THE MARKET MIDDAY
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No More Child's Play
More trouble in toyland today. Toymax International (Nasdaq: TMAX) -- the maker of R.A.D. Robot, Mighty Mo's vehicles, Laser Challenge, and Creepy Crawlers -- lost $1 1/4 to $5 3/4 this morning after reporting that fourth quarter earnings will come in at roughly negative $2 million -- off of sales between $13 and $14 million. With investors expecting net income of around $1.16 million for the quarter, or $0.11 per share, Toymax is understandably seeing some pressure. Sales for the full year are expected to be $108-$109 million, while net income for the full year is expected to be in the range of $8-$9 million.
Due to the extreme seasonality of the toy business, managing working capital requirements is of the utmost importance. Production is invariably financed by short-term borrowings that reach peak levels between September and November in conjunction with bulges in accounts receivable. Traditional marketing strategies in the toy industry allow retailers and distributors to pay for sales made throughout the course of the year in the fourth quarter, as well as early in the first quarter of the following year. This boosts manufacturers' need to borrow funds pending these collection times. Most manufacturers encourage their customers to place orders and accept shipments early in the year to book a backlog of orders. However, the toy business is characterized by dramatic swings in customer order patterns because of differences in consumer acceptance of certain product lines.
Further, retailers will always do what is in their best interests, often to the detriment of manufacturers. For more than a year now, toy manufacturers have been struggling while retailers (especially the discounters that control 40% of the market) have been bringing down inventories and managing leaner purchasing operations. As Toymax noted, "Retail consolidation both in the U.S. and in Europe continues to affect business, with the bankruptcies of Caldor's and Service Merchandise, the sale of Hills Stores to Ames Department Stores, and the failure of one of Toymax's major European distributors, Linea GIG S.P.A. The reduction in sales in the quarter was also attributable to the ongoing shift in retailer buying patterns, which began in the middle of last year..."
This consolidation, along with a secular shift in the business with respect to the age that children transition to computer-related activities, has hit the industry hard. Toymax, though, has always strived to be a somewhat non-traditional toy firm. Licensing is such an integral part of the toy business that it affects almost all product categories. Licensing is the business of "leasing the right to use a legally protected name, graphic, logo, saying, or likeness in conjunction with a product, promotion, or service." Toymax has decided to pursue diverse revenue streams rather than bet the future on only a few successful licenses, and the firm's announcement of its acquisition of Monogram jibes with this overall strategy. A significant portion of the firm's net sales have come from toys developed internally, and until recently this has been a sound strategy. Interested investors should take a closer look.
Online brokerage E*Trade Group (Nasdaq: EGRP) traded up $8 3/16 to $82 after reporting a pro forma Q1 loss of $0.12 per share as the company spent heavily on marketing and investments in technology and customer service. Still, the loss was not quite as bad as the loss of $0.17 per share expected by analysts surveyed by First Call. Total active accounts rose 129% from a year ago to 909,000 while total transactions for the period were up 168% to 4.3 million.
Better Homes and Gardens and Ladies' Home Journal publisher Meredith Corp. (NYSE: MDP) unearthed a $2 9/16 gain to $33 3/16 after posting fiscal Q3 EPS of $0.41 versus $0.37 a year ago, topping the Zacks mean estimate by a penny. The company also announced a deal with online services conglomerate America Online (NYSE: AOL) under which AOL will distribute content from Meredith's branded websites. Separately, AOL rose $7 1/16 to $122 15/16.
A trio of Internet-related companies got a boost this morning following upgrades from Goldman Sachs, which raised its ratings for the firms to "recommend list" from "market outperform." Internet search and caching software firm Inktomi (Nasdaq: INKT) rose $17 to $106, online advertising firm DoubleClick (Nasdaq: DCLK) added $15 to $119, and Internet systems management and web hosting firm Exodus Communications (Nasdaq: EXDS) gained $6 7/8 to $68 1/4.
ESS Technology (Nasdaq: ESST), which supplies Internet, modem, PC audio, and digital video products, picked up $1 29/32 to $8 1/32 after posting Q1 earnings of $0.28 per share compared to a loss of $0.30 per share a year ago, topping the $0.06 per share estimate of the sole analyst surveyed by Zacks. Revenues were up 50% during the period to $79.3 million.
Banking and financial services giant Citigroup (NYSE: C) advanced $1 to $71 5/8 after announcing a three-for-two stock split payable on May 28 and an increase of its quarterly cash dividend to $0.14 per share from $0.12 per share on a post-split basis. Lehman Brothers raised its rating on the firm to "buy" from "outperform."
Electric power company Southern Co. (NYSE: SO) charged ahead $1 15/16 to $27 11/16 after reporting Q1 EPS of $0.32, down from last year's $0.35 but in line with the First Call mean estimate. The company added that it plans to buy back up to 50 million of its outstanding shares over the next two years.
Newspaper advertising inserts company Big Flower Holdings (NYSE: BGF) grew $4 to $31 7/8 after saying it is exploring "strategic alternatives," including transactions that could include all or just part of the company.
MedImmune Inc. (Nasdaq: MEDI) gained $4 1/4 to $50 after Goldman Sachs raised its rating on the biotechnology firm to "recommended list" from "market outperform."
Aztar Corp. (NYSE: AZR) up $7/8 to $6; Q1 EPS: $0.06 vs. $0.01 last year; estimate: $0.01
Ben & Jerry's Homemade (Nasdaq: BJICA) up $1 3/4 to $27 1/8; Q1 EPS: $0.16 vs. $0.05 last year; estimate: $0.09
Burr-Brown Corp. (Nasdaq: BBRC) up $2 1/8 to $25 5/8; Q1 EPS: $0.20 vs. $0.27 last year; estimate: $0.20
Cognex Corp. (Nasdaq: CGNX) up $1 13/16 to $26 1/2; Q1 EPS: $0.07 vs. $0.24 last year; estimate: $0.05
Dal-Tile International (NYSE: DTL) up $1 9/16 to $12; Q1 EPS: $0.21 vs. $0.02 last year; estimate: $0.12
DeVry Inc. (NYSE: DV) up $2 5/8 to $25 3/16; fiscal Q3 EPS: $0.15 vs. $0.12 last year; estimate: $0.15
Immunex Corp. (Nasdaq: IMNX) up $7 1/4 to $73 1/2; Q1 EPS: breakeven vs. loss of $0.11 last year; estimate: loss of $0.07
Mallinckrodt Inc. (NYSE: MKG) up $3 7/16 to $30 7/8; fiscal Q3 EPS: $0.75 vs. $0.54 (before charges) last year; estimate: $0.64
Millipore Corp. (NYSE: MIL) up $3 7/16 to $30; Q1 EPS: $0.25 vs. $0.32 last year (before one-time items); estimate: $0.17
Rush Enterprises (Nasdaq: RUSH) up $1 3/8 to $13 3/8; Q1 EPS: $0.50 vs. $0.20 last year; estimate: $0.40
SmithKline Beecham (NYSE: SBH) up $3 1/16 to $65 13/16; Q1 EPS (ADR): $0.49 vs. $0.43 last year; estimate: $0.47
TriQuint Semiconductor (Nasdaq: TQNT) up $3 1/2 to $25; Q