappointing holiday sales and issued pessimistic outlooks, some beauty-industry observers expected upscale makeup and skin-care products to hold their own, thinking consumers would resist scrimping on their appearance.
Whether shoppers are trading high-end department-store beauty products for lower-priced drug-store options or forgoing purchases altogether will be clearer next week, when mass-market beauty giants including Procter & Gamble Co., which makes Olay skin cream and CoverGirl cosmetics, and Alberto-Culver Co., owner of Tresemmé shampoo and St. Ives skin care, report earnings.
"Beauty is still holding up better than other categories, but nothing is recession-proof," says Bill Chappell, a SunTrust Robinson Humphrey analyst. "Instead of buying their fifth and sixth tubes of lipstick, [consumers are] going to work down what's already in their pocketbook."
Estée Lauder, whose Clinique, MAC and namesake line dominate the beauty counters of U.S. department stores, expects sales for its fiscal second quarter, ended Dec. 31, to fall about 6% from a year earlier, down sharply from the 2% to 3% revenue gains previously forecast. Quarterly earnings per share are expected to range from 75 cents to 82 cents, the New York company said, down from its previous guidance of 97 cents to $1.05.
Warning of difficult sales trends in North America as well as in its foreign markets, Estée Lauder downgraded already-lowered expectations for the rest of its fiscal year, ending June 30. The company now expects earnings per share of $1.30 to $1.60, down from the lowered full-year guidance of $2.20 to $2.50 issued in October. Full-year sales are expected to be flat to down 3% from a year earlier, lower than its previous guidance of 3% to 5% sales gains.
The dismal outlook sent Estée Lauder's share price down $2.92, or 10%, to $26.11 Friday on the New York Stock Exchange. Elizabeth Arden's shares plunged 39%, or $4.50, to $7.06 on the Nasdaq Stock Market. The news sent other beauty companies' share prices down, too. L'Oréal SA shares fell 6% to €53.81 ($70.78), Avon Products Inc. shares fell 8% to $20.25 and Revlon Inc. fell 3% to $6.21. U.S. stock markets were closed Monday for a holiday.
Elizabeth Arden, best known for its fragrances under its namesake, Elizabeth Taylor and Britney Spears brands, expects sales for the quarter ended Dec. 31 to fall 12.5% to 13.5% from a year earlier, while earnings per share for the period are expected to range between 57 cents and 61 cents. Earnings per share for its fiscal year ending June 30 are expected to range from 71 cents to 84 cents, on sales down 4% to 5%.
U.S. colleges have been scrambling to refinance often heavy debt loads that have left some uncomfortably exposed to the vagaries of the credit markets.
In a report early this month, Surety Bonds rater Moody's Investors Service said the outlook for the higher-education sector was negative. In part, analysts cited colleges' reliance on "volatile" debt markets. Last year, the ratings agency downgraded or changed the ratings outlook on 29 colleges. Students would not be able attend colleges without Alternative Student Loans.
Simmons College in Boston took on $100 million in variable-rate debt over the past decade, and now is finalizing a deal to sell about $39 million of fixed-rate license bonds to replace some of that debt.
A key area of concern: most schools' reliance on variable-rate demand bonds, whose payments are tied to prevailing interest rates. The bonds often bear lower rates than plain-vanilla, fixed-rate debt. That is why they are so popular among colleges, which have used them since the 1980s.
Moody's said the 300 private colleges it rates have sold $25 billion in variable-rate debt, or about 39% of their borrowing outstanding. Almost three-quarters of the colleges sell variable-rate debt. Among the schools that have used the instruments are Harvard and Princeton universities, which recently replaced variable-rate debt with fixed-income borrowing while retaining their top AAA bond ratings.
Variable-rate debt has a big catch. Although the bonds have maturities as long as 30 years, investors can demand repayment in full with little notice. Colleges typically secured a guarantee from a bank to be a buyer of last resort to protect them. But the terms of that credit typically call on schools to repay the banks in three to five years. Similar loann periods can often be found with private student loans.
Complicating matters, many colleges entered into arrangements that let them, in effect, pay fixed rates on their variable-rate bonds. They achieved that by entering into interest-rate swaps with big banks. In many cases, colleges would face hefty fees if they ended those swap arrangements.
Analysts at Moody's and Standard & Poor's said most colleges should be able to weather the debt storm through budget cuts and fund raising. But Mary Peloquin-Dodd, a managing director at Standard & Poor's, said a few could face "severe circumstances" if they can't find financing to repay a bank quickly.
In November, Moody's downgraded the debt of Simmons College, a women's school in Boston, to Baa1 from A3, citing risks associated with variable-rate debt. Standard & Poor's made a similar downgrade.
Simmons took on $100 million in variable-rate debt over the past decade for various campus projects. In a recent report, Moody's said the school has only $52 million in unrestricted funds that it could use to repay that debt. Were investors to demand early payment, it could result "in rapid credit deterioration for the college," Moody's wrote.
Simmons is finalizing a deal to sell about $39 million of fixed-rate debt to replace a batch of variable-rate bonds recently trading at distressed levels -- with interest rates of almost 10%.
Helen Drinan, Simmons's president, said it's unlikely that investors would demand repayment on the rest of the bonds, which have long-term bank backing. But she said that, over time, Simmons plans to replace those bonds with fixed-rate debt, as well. "Without a doubt, no institution wants to face an acceleration of its debt, which can be crushing," she said.
To shore up its finances, the college cut about 5% from its budget, now about $100 million, and froze hiring.
In September, investors redeemed $235 million in variable-rate debt issued by the University of Pittsburgh because of concern about the credit-worthiness of the bank that provided a backstop for the bonds. The University of Pittsburgh, which has a high investment-grade credit rating, was able to restructure its bonds so that its own financial resources now back the bonds.
Satyam Computer Services Ltd., the Indian outsourcer embroiled in a fraud scandal, used forged documents from at least four major banks to claim a cash balance in excess of $1 billion, according to a person close to the investigation.
Investigators have sent Satyam's account-balance statements and letters of confirmation of account balances to officials at HSBC Holdings PLC of the U.K., Citigroup Inc. of the U.S., and HDFC Bank and ICICI Bank Ltd. of India. Based on the banks' reviews, investigators have determined that the documents were forgeries, according to the person close to the investigation. Spokesmen for all four banks declined to comment.
The documents offer a further glimpse into how Satyam founder and former Chairman B. Ramalinga Raju executed a fraud that inflated the company's balance sheet over several years, according to a confession he wrote to Satyam's board earlier this month. Since then, investigators have launched a probe into the company's dealings to determine the full extent of the deception.
Mr. Raju and his brother, B. Rama Raju, Satyam's former managing director, have been arrested in Hyderabad, the capital of the southern state of Andhra Pradesh, on complaints of cheating, forgery and breach of trust. A bail hearing for the two is expected on Jan. 22. The Raju brothers' lawyer, S. Bharat Kumar, declined to comment Monday.
The Raju brothers have financial stakes in two infrastructure companies, Maytas Infra Ltd. and Maytas Properties Ltd. The Indian government said Monday it will seize the books of both Maytas companies as part of the probe into Satyam because of a possible connection.
B. Ramalinga Raju's confession to cooking the books at Satyam Computer Services comes as a shocking disappointment to young Indian tech workers who saw him as a role-model. WSJ's Divya Gupta reports.
"We have ordered extension of [the probe by] the Serious Fraud Investigation Office into the two companies as the initial investigation has showed a nexus," P.C. Gupta, minister of corporate affairs, told reporters. "To uncover the facts relating to the events in Satyam, it is necessary to obtain information, records, books and papers from the two companies."
Spokesmen for both Maytas companies had no immediate comment.
Meanwhile, Maytas Infra said Chief Executive P.K. Madhav has resigned, effective Jan. 14, because he needs to spend time addressing legal issues in an unrelated case. A Maytas spokesman said Mr. Madhav was unavailable for comment.
The biggest surprise this week was not that Steve Jobs has to go on medical leave. It was that the shares have dropped only 3.5% since the chief executive and architect of Apple's revival disclosed his news.
The reason: Apple stock already had lost the Steve Jobs premium. It already was near a 52-week low due to recessionary worries and speculation about his health. Now, on some measures, Apple is valued below rivals such as Hewlett-Packard and Dell.
Apple's enterprise value is roughly six times free cash flow from the past 12 months. That compares with H-P on about eight times and Dell on 8.5 times, according to Barclays Capital analyst Ben Reitzes. Apple looks pricier on a price-earnings basis: 15 times trailing 12 months against roughly seven to 10 times for Dell and H-P. But some of Apple's premium disappears when earnings are adjusted for Apple's policy of recognizing iPhone revenue over two years, rather than when the cash comes in the door. Apple specializes in Apple Laptops.
Even assuming the worst -- that Mr. Jobs doesn't return to his post -- the stock should trade above its peers. It has an unbeatable brand name in technology and a diversified product lineup. Even though its products are high-end discretionary purchases, making them vulnerable to a nasty recession, Apple has broadened its range to include lower price points.
Majestic Research, which tracks Apple sales, reported Dec. 22 that holiday season demand, particularly for the iPod and laptops, had been resilient. On Wednesday, Apple's December quarter results will clarify the business picture. Mr. Jobs's future will remain uncertain. But right now, Apple looks like a bargain.
Venture-capital investment dropped 30% in the fourth quarter to its lowest level since 2005, as the financial crisis threatened to cut off more funding for start-up companies.
In total, $5.5 billion was invested in private companies in the U.S. during the fourth quarter, down from $7.9 billion a year earlier and the lowest quarterly tally since 2005's first quarter, according to new data from research firm VentureSource. (VentureSource is owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.) Just 554 venture deals were completed in the quarter, down from 718 a year earlier.
Venture capitalists typically put money into start-ups in sectors such as technology and health care, aiming to profit when the firms go public or are sold.
But venture-capital firms are pulling back now as the economy struggles to get back on track. "Very few new deals are getting done, and a lot of people are trying to make sure their portfolios are protected," says Faysal Sohail, a venture capitalist at CMEA Ventures in San Francisco, who says his firm has slowed its investment pace.
The venture business has been hit hard because the sector's routes to returns -- initial public offerings of shares and mergers-and-acquisitions activity -- have been all but shut down by the market's gyrations. In addition, some institutional investors have become gun-shy about investing in venture capital amid the downturn.
In particular, technology start-ups had their worst investment quarter since 1998, with just $2.2 billion invested in 266 tech-venture deals in the fourth quarter, off 39% from the $3.6 billion invested in the year-earlier period, according to VentureSource. Within the tech sector, investment in software start-ups fell to the lowest level since the first quarter of 1997.
Venture investment in health-care start-ups dropped to the lowest level in three years in the fourth quarter, with about $1.5 billion invested in 137 deals.
For all of 2008, there were 2,550 venture deals totaling $28.8 billion in investments, down from 2,823 deals totaling $31.4 billion in investments in 2007, says VentureSource.
Wednesday, January 21, 2009
Bank of America Corp. reported a fourth-quarter loss of $1.79 billion Friday and went on the offensive to answer critics and shore up support for the giant Charlotte, N.C., lender during a time of crisis.
The loss, the first for Bank of America since its predecessor NCNB Corp. posted a loss in 1991, was down from a net income of $268 million a year ago. It came on the same day details emerged of a new agreement with the U.S. that provides Bank of America with $20 billion in additional federal aid and loss protections on $118 billion in toxic assets.
Bank of America maintains it went back to the government for more support because of larger-than-expected fourth-quarter losses at Merrill Lynch and that the problems came to light after shareholders approved the Bank of America-Merrill combination on Dec. 5. But 25% of the protected asset pool belonged to Bank of America, Chief Financial Officer Joe Price said Friday, a signal that the problems weren't tied strictly to Merrill's disintegration.
The nation's largest bank by assets continues to be weighed down by rising credit costs linked to the economic downturn and an array of problems confronting U.S. borrowers. It set aside $8.54 billion for bad loans in the fourth quarter, up from $3.31 billion a year earlier. Loans written off as unpaid nearly tripled, to $5.54 billion.
It also reported write-downs and trading losses in its capital-markets business, including losses on collateralized debt obligations of $1.7 billion and write-downs on commercial mortgage-backed securities of $853 million.
Investors sent the stock down 14% Friday, to $7.18, undermining the bank's effort to shed the best light on its situation by rushing out the release of its earnings earlier than expected and issuing a memo Thursday to employees titled "Bank of America Remains Strong." Shares fell 18% Thursday.
Chief Executive Kenneth Lewis "has very little credibility with the investor public right now," said Paul Miller, analyst with Friedman Billings Ramsey Group Inc. in Arlington, Va.
Mr. Lewis's credibility among employees may also be suffering. Many are angry not only at how the losses were handled but also that just last week they were issued compensation in the form of shares worth $14.33 apiece, said people familiar with the situation. Several employees questioned how the company could have issued the shares in light of the past week's news, these people said. Bank of America declined to comment.
"While these earnings and these businesses in some cases are substantially lower than earnings in normal times, they're still profitable, even with the significant increases in credit costs, lower customer activity and other market headwinds." --Ken Lewis, Bank of America CEO
Read the full transcript of Bank of America's conference call, provided by Thomson StreetEvents (www.streetevents.com). (Adobe Acrobat Required.).
Executives at both Bank of America and Merrill have indicated the losses at Merrill ballooned in mid-December, leading to a meeting between Mr. Lewis and Treasury Secretary Henry Paulson on Dec. 17. However, the market for various credit-related products began to deteriorate in mid-November, leaving many Merrill insiders to ask what Merrill CEO John Thain knew, and when.
Merrill lost $15.3 billion during the period, and the run-up in losses was concentrated in the firm's sales and trading department, run by Tom Montag, who was hired by Mr. Thain in 2008 to run that division. The two frequently told the firm's other top managers that the losses, while significant, were largely connected to so-called legacy positions at Merrill and the losses were "market-related" and not out of step with Wall Street.
Friday, some top executives and members of Merrill's board questioned privately why they weren't told about the magnitude of the losses or that the deal was possibly in jeopardy. Mr. Thain declined to comment on whether he knew about the Dec. 17 meeting between Messrs. Paulson and Lewis.
Merrill incurred large losses during the fourth quarter from derivative trades with thinly capitalized bond-insurance companies whose financial health deteriorated considerably last year. Many of the derivative contracts were written to cover periods of more than 20 years, which meant the bond insurers wouldn't be on the hook for significant cash payouts for years.
Mr. Lewis rejected the suggestion Friday that he and his team didn't conduct enough due diligence. "We did not expect the significant deterioration in mid to late December that we saw," he said on a conference call with analysts.
Despite the need for more capital and the cutting of the bank's quarterly dividend to a penny, from 32 cents, the consumer-banking and wealth-management operations performed well in the fourth quarter, Mr. Lewis noted. The company made $115 billion in new loans during a time of crisis, he added.
Meanwhile, Merrill said on Friday it will pay $550 million to settle shareholder lawsuits claiming it failed to inform investors about the risks associated with its business in the subprime-mortgage market.
Merrill "vigorously disputed" the allegations, but agreed to pay $475 million to settle a suit brought by the Ohio State Teachers' Retirement System, and another $75 million to Merrill employees who held company stock in retirement programs.
Target Corp. said Chairman Bob Ulrich will retire at the end of the month, and will be succeeded by Chief Executive Gregg Steinhafel, completing a transition that began when Mr. Steinhafel was tapped for his current post a year ago.
Mr. Ulrich will become chairman emeritus, the retailer said.
The 53-year old Mr. Steinhafel joined Target in 1979 and became president in 1999. Target announced last January that he would succeed Mr. Ulrich as CEO, although he didn't take the reins until May of 2008. He was named to the board two years ago.
Mr. Ulrich has spent his entire 41-year career at Target and its predecessor company, Dayton's, starting as a merchandise trainee. He became its president in 1984 and chairman and CEO three years later. Mr. Ulrich is credited with creating Target's "cheap chic" marketing strategy some 20 years ago.
Like so many other retailers, Target has been struggling with slackening sales as shoppers rein in discretionary spending in the face of the housing-market collapse, the financial-markets meltdown, gyrating gasoline prices and tight credit. Target has large lawns that may require Lawn Care.
Last week Target said its December same-store sales fell 4.1%, in line with its expectations. But it said that markdowns "pressured profits."
In addition to slowing sales, Target's profit has suffered as an increasing number of its shoppers default on credit-card payments.
"We are completely confident in Gregg's leadership and his ability to build on Bob Ulrich's legacy," said Vice Chairman Jim Johnson.
A friend in need is...a tenth of a burger?
Such is the calculus Burger King Holdings Inc. encouraged on Facebook, asking members of the social-networking site to "de-friend" 10 others in exchange for a free Whopper. (Facebook members can "friend" people -- invite them into their circle -- and also de-friend them.)
Now the fast-food chain has pulled the plug on the campaign, which launched Jan. 5 and was dubbed "Whopper Sacrifice," amid concerns from Facebook that it publicized severed friendships. The campaign, which featured tag lines such as "Friendship is strong, but the Whopper is stronger," grew rapidly on the site, as thousands of members jilted each other for burgers.
Each time someone de-friended someone else through a special application, Burger King published an update on both people's Facebook pages. That helped spread the word -- but ran afoul of the site's protocol.
A Burger King Web site, Whoppersacrifice.com, says, "Facebook has disabled Whopper Sacrifice after your love for the Whopper sandwich proved to be stronger than 233,906 friendships."
Charter Communications Inc. said two units didn't make scheduled interest payments of $73.7 million due Thursday as the debt-laden cable-TV provider continues to talk with bondholders about restructuring its debt.
If the interest payments on the $1.15 billion notes aren't made within the 30-day grace period provided, Charter would default on the notes. The company said Thursday such a default would not trigger cross-defaults on any other debt.
Talks began last month to explore financing options to improve Charter's balance sheet. The company, controlled by Microsoft Corp. co-founder Paul Allen, warned last year it could be forced to seek bankruptcy protection if it failed to raise additional funds to finance its cash needs by 2010.
Charter and its units have more than $900 million in cash on hand and cash equivalents available to pay operating costs and expenses. They had $21.03 billion in long-term debt outstanding as of Sept. 30.
Last month, Moody's Investors Service lowered one of the company's ratings, saying default was likely imminent. Standard & Poor's Ratings Service echoed Moody's concerns, while Fitch Ratings put Charter's issuer default rating on watch for possible cuts.
One of the country's most irreverent advertisers, Anheuser-Busch InBev, is expected to serve up some Super Bowl ads this year that hit a different note, drilling home the quality of its beer.
Anheuser's Bud Light brand, whose ads are known for their slapstick humor, is adopting a more pragmatic approach in its ad lineup for the Feb. 1 big game. That mirrors shifts many other advertisers are making as they adapt to a hostile economy.
"For this Super Bowl, a lot of advertisers will stick with the hard-sell approach," says John Greening, an associate professor of advertising at Northwestern University, who used to work on Anheuser ads.
Anheuser-Busch's trademark Clydesdales are expected to appear in three different Super Bowl ads this year.
One Bud Light spot, which will use the brand's "drinkability" slogan, features two young men at a ski resort talking about how Bud Light is "easy to drink because it goes down smooth." But Anheuser won't give up entirely on trying to tickle viewers' funny bones. One of the men attempts to illustrate competing brands' alleged lack of smoothness by throwing painful obstacles in front a skier.
Another Bud Light spot features late-night talk-show host Conan O'Brien agreeing to do a commercial that ostensibly will be aired only in Sweden. In the ad, he dons a disco-themed ensemble with a plunging neckline that reveals his chest hair.
Other Super Bowl advertisers are trotting out some humor as well. They include Pedigree, a dog-food brand owned by Mars, and E*Trade Financial. A new E*Trade ad will feature the company's talking baby.
The stakes are always high for Super Bowl advertisers because of the game's huge audience -- more than 90 million -- and the high price of ad time. But the troubled economy has ratcheted up the pressure to deliver this year. Marketers have shelled out as much as $3 million to run 30-seconds spots at the same time many companies are on cost-cutting binges.
Anheuser, the game's biggest advertiser, with 4½ minutes of ad time, is paying roughly $2 million per 30 seconds, says a person familiar with the matter. Anheuser is still formalizing its ad plans, and its lineup could change.
Branding experts say Bud's advertising will be put under the microscope this year. Anheuser recently completed a merger with InBev of Belgium, and consumers are expected to watch closely to see what effect, if any, the company's new ownership will have on its ads.
Those ads will work hard to remind consumers of Anheuser's heritage. For the first time, the company will air three ads that star the iconic Clydesdales that pull its vintage beer wagon.
In one spot, a Clydesdale is struck by Cupid's arrow, and in another one of the big horses plays a game of fetch. Yet another spot, which is still being crafted, show how the Clydesdales made their way to America and found their niche.
The Clydesdale image "reinforces our brand values and reinforces that we are not changing, and we are the same company," says Bob Lachky, Anheuser's chief creative officer.
Tuesday, January 20, 2009
Now that Yahoo Inc. has named a new chief executive, Microsoft Corp.'s Chief Executive Steve Ballmer may finally be in a position to gain ground on Internet juggernaut Google Inc.
Mr. Ballmer is expected in the coming months to renew his yearlong pursuit of a multibillion-dollar deal for Yahoo's Web-search unit. But behind his push to capture a bigger piece of Google's lucrative business lies an untold story: Nearly a decade ago, early in Mr. Ballmer's tenure as CEO, Microsoft had its own inner Google and killed it.
In 2000, before Google married Web search with advertising, Microsoft had a rudimentary system that did the same, called Keywords, running on the Web. Advertisers began signing up. But Microsoft executives, in part fearing the company would cannibalize other revenue streams, shut it down after two months.
Microsoft got a second chance in early 2003 when top executives proposed that the company buy Overture Services Inc., a pioneer in combining search results with ads. Mr. Ballmer and Microsoft co-founder Bill Gates shot down the deal. Instead, Overture was snapped up by Yahoo -- and now forms a cornerstone of the Yahoo unit Mr. Ballmer covets.
Last year, Mr. Ballmer offered to buy Yahoo for $50 billion. When that bid failed, he made an offer to buy Yahoo's Web-search operations, saying in the past month that both companies would benefit by doing a deal "sooner than later." Tuesday brought fresh opportunity, when Yahoo named Carol Bartz, an industry veteran, as its new chief executive. Many industry observers think Ms. Bartz could become Mr. Ballmer's new counterparty in negotiations.
The story of Microsoft's early missteps helps explain how Google became the uncontested leader in making money from Internet searches, and why Microsoft is trying so hard to make up for lost time. It also exposes a broader challenge facing Mr. Ballmer as he guides his company of nearly 100,000 employees: how to foster groundbreaking technologies and businesses that are under his nose. With investments into nearly every major area of software, Microsoft has plenty of innovative ideas and technologies. Its challenge is deciding which ones to nurture.
Search ads, called paid search in industry lingo, are the prime engine of Google's profits. Each time a person searches Google, the site spits out the results, plus paid advertiser links. Whenever someone clicks on one of the paid links, Google collects a fee from the advertiser.
The paid-search business will account for most of the $5 billion in profit analysts expect Google to post when it reports its 2008 earnings next week. Researcher eMarketer Inc. forecasts the U.S. paid-search market will reach $12.3 billion in 2009, about three times the level in 2004. Google has captured 73.5% of the market, compared with 13.3% for Yahoo, eMarketer says. Microsoft is a distant third.
Mr. Ballmer is facing many challenges over the next year. A worsening economy is forcing him to consider cutting workers to an unprecedented degree in coming days. There's no guarantee that a deal for Yahoo's Web-search business would propel the company to the forefront of a rapidly changing industry, where competitors include "vertical search" engines for specialty areas such as health care. Many industry experts say Google's present service may ultimately be seen as a primitive precursor to more-advanced services that better handle video or render results in three-dimensions. Microsoft, Yahoo and Google are all investing in such areas.
But as Mr. Ballmer manages Microsoft without Mr. Gates, who left full-time work there last year, he said the Keywords episode and similar missteps are at the front of his mind. "The biggest mistakes I claim I've been involved with is where I was impatient -- because we didn't have a business yet in something, we should have stayed patient," Mr. Ballmer said in an interview. "If we'd kept consistent with some of the ideas" that Microsoft had in-house in 1999, "we might have been in paid search."
The roots of Microsoft's first paid-search foray trace back to 1995. The World Wide Web was just becoming popular. Small companies like Yahoo allowed users to punch in search terms to find content across the expanding Internet. That year, a University of Illinois student named Scott Banister hit upon adding ads to these search results. He quit college in 1996 and drove his Geo hatchback to California to start a company around his idea, which he called Keywords.
Mr. Banister left Microsoft soon after it bought his employer in 1998. He eventually co-founded IronPort Systems, an antispam company he sold to Cisco Systems Inc. in 2007 for $830 million. He then became an investor and helped his wife start Zivity, a subscription-only Web site that lets photographers post "tasteful" pictures of women with little or no clothing. Now 33 years old, Mr. Banister never made Google-like money from paid search. "I've kind of had to make my peace with it," he says.
After leaving Microsoft in 2000, the LinkExchange founder started a rock band, the Shusterbabies, and worked on a screenplay about guys in their mid-20s trying to meet women. In 2002, he bought online music site Garageband.com, and later, with the help of his twin brother, rechristened the company iLike, which became a hit service on Facebook. Now 36 years old, Mr. Partovi says he remains a Steve Ballmer fan. After running his current company, "I completely sympathize with the difficulty" of running Microsoft, he says.
Mr. Bliss left Microsoft in late 2003 after 16 years working on Outlook email software and running the search business. He took an executive role at the travel Web site Expedia, became a donor to cancer research and in 2007 joined Gomez Inc., a company that makes software for measuring Web site performance. Now 44 years old, he recounts fondly the days as one of few Microsofties to push search. "We had made pretty good strides," he said. "Until Google came along."
In 1998, Mr. Banister joined Ali Partovi, a 26-year-old San Francisco entrepreneur who ran an online-ad company called LinkExchange. That November, Microsoft bought LinkExchange for $265 million.
Microsoft wanted LinkExchange for its core business of distributing online ads to Web sites. But Mr. Partovi spent 1999 making monthly trips to company headquarters near Seattle to persuade his new bosses at Microsoft's online group to develop Mr. Banister's idea. Mr. Partovi proposed programming a system to auction off keywords -- bed and breakfast, for example, or llama farms -- to advertisers. When users of the company's online service, Microsoft Network, or MSN, searched these terms, advertiser links would appear alongside the search results.
"This is the next big thing," Mr. Partovi said, according to Bill Bliss, then the leader of the online group's Web-search team.
But his bosses were eyeing different prizes. Microsoft was chasing America Online Inc., believing that the Web's big profits would come from selling subscriptions to sites that offered news, entertainment or travel information. Ad revenues would come primarily from the high-priced display banners that big advertisers were buying on MSN. Microsoft and most Internet companies saw search engines as an unimportant sideline.
Microsoft managers also had philosophical objections to Mr. Partovi's plan. At the time, Microsoft culled search results from outside search-engine companies, and then had some 15 in-house editors check the links for accuracy and relevance before clearing them to appear on MSN. Mr. Bliss, the search-group manager, says he wanted Microsoft to expand into the search business but he initially thought mixing edited results with auction-generated ads would lower the quality of Microsoft's search results.
Mr. Partovi was also buffeted by convulsions far above him. Microsoft's top executives had trouble settling on a clear strategy for the fast-growing Internet, which opened a revolving door of managers at MSN, say those familiar with the online group. The two executives who first championed Mr. Partovi's ideas were shifted out of the group. Later, Mr. Partovi's team was moved to the division that made Microsoft's Office software.
Mr. Ballmer didn't oppose the Keywords concept, say people involved with MSN at the time. One day, Mr. Ballmer argued the issue with Mr. Bliss while traveling with other executives across Microsoft's campus in a company van. Mr. Bliss's resistance to the automated search ads was like having "demons," Mr. Ballmer told Mr. Bliss, according to people familiar with the exchange.
"I'm going to exorcise the demons from you!" Mr. Ballmer bellowed repeatedly as he shook his outstretched hands at Mr. Bliss, these people say.
Mr. Bliss started to warm to paid search, he said, as he watched a little company called Goto.com that had successfully combined ads and search. The little start-up had struck a deal that paid Microsoft any time a person used the software giant's Web browser to access Goto.com. On the day the deal went live, an employee in Microsoft's online group taped a piece of paper on her boss's door with the result: "$50,000 in One Day!" it read.
By 1999, advertisers and other partners were flocking to Goto.com. Mr. Bliss, who left Microsoft at the end of 2003, says that by early 2000, the Goto deal was supplying the online group growing amounts of cash.
In early 2000, a new boss in the online group helped Mr. Partovi get clearance to run a live search-ad trial on the MSN site. The "bed and breakfast" search would now generate not only edited results, but also sponsored links to travel sites and tourism associations. Advertisers signed up and a small stream of revenue started flowing.
But some managers, worried the service would eat into display-ad revenue, had placed restrictions on it. Results appeared low on MSN's search page. Auctions for keywords started at a minimum bid of around $15, which Mr. Partovi believed might deter many potential advertisers.
Mr. Partovi and his small team fought unsuccessfully to have the restrictions removed. One day, Mr. Partovi says, he took it upon himself to have a colleague lower the minimum bid price.
The insubordination incensed executives. Mr. Partovi's boss, though a supporter, told him to stop emailing the MSN executives and stay away from Seattle for a while. In May 2000, after Keywords had brought in about $1 million in revenue -- far less than Microsoft's other online ad revenue -- the company shut it down.
"In retrospect, it was a terrible decision" to end the search-ad service, says Satya Nadella, the boss who helped Mr. Partovi get the live trial for Keywords. "But in all honesty," said Mr. Nadella, now a Microsoft senior vice president and a manager of Microsoft's search business, "none of us saw the paid-search model in all its glory."
By then, Mr. Partovi says he was ready to quit. He talked to Mr. Ballmer by telephone about his frustrations with Microsoft's resistance.
Mr. Ballmer sympathized but said he was hamstrung, Mr. Partovi recalls. Mr. Ballmer had become Microsoft's chief executive earlier that year and was trying to delegate. Reviving the search-ad service would mean reversing a decision made by managers at least three levels below him, he told Mr. Partovi. Mr. Ballmer, through a spokesman, declined to comment.
Mr. Partovi started shopping for a new employer that would champion his search-ad concept. He pitched the idea to Yahoo. Yahoo co-founder Jerry Yang responded that the idea "would not fit well given our current set of strategies," according to a June 20, 2000, email from Mr. Yang viewed by The Wall Street Journal. Mr. Yang declined to comment through a Yahoo spokeswoman.
Mr. Partovi also approached Google, then a fast-growing search-engine company unsure of how to turn its popularity into big profits. Google also chose not to work with Mr. Partovi. But behind the scenes, the company was working on its own search-ad business.
Mr. Partovi left Microsoft in July 2000, closing Microsoft's first paid-search episode. Soon, with the cost of entry rising, Microsoft would miss a second time.
In October 2000, Google launched its union of search and ads, called AdWords. By 2002, the upstart search company was stealing advertisers from industry pioneer Goto.com. Google also had one advantage over competitors like Microsoft: It had its own search engine, which allowed it to better control its paid search system. Goto and Mr. Partovi's Keywords relied on partnerships with other search engines. That May, America Online dropped Goto.com as its paid-search partner and teamed up with Google.
Microsoft took notice of Google's growth. By late 2002, a group of Microsoft executives visited the Pasadena offices of Goto.com -- which had by now changed its name to Overture -- for a briefing on the business. Yusuf Mehdi, now a senior vice president at Microsoft, launched an effort to buy Overture.
Around the same time, Overture executives were also shopping the company to Yahoo. Yahoo and Overture nearly reached a deal one Saturday in February 2003 but Yahoo walked away, a move that mystified Overture executives. Overture then approached Microsoft, saying it was open to a takeover offer.
In spring 2003, Mr. Mehdi and a small team assembled in a Microsoft conference room to pitch an Overture purchase to Messrs. Gates and Ballmer. By then, Google was the largest Internet search provider and was quickly eating into Overture's business.
Messrs. Gates and Ballmer tore into Mr. Mehdi and another executive, in part criticizing the rationale for buying a company that appeared to have little in the way of unique software technology, say Mr. Mehdi and other meeting participants. The Microsoft chiefs balked at Overture's valuation of $1 billion to $2 billion, arguing that Microsoft could create the same service for less.
The company's chiefs gave Mr. Mehdi clearance to build ad-search services in-house, the traditional Microsoft approach. Messrs. Gates and Ballmer declined to comment.
That summer, Yahoo bought Overture in a deal that would be valued at $1.8 billion.
Microsoft, meanwhile, spent the next 18 months deploying hundreds of programmers to build a search engine and a search-ad service, which it code-named Moonshot. The company launched its search engine in late 2004 and its search-ad system in May 2006.
Advertisers applauded Moonshot for its technical innovation. But Microsoft had trouble coaxing people to migrate to its search engine from Google; advertisers were unwilling to spend large sums on MSN's search ads. By building a new system instead of buying Overture, Mr. Mehdi says, "we really delayed our time to market."
Yahoo began retooling Overture to better compete with Google, but technical troubles plagued its efforts for years. Still, Yahoo had a strong team of engineers, good advertiser connections and a solid second place to Google in the Internet search market. It was enough for Mr. Ballmer to swoop in last year with his bid to buy the company. That plan faltered in May as the two sides failed to come to terms.
Now, Mr. Ballmer is ready to return to the negotiation table. "Good ideas are usually better done quickly than slowly, so it would probably be better for both us, and certainly for Yahoo, if we were to do it sooner than later," he said in his interview with the Journal. People close to Mr. Ballmer said he was waiting for Yahoo to appoint its new chief executive officer before making an advance.
Whether or not Mr. Ballmer and Ms. Bartz strike a deal, Microsoft has learned a lesson from the Keywords episode. Five years ago, Mr. Ballmer said, the company didn't want "discordant and dissident" directions and thus "ran the risk of some things not happening." Recently, the company started a service that Google doesn't have -- paying people a small fee if they use Microsoft's search engine to find and then buy certain products online.
Drugstore giant Walgreen Co., which is slowing its breakneck growth in response to poor economic conditions, said it plans to eliminate about 1,000 corporate and field management jobs, or 9% of the total, by September.
The Deerfield, Ill.-based chain has never before cut management jobs as part of a strategic initiative, a spokesman said.
In October, Walgreen's launched an initiative to improve efficiency. The latest cuts fall under that plan. The initiative, expected to save $1 billion a year by the fiscal year beginning September 2010, includes reducing overhead and labor, saving money on spending for store fittings and computer equipment, and consolidating some pharmacy fulfillment work at central processing centers, the spokesman said.
Walgreen is the No. 2 drugstore chain, measured by number of stores, behind CVS Caremark Corp.
The company said it will offer voluntary severance packages to eligible employees initially, then move to a layoff program next month if necessary. About half the affected jobs are at headquarters and half in district management posts; no distribution center jobs or positions at its 6,600 stores will be affected, the spokesman said.
The company last month said it plans to slow the pace of new store openings to a rate of 4% to 4.5% in 2010 and between 2.5% to 3% in 2011.
Just last summer, Walgreen had foreseen slowing so-called organic growth to 5% in 2011. The new targeted growth rate will reduce capital expenditures by $1 billion through 2011.
For its fiscal 2009 first quarter ended Nov. 30, Walgreen said profit fell 10.4% to $408 million on sales of $14.9 billion.
Overall sales were up 6.6% in the period, while sales in stores open more than a year rose 1.7%. Prescription sales, which accounted for two-thirds of total sales in the quarter, continue to climb, against an industrywide decline, it said.
Chico's FAS Inc. announced Chairman and Chief Executive Scott Edmonds stepped down after months of pressure from an activist investor to resign.
The women's apparel retailer said that after months of discussing succession plans, Mr. Edmonds, 51 years old, told the board on Wednesday he was retiring. David Dyer, a 59-year-old apparel-industry veteran and Chico's director since 2007, was named chief executive of the Fort Myers, Fla., company. Ross Roeder, the board's 70-year-old lead director, was named chairman.
The announcement came as Spotlight Capital Management LLC, a New York hedge fund that has been pressing the board to name a new CEO since last March, was preparing to nominate its own slate of directors. Spotlight blames Mr. Edmonds for the retailer's missteps, including turning off Chico's core baby boomer customers by trying to reach younger women, not investing enough in e-commerce and locating new stores too close to existing ones, among other things. Mr. Edmonds wasn't available for comment. Chico's said the allegations "lack merit and substance." Chico's stores may offer Organic Baby Clothing, Kids Shoes, Natural Baby Clothes, and Designer Women's Clothes.
"This is good news for Chico's and its long-suffering shareholders," said Gregory Taxin, managing director of Spotlight, who wouldn't disclose Spotlight's stake.
In a Securities and Exchange Commission filing Thursday afternoon, Chico's disclosed that Mr. Edmonds's departure would be treated as a "termination by employer without good cause," meaning Mr. Edmonds will receive separation pay of nearly $4.4 million plus a prorated portion of any bonus he would have received for the fiscal year ending Jan. 31, among other benefits.
After years of rapid growth fueled by its success at selling comfortable, colorful clothes to baby-boomer women, Chico's began slipping in 2006. Growth slowed at its namesake chain, and it struggled to develop newer brands including the White House/Black Market chain aimed at younger women and Soma Intimates apparel stores. On Thursday, shares of Chico's rose 30 cents to $4.23 in 4 p.m. New York Stock Exchange composite trading.
In an interview, Mr. Dyer said he plans to focus on efficiency, continue efforts to improve business at the Chico's chain and raise the profile of the White House/Black Market chain.
He also said he would invest more in direct marketing and e-commerce.
The former Tommy Hilfiger and Lands' End executive said, "we think we can grow the business to increase market share." The company has no long-term debt and more than $250 million in cash and marketable securities.
On Thursday, Chico's also said December sales at stores open at least a year fell 12.4%, in line with analysts' expectations, and it expects "lower gross margins" in the fourth quarter, due to the sales drop, the promotional landscape and its intent to end the quarter with lower inventory levels.
In an interview, Mr. Roeder said he and Mr. Edmonds, who became chief executive in 2003 and chairman in 2007, had been discussing succession plans for at least a year.
He said Mr. Edmonds a noted keynote speaker decided to leave as the economic situation grew worse.
Monday, January 19, 2009
DUBLIN -- Dell Inc. said it is moving its Irish manufacturing operations to Poland by early 2010, a cost-cutting measure that will result in the loss of 1,900 Irish jobs -- about half of the computer maker's Irish work force.
The company said Thursday the move is part of a $3 billion company-wide cost-cutting initiative announced last year.
Since establishing a manufacturing facility in Limerick, Ireland in 1990, Dell has become the country's second-biggest foreign employer and one of its biggest exporters. But since 2006, Dell has lost its status as the world's largest personal-computer maker as it struggles to keep up with rival Hewlett-Packard Co. Whereas Dell still builds many of its PCs in plants it owns around the world, H-P began outsourcing much of its PC assembly to Asian contract manufacturers years ago.
Computer maker Dell will move its Irish manufacturing operations to Poland by 2010, part of a company-wide cost-cutting initiative that is expected to result in the loss of 1,900 jobs at this plant in Limerick, Ireland.
Dell founder and Chief Executive Michael Dell has been trying to remake the Round Rock, Texas-based company since early 2007 by building new products and changing Dell's manufacturing system to cut costs. Dell has been trying to sell its factories, say people briefed on the matter; last year, it closed down a Texas assembly plant.
So far, the cost savings haven't allowed Dell to weather the tough economy -- shares closed Thursday at $11.27, down from more than $25 last August. Last week the company announced a reorganization that involved the departures of two top executives, including the company's manufacturing chief, Mike Cannon.
"This is a difficult decision, but the right one for Dell to become even more competitive," Sean Corkery, the vice president of the Dell's Europe, Middle East and Africa operations, said in a statement.
Economists say the cuts are another sign that the Irish economy, fueled by a construction boom and multinational investment since the 1990s, has lost its edge to less-expensive Eastern European countries.
"If you're starting to lose jobs in multinationals, it doesn't augur well for the economy as a whole," said Alan McQuaid, an economist at Bloxham Stockbrokers.
While Ireland still provides the low 12.5% corporate tax rate that attracted overseas companies in the 1990s, labor rates there remain high.
"Assuming that just because the country has a low corporate tax regime we will continue to attract foreign direct investment is extremely misguided to say the least," Mr. McQuaid added.
Ireland's National Competitiveness Council has highlighted problem areas for the country. They include productivity, labor and energy costs, increased business regulation and overall infrastructure quality.
The American Chamber of Commerce in Ireland said that Dell continued manufacturing in Ireland long after competitors left. "It's a tribute to the management and staff that this investment was retained in Ireland for so long," it said in a statement.
IDA Ireland, the state agency charged with attracting foreign-direct investment, earlier this week reported 10,044 job losses last year at IDA-sponsored companies and only 8,837 new jobs. Irish Prime Minister Brian Cowen called Dell's move a "major blow," and said "the government will continue to work with Dell to identify further development opportunities which may arise as the company continues to develop the new business model."
Dell said 1,300 sales and marketing jobs will remain in Dublin, as will 1,000 Limerick-based jobs in logistics, solutions, procurement, engineering and product development. "Limerick will remain the logistics hub for Europe," a Dell spokeswoman said.
A sharply slowing global economy appears to be taking its toll on one of the world's biggest technology conventions, the Consumer Electronics Show in Las Vegas, set for next month.
Organizers of the event, which is to hold its 32nd gathering between Jan. 8 and Jan. 11, now expect fewer companies to participate and less booth space to be sold. CES is on track to occupy 1.7 million square feet of floor space, about 5% less than the previous CES show.
About 15% fewer companies have registered to attend the event, compared with the show last year. Among the missing will be Philips Electronics NV. Philips declined to comment.
Meanwhile, a handful of companies are downsizing by using meeting rooms rather than renting out pricier showroom floor space, said Tara Dunion, a spokeswoman for the show's sponsor, the Consumer Electronics Association.
While a count doesn't yet exist, it is likely that products to be introduced at 2009 CES will be down from the roughly 20,000 that made their debuts at the 2008 show.
One bright spot is attendance preregistration, which is running on pace with last year's attendance of 141,000. "Will we exceed that? Who knows," Ms. Dunion said.
Behind the shrinking show is a sharply contracting global economy that is curtailing discretionary budgets for companies and consumers alike. Cutting travel and display expenses for conventions is a budget priority for many Fortune 500 companies, according to recent surveys. Many more companies have begun slashing their research-and-development budgets, meaning fewer new gadgets to display.
Some penny-pinching consumers also appear to be skipping CES, usually one of Las Vegas's biggest draws in January. Hotels have begun chopping their rates by as much as $75 a night, the show's organizers said in an email to registered attendees last week. Some hotels have vacancies during the show.
Recessions have proven difficult for conventions, particularly those aimed at consumers. During the 2001 recession, attendance at the Comdex computer show, which had drawn as many as 200,000 visitors, dropped sharply. The dot-com bust proved to be the beginning of the end for Comdex in Las Vegas. The show closed after 2003.
Thursday, January 15, 2009
As posted by: Wall Street Journal
LONDON -- Marks & Spencer PLC is slashing costs by shutting stores and firing employees, but the moves may not be enough to weather the drop in consumer spending, potentially forcing the British retailer to cut its dividend.
Shoppers pass British retailer Marks and Spencer's flagship Marble Arch store in London Tuesday.
The cost cutting, which includes closing 27 of 600 stores and the reduction of 1,230 jobs, or 1.6% of its work force, caps a difficult holiday season. On Wednesday, Executive Chairman Stuart Rose said he expects economic conditions to remain challenging for at least another 12 months. He also rejected the possibility of his departure anytime soon.
"If this was an airplane flying through a storm, I don't think the best thing to do is go up front and shoot the pilot," he told reporters Wednesday.
Marks & Spencer's stock rose 2.2% to close at 244 pence ($3.65) in London Wednesday.
The question now is whether the cuts are sufficient to make up for the decline in sales volume and profit margins as British shoppers curb their spending in a worsening economy. Adding to Marks & Spencer's troubles is the weakness of the British pound, which will make it more costly to buy goods overseas. In addition, it is unclear how much discounting the store chain will have to do in coming months to preserve sales.
Many analysts now predict Marks & Spencer will reduce its dividend.
"We will retain our negative stance on M&S partly because we expect further downgrading of consensus profit estimates, partly because a full-year dividend cut now looks inevitable and partly because the company, in our view, is in disarray with none of its many strategic issues any nearer to resolution," Credit Suisse Group analyst Tony Shiret said in report.
Marks & Spencer said it wasn't changing its dividend policy and would review the issue in May. The company paid 14.2 pence a share for the second half of fiscal 2008 and 8.3 pence a share for the first half of the current fiscal year, which ends in March.
For the 13 weeks to Dec. 27, the 125-year-old company reported that same-store sales fell 7.1% from a year earlier -- the steepest quarterly drop in a decade -- despite massive pre-Christmas promotions and long-term discount offers in the food department.
The price cuts also hurt Marks & Spencer's gross profit margin. The retailer said the gross margin at its U.K. stores would be 1.75 percentage points lower than last year's gross margin of 43%.
Family Dollar Stores Inc. raised its outlook for the fiscal year after posting a better-than-expected 14% gain in fiscal first-quarter net income.
The Matthews, N.C.-based discounter now sees earnings for the full year of between $1.63 and $1.81 a share, up from October's projection of $1.58 to $1.78. It raised its estimate of annual revenue by one percentage point, to a gain of between 4% and 6%.
For the current quarter, Family Dollar forecast earnings of between 48 cents and 52 cents, with same-store sales up by 3% to 5%. Analysts surveyed by Thomson Reuters expect 47 cents.
Family Dollar and other deep discounters have been benefiting in recent months from the economic downturn as shoppers trade down and search for bargain-priced basics. Family Dollar has been reporting consistent growth, with traffic and market share increasing in part due to an expanded emphasis on food sales. That has helped push up its shares 41% in the past year.
For the quarter ended Nov. 29, Family Dollar reported net income of $59.3 million, or 42 cents a share, up from $51.9 million, or 37 cents a share, a year ago.
Gross margin, or profit after deducting the cost of goods, widened to 35% from 34.2% on lower seasonal markdowns and freight costs. The company also said less shoplifting and higher prices contributed to the gain.
Family Dollar last month said the quarter's sales rose 4.2% to $1.75 billion, with same-store sales up by half that amount. Consumable sales increased 13%, driven primarily by food sales. Its stock was the top performer among S&P 500 stocks last year with a 35.6% gain.
Some analysts applauded Family Dollar's efforts, with Wedbush Morgan Securities saying the company has improved "the assortment and quality of merchandise" and store appearance. But others say the 6,600-store deep discounter faces more competition and margin pressure as it adds consumable goods.
In a sign that restaurant sales won't rebound anytime soon, the chief executive of Ruby Tuesday Inc. offered a bleak outlook for the next several months as the company posted a wider loss and said same-store sales in its fiscal second quarter fell sharply.
The results show how consumers are cutting back on eating out during the recession despite the discounts and freebies restaurants are offering. Analysts expect that chains will have to close more locations to survive what is looking like another difficult year.
Ruby Tuesday expects same-store sales will drop 9% to 10% for the fiscal year ending June 2. Above, a Times Square branch in New York
Investors recently have hoped that the worst times were behind restaurant chains. From Dec. 1 through Wednesday, the Dow Jones Wilshire U.S. Restaurants and Bars Index has risen 16.8%, while the Dow Jones Wilshire 5000 Index has risen 12.4%.
But Ruby Tuesday's results indicate that 2009 may not be the year that restaurants rebound from a more than two-year downturn. For the quarter ended Dec. 2, Ruby Tuesday reported a loss of $37.4 million, or 73 cents a share, compared with a year-earlier loss of $10.4 million, or 20 cents a share. Same-store sales fell 11%. Revenue declined 9.7% to $289.8 million.
Sandy Beall, Ruby Tuesday's founder and chief executive, said that fiscal 2009 is the most difficult year since the company's founding 37 years ago. The company expects same-store sales will worsen, declining 9% to 10% for the fiscal year.
While most large restaurant chains are struggling, Ruby Tuesday has had a particularly difficult time. Since 2007, the company has invested heavily in a brand overhaul to make its food and atmosphere more contemporary, but the effort hasn't reversed the slide in same-store sales.
During the past year, its shares have fallen 82%. The Maryville, Tenn., company's shares were down 9.2% to $1.49 in 4 p.m. New York Stock Exchange composite trading Wednesday, before the company released its quarterly results. Investors' main concern has been that the company has a lot of debt and declining profitability, said Howard Penney, an analyst at Research Edge LLC.
Ruby Tuesday plans to close 40 locations early this year and will close an additional 30 restaurants over the next several years. The company said Wednesday that it has reduced its costs by an estimated $40 million to $45 million annually and is paying down its debt.
Worried that consumers won't go back to paying full price after the holiday season's deep discounts, some retailers are cutting prices on early spring merchandise as soon as it hits store shelves.
The deals on fresh goods suggest that retail profit margins will remain under pressure in the first half of the year. On Thursday, most chains are expected to report that their same-store sales declined in December, with many likely to cut their profit outlooks.
"This is really the first time that we have seen such quick discounting on new seasonal goods," said Kimberly Greenberger, an analyst at Citigroup Inc.
On Wednesday, discount giant Wal-Mart Stores Inc. said it would cut prices this week on certain exercise machines, athletic apparel and food items, in what it calls the second phase of its Operation Main Street initiative to help consumers save money, this time on health-related products such as organic baby clothing and natural baby clothing.
Many deals at other stores involve apparel, which has a short shelf life and must be cleared out quickly to make way for new styles. Spring orders were generally placed before the financial crisis exploded in late September, causing consumers to cut spending sharply. As a result, stores may once again have more inventory than they need to meet demand.
By trimming prices selectively on early spring goods now, department stores, specialty apparel chains and teen retailers hope to persuade skittish shoppers to buy new styles, analysts said. They're also trying to capitalize on crowds flocking to winter clearance sales, fearing that traffic will fall off sharply after the sales end.
"It's never a good thing to be marking down merchandise as it hits the floor," but "if you have to move [it], try to move it when traffic is in the mall," said Amy Wilcox Noblin, an analyst at Pali Capital.
Polling suggests retailers are right to think shoppers will balk at paying full price. In an America's Research Group survey of 1,000 consumers the first weekend of 2009, 90% said they would primarily buy advertised specials, up from 84% in early November.
Some of the deals on new styles require shoppers to buy more than one item. Gap Inc.'s Old Navy chain is selling new $12.50 women's lace jersey-knit camis tops online for $6 each if shoppers buy two or more. And AnnTaylor Stores Corp.'s Ann Taylor division will sell two $29 split-neck cotton tops for $35. A Gap spokeswoman said the chain routinely offers new-item specials as part of a strategy to focus on value. At AnnTaylor, a spokeswoman said the strategy is to be "more promotional in order to remain competitive, to provide our clients greater savings, and to continue to keep our inventories clean."
Other clothing makers such as J. Crew Group Inc. and Bebe Stores Inc. are trying to attract shoppers by cutting their opening price points on some spring merchandise before it even hits stores.
"The reset button has been pushed on price," Millard "Mickey" Drexler, J. Crew's chairman, told analysts in a conference call in late November. He cited ballet flats for the company's spring collection, which now start at $98, down from $125.
Bebe, meanwhile, plans more "two for" deals this spring than last year and is also lowering opening price points in categories like rings and tops. Later this month, it plans a campaign called "The New Deal" to promote the new prices. "It's a good practice right now that we show a client that if today all she has is $29, we might have a top for $29," said Chief Executive Greg Scott.
And at Intermix, a chain of boutiques based in New York, Chief Executive Khajak Keledjian said he has negotiated with a few U.S. labels to produce some items at lower prices for spring. A one-shouldered, ruffled dress by Madison Marcus, for example, will carry a $295 price tag this spring at Intermix, compared with $395 for a similar style by the label last spring, he said.
Premium-denim maker Rock & Republic is producing a Recession Collection of jeans priced at $128 to $138, or about $50 less than the label's previous opening price point for denim. President Andrea Bernholtz said the collection, due in stores in March, was created after discussions with retailers on what consumers want now.
"If a starting price point of $180 is going to throw you into a tailspin...we thought we'd take lesser margins on our end and pass that on to the consumer," she said.
The move, coming as the advertising outlook sours, could signal more write-downs for media and cable companies. After a rash of acquisitions at peak prices, companies in those industries are having to scale back accounting values in the now-sullen climate. The media industry also faces secular declines in areas such as newspapers, broadcast television and radio, which are being ravaged by ad declines.
Time Warner CEO Jeff Bewkes has signaled a shift to focus more on the TV and movie businesses.
Coupled with weaker-than-expected advertising revenue,Time Warner's fourth-quarter write-down is expected to swing the company to an annual loss for 2008 -- its first in six years.
Time Warner Cable Inc., whose shares have fallen 50% in the past couple of years, represented the bulk of the non-cash write-down, at nearly $15 billion. The news also highlights the lingering effects of Time Warner's disastrous 2001 merger with AOL and a gloomy outlook for the magazine-publishing business.
Time Warner has made a slew of acquisitions since the company's last major write-down in 2002 for the value of AOL and its cable systems. Time Warner Cable spent about $9 billion of cash and 16% of its equity acquiring assets from rival Adelphia in 2005. AOL also has been on a buying spree in its bid to revamp itself as an ad-based company. Investors chided AOL last year for the steep $850 million price tag of its Bebo acquisition.
Cable-TV company Comcast Corp. similarly plans to write down its stake in wireless broadband company Clearwire Corp., whose shares have fallen about 60% in the past 12 months, said people familiar with the situation. Last October, CBS Corp. recorded a $14.1 billion charge, largely for the shrinking value of its local television and radio stations. "We believe that similar announcements from other media companies could be forthcoming," said UBS analyst Michael Morris.
Time Warner's write-down says a lot about the challenges that face Chief Executive Jeff Bewkes. Mr. Bewkes has signaled a shift to focus more on the TV and movie businesses and less on non-content assets such as Time Warner Cable, which he expects to spin off by the end of the current quarter.
But he still needs to find long-term solutions for AOL and publishing. Time Warner CFO John Martin, speaking at an investor conference, said the company is still interested in finding AOL a partner, after on-off talks with potential candidates, but noted the current climate "is not conducive to" quick action.
Time Warner rang more alarm bells about the advertising climate, saying "the economic environment has proved somewhat more challenging" than previously expected, particularly at its AOL and publishing units. The company scaled back its operating projection for 2008, saying it now expects adjusted operating income before depreciation and amortization to be $13 billion, up 1%, a drop from its previous forecast of a 5% increase.
Time Warner shares were down 6.3% at $10.29 in 4 p.m. composite trading on the New York Stock Exchange, while Time Warner Cable stock was down 4.8% at $21.56.
In addition to the write-down, Time Warner will record charges of as much as $380 million in the fourth quarter, including as much as $60 million from the restructuring of a lease for floors in its Time & Life Building in Manhattan held by Lehman Brothers Holdings Inc.; a $40 million increase in its credit-loss reserves for bankruptcy filings by retail customers; and $280 million for a court judgment against its Turner Broadcasting System Inc.
Time Warner still expects cash flows for 2008 to total $5.5 billion, matching its outlook provided in November, because of strong performances from its film division and its cable-television networks.
Time Warner was expected to come under pressure to write down assets as it carried over $42.5 billion in goodwill on the books for 2008. Mr. Martin said he expects no "adverse impacts" from the write-down, noting there are no debt covenants or tax implications that will lead to more financial pain.
The Time Warner Cable write-down reflects the decline in the market value of the company, a drop in the value of its franchise rights and lowered expectations for cash flow amid increased competition and higher borrowing costs. Time Warner Cable said it also plans to take a charge of about $350 million related to its investment in Clearwire.
Time Warner is to report fourth-quarter earnings Feb. 4.
Tuesday, January 13, 2009
Former Autodesk CEO Carol Bartz has agreed to become the next chief executive of Yahoo, a job many might consider thankless and others one of the greatest turnaround opportunities of the internet age.
Bartz's selection would end a two-month search to replace Jerry Yang, who served as CEO for about a year -- arguably one of its worst ever of the post-bubble era.
The Wall Street Journal was apparently first with the speculative report, citing "people familiar with the situation." Bloomberg, Silicon Alley Insider and others are also quoting their own unnamed sources of the decision, which has not been announced. We asked: no comment from Yahoo.
Bartz is currently executive chairman of Autodesk Software and has been an executive at Sun Microsystems. She sits on the board of Cisco (with Yang), and on the Intel board with Yahoo president Sue Decker, who was another aspirant for the top job.
Bartz's name began circulating widely last week after weeks of tantilizing rumors -- mainly from Silicon Alley Insider and AllThingsD -- that the announcement of a Yang successor was immiment.
If true, the Valley parlor game is over, won by a solid, if not terribly-well-known, tech executive. According to her official bio at Autodesk, which she joined in 1992 and left in 2006 -- the company grew revenues from $285 million to $1.523 billion. She holds an honors degree in computer science from the University of Wisconsin, giving her some geek cred.
Bartz was also on President Bush's Council of Advisors on Science and Technology. In 2005 she was named one of the "50 Most Powerful Women in Business" by Fortune; "50 Women to Watch" by the Wall Street Journal; "The World’s 30 Most Respected CEOs" by Barron's and "World’s 100 Most Powerful Women by Forbes.
Pedigrees and resumes and honors are all very well and good. But former colleagues describe her as tenacious, dedicated and tireless, which are three qualities that anyone who wants to tackel Yahoo must possess. When Silicon Alley Insider asked for come feedback from the crowd about her, this was one of the responses:
On her first day at Autodesk, she was diagnosed with cancer. She took 30 days off for aggressive treatment and, as promised, returned to work a month later. She was still very sick and feeling the effects of continuing chemotherapy. She would arrive early and puke in the parking lot, then go to work.
That might be the way she spends her first few weeks at Yahoo which has, to put it mildly, seen better days.
Yang announced two months ago that he would be stepping down after a dismal tenure in the corner office he first occupied in Oct. 2007. While not a businessman by training or inclination Yang's ascension brought with it some hope that the passion of a co-founder could somehow help re-ignite the fire that had once powered Yahoo as one of the pre-eminent internet innovators. Instead, the company which basically invented internet search lost the war to an upstart called Google, some say forever.
Still, the "Chief Yahoo!" stepped up at what was then thought to be a significant turning point for Yahoo, after the doldrums that were the tenure of Terry Semel and his ill-fated strategic foray into content creation.
Yang's leadership was not particularly inspired but the wheels really came off in 2008. He orchestrated a forceful rejection of an unsolicited offer by Microsoft to take over the company at $33 or so a share, asserting that this was not a sufficient premium on an enterprise then valued at about $19, only to see the company's value plummet to the low teens.
As the year came to an end Yang was reduced to begging Microsoft for a new offer that was not to materialize. In between he was forced to bring onto the board three interlopers, including his most vocal critic -- Carl Icahn, who urged his ouster early and often and in no uncertain terms.
The consolation prize that would have been an advertising deal with Google -- not a strategic partnership, but a means of generating some new cash flow -- also fizzled when the Department of Justice made clear it would litigiate to prevent even that level of partnership as anti-competitive, and Google walked away.
Yang himself may have lacked the skills to bring the ship of state but he does have the eternal optimism that is a necessary if not sufficent quality. Days before he announced his decision to step down, he told a technical conference in London that these could still be the best of times.
Despite market volatility and a crisis of confidence that seems to have literally frozen portions of the economy, Yang said, this "a great time for opportunity."
"In many ways, the darkest days bore Yahoo and Google," Yang said. "Somewhere out there, there is a great company being built."
It will take more than luck, but there is still a chance that company can be Yahoo, again. We wish Ms. Bartz -- should she in fact accept the post -- all the best.
When the Bush Treasury decided to bail out Detroit, GM and Chrysler quickly said yes to the taxpayer cash, but Ford Motor Co. said it didn't need the money and declined. Ford's reward for this show of self-reliance? Treasury is now helping GM again by giving it a credit pricing advantage against Ford in the marketplace.
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That's one little-noted result of Treasury's action earlier this week to rescue GMAC, the GM credit arm that, as it happens, is 51% owned by the Cerberus private-equity shop that also owns Chrysler. With $5 billion in taxpayer cash in its pocket, GMAC quickly decided to offer 0% financing on several of its models. "I think it would be fair to say that without this change . . . we would not be able to do this today," explained GM Vice President Mark LaNeve in a conference call with reporters this week.
GM said it will offer 0% financing for up to 60 months on the 2008 Chevrolet TrailBlazer, GMC Envoy and Saab 9-7X sport utility vehicles through GMAC. The Saab 9-3 and 9-5 sedans also qualify for 0% financing. The car maker is also offering financing between 0.9% and 5.9% on more than three dozen other 2008 and 2009 models, including many trucks and SUVs. The deal runs through January 5, and no doubt GM is hoping for a booming sales weekend.
The messy little policy issue is that these GM products compete with those sold by Ford, Toyota, Honda and numerous other car makers that won't benefit from GMAC's cash infusion. And with the cost of financing often crucial to buyer decisions, the feds have now put the muscle of the state behind one company's products.
Ford in particular must wonder what it did to deserve this slap. CEO Alan Mulally joined the GM and Chrysler chiefs in testifying for the bailout even while insisting his company didn't want the funds. And once the bailout was announced, Mr. Mulally said that "All of us at Ford appreciate the prudent step the Administration has taken to address the near-term liquidity issues of GM and Chrysler." So much for gratitude.
Ford -- and for that matter Honda and Nissan and most others -- makes cars with American workers. President Bush justified the auto bailout in the name of saving jobs, but apparently GM's jobs are more valuable than others. And with the taxpayers now having a stake in GM and Chrysler success, the Washington temptation will be to take other steps to help the two companies gain market share at the expense of their private competitors. Never mind that Ford is still struggling and Toyota recently posted its first full-year loss in 70 years.
This is always what happens when politicians decide to muck around in private industry. Even when made with the best intentions, their policy decisions have unintended consequences that help some companies at the expense of others. Meanwhile, your neighbor who buys a GM SUV this weekend with 0% financing should thank you when he pulls into the driveway. He did it with your money.
Speaking at last year's World Economic Forum in Davos, Switzerland, Microsoft founder Bill Gates called on "capitalism" to become more "creative" in finding ways to help the world's needy. Government and philanthropy had important roles to play, he said, but neither could accomplish as much as business in reducing social problems such as poverty, disease and malnutrition.
Although Mr. Gates's speech received considerable attention at the time, its substance was not particularly novel. For at least a decade, high-tech billionaires, including eBay's Pierre Omidyar and Jeffrey Skoll and Google's Sergei Brin and Larry Page, have been looking for ways of achieving their philanthropic goals through business-like activities. The search for profit-making ventures that also improve the world -- by means of "social entrepreneurship" or "philanthro-capitalism" -- is now the rage at business schools, and it has given rise to countless books, competitions and consulting groups. In 2006, one of the best-known practitioners of social entrepreneurship, Muhammad Yunus, won the Nobel Peace Prize for developing the micro-lending Grameen Bank. President-elect Obama has promised to create a federal "social entrepreneurship" agency.
Not everyone is convinced, of course. Critics fear that efforts to combine philanthropy and business will hurt the former by thwarting philanthropic effort in controversial areas and by de-emphasizing philanthropy's helping mission. Some also question whether capitalism is really apt to be more effective than philanthropy or government when it comes to aiding the poor, especially in Third World countries that lack health care and social services or honest political and economic institutions.
In "Creative Capitalism," Michael Kinsley and Conor Clarke have enlisted a distinguished group of economists, journalists and executives of nonprofit organizations to assess Mr. Gates's speech and its social-entrepreneurship theme. Their responses (which originated as entries in a "web-based discussion," as Mr. Kinsley puts it) range from strongly supportive to sharply critical. One of the more interesting ideas found in this somewhat rambling book contends that "philanthropic" business activity is in fact at odds with what is best about capitalism itself and thus counterproductive.
Lawrence Summers, the former Harvard president and former Treasury secretary, states the difficulty succinctly: "It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too." He offers as an example Fannie Mae and Freddie Mac, government-created corporations that were supposed to achieve a social goal -- affordable housing -- while operating as businesses. They did neither well, eventually leaving their catastrophic debts for taxpayers to pay.
U.S. Circuit Court Judge Richard Posner, along with other contributors, notes that companies often suffer losses when they set out to address a social problem. If they could really make a profit by doing good works, the argument goes, they would no doubt already be hard at it. But if they do good works at the expense of profit, they will become less efficient, making themselves more vulnerable to competitors. Economist Steven Landsburg suggests that companies sacrificing profit to accomplish philanthropic goals end up betraying their shareholders, who rightly expect the best return on investment. Sometimes acting philanthropically will result in an indirect business benefit, such as improving worker skills. In that case, philanthro-capitalism might be in a company's interest -- but Judge Posner and others of like mind suspect that such instances are rare.
Their skepticism echoes Milton Friedman's objections to "corporate social responsibility," expressed in a 1970 article that is usefully reprinted in the book's appendix. Business professor David Vogel argues that "creative capitalism" is indeed a descendant of "corporate social responsibility," which has attracted support from corporations throughout the world, if only to improve their public images -- a kind of business benefit, to be sure. "Managers can plausibly claim that virtually any corporate expenditure on good works is in the interest of its shareholders," he writes, because subsidizing good works is "a form of risk management or public relations" that protects the company's reputation and brand. But even Mr. Vogel is hard-pressed to make an economic case for philanthro-capitalism. At best, he observes, companies that embrace an aspect of "social responsibility" do not seem to suffer much harm; but they do not prosper either.
Other contributors to "Creative Capitalism" are more sanguine about Mr. Gates's campaign. Markets are not perfect, they say, and businesses may need to be encouraged to look harder at opportunities for profitable enterprises in poorer countries, not least where failed governments are incapable of providing public services. In any case, as Harvard economist Ed Glaeser argues, consumers and investors may not be as single-mindedly profit-oriented as Milton Friedman perceived. Companies that try to balance doing good with doing well may reap rewards that their less altruistic rivals miss.
In the end, these differing judgments are left unresolved, as one might expect in what is essentially a collection of blog posts. Watching these smart folks kick the idea around, the reader might be tempted to interject a simple question: Why is "creative capitalism" even necessary? Whatever its limitations, no economic system has done more to create wealth, drive the progress of technology, improve the world's living standards and reduce poverty than capitalism in its traditional form. Maybe what the world could really use -- especially in its poorest regions -- is not "philanthro- capitalists" but just more plain old profit-seeking ones.
SEATTLE — Dell said today it has agreed to a legal settlement with states that claimed the computer company made misleading financing and service offers to PC buyers.
Dell said in a statement it will pay $3.85 million to at least 45 states participating in the settlement. A portion of the money will be used to reimburse states for legal costs.
Shares of Dell dropped 62 cents, or 5.6 percent, to $10.50 in afternoon trading.
Spokesman David Frink said Dell was contacted by the attorneys general from Connecticut and Washington, representing a larger group of states, last year.
"Consumers who sought and believed they received zero-percent financing were then ambushed by high interest rates and fees," said Connecticut Attorney General Richard Blumenthal in a statement. "Many consumers faced unacceptable obstacles obtaining warranty service on their Dell computers and others said they never received promised rebates."
Under the terms of the settlement, Dell agreed to give customers more information up front about what kind of financing they qualify for and allow them to cancel orders once they review final credit terms.
Dell also agreed to mail rebate payments and fulfill warranty obligations within a reasonable amount of time.
The settlement requires Dell to tell customers whether they must troubleshoot problems by phone before qualifying for in-person technical support at home. Dell must also justify claims about its customer service. For example, if it wants to use the term "award-winning," it must have won a customer service award in the past 18 months.
In its statement, Dell said the states' issues "represented only a very small percentage of the tens of millions of Dell consumer transactions in the states."
Round Rock, Texas-based Dell also said it had addressed these problems with many customers directly.
People who bought a computer or service on or after April 1, 2005, and had a problem with a financing offer, rebate or service can file a claim within 90 days with their state attorney general.
Monday, January 12, 2009
As part of the restructuring plans that General Motors Corp. and Chrysler LLC presented to the federal government, the automakers have pledged to speed up the process of shrinking their dealer bodies.
Neither Chrysler, which has 3,300 dealerships, nor Ford Motor Co., with its 3,790 stores, have shared their targets for dealership reductions.
But GM told Congress that it aims to reduce its dealer count by 26%, from 6,375 at the end of 2008 to 4,700 by 2012.
Industry experts say that alone will be difficult to accomplish -- but they also said it's still not enough.
Even if the automaker were to cut its dealer body to 4,700 without shrinking the rest of the business, experts said, GM's sales per dealership would remain much lower than those of competitors Toyota Motor Corp. and Honda Motor Co.
When Toyota and Honda dealerships have more sales per store than GM stores, that means they also have more profits to invest in facilities, customer service and perks, such as rental cars for customers who are having their vehicles serviced.
While Detroit's automakers do have many profitable, first-rate dealerships nationwide, thousands of stores are struggling with low sales and cannot afford to deliver the retail experience that could help woo customers back to Detroit's improving cars and trucks.
"Their argument is if we have fewer, more profitable dealers, they'll spend more on their facilities, they'll be able to strengthen their brand image," said Mark Johnson, automotive merger consultant in suburban Seattle.
To be competitive, Wachovia analyst Richard Kwas has said GM should reduce its dealer count to closer to 2,000.
Other experts have told the Free Press that Detroit's automakers need to reduce as many as 20% of their stores nationwide to get competitive.
Solutions in bankruptcy?
Given the complexities of shedding dealerships, several experts told the Free Press that it might not be possible to achieve the scope of closures and consolidations the automakers are seeking without a bankruptcy proceeding or a federally-facilitated bankruptcy-like proceeding, in which the automakers are allowed to void franchise contracts in order to achieve the changes they want.
Howard Polirer, director of industry relations at AutoTrader.com, said the early conditions of the federal loans made it appear that the federal government would require automakers to slash their dealership numbers, but it's unclear how they would do that absent bankruptcy-like procedures.
Until the Obama administration and new Congress take over later in the month, the conditions are not seen as very meaningful, he said.
"This is far from being resolved," Polirer said. "We all know, come Jan. 21, this whole process is going to be looked at much closer, probably much differently. The question is whether they can accomplish what they're looking to accomplish without the rules and regulations of a bankruptcy."
A complicated process
Johnson, the merger consultant from Seattle, said that shrinking the dealer body won't save automakers much money because it ultimately will be exorbitant to get the dealerships to close.
When GM announced in 2000 that it would close its Oldsmobile brand, it took four years and $1 billion to shutter 2,800 dealerships, largely because so many dealerships sued to protect their contracts.
More dealers are expected to fail or close up because of poor sales in the coming year than a typical year because of the weak economy.
Grant Thornton put out a report in October that said the rate of decline would accelerate into 2009.
"We see more unprofitable dealers closing their stores outright," Paul Melville, a Grant Thornton LLP partner, said as part of that report.
Despite that, dealers and industry experts said they don't believe there will be enough closures to solve the automakers' problem of having too many dealers competing with each other for too few sales.
"It's a sticky wicket," said Ron Tonkin, president and chief executive officer of the Ron Tonkin family of dealerships based in Portland, Ore., and the former president of the National Automobile Dealers Association. "Because of the state franchise laws, it is a very, very costly effort."
Offers to close up shop
Tonkin and other experts have estimated that the fastest, easiest way for automakers to shed dealerships they don't need is to pay them to close. However, that likely would cost several million dollars per store.
Tarik Daoud, former president of Al Long Ford in Warren, agreed in December to close the new-car sales franchise and instead operate a used-car sales showroom and service center instead. His decision was based on an offer from Ford.
"For the times and the economy, Ford came to me and made me a lucrative offer if I take a buyout," he said.
In the end, however, experts said they don't believe the federal government or taxpaying public will like the idea of federal loans being used to pay independent businesspeople to close their businesses.
Nor might members of Congress, many of whom probably didn't anticipate that dealerships in their districts might have to be closed in order to make Detroit's automakers healthy again.
read more about auto dealership closures at: Michigan Business News Blog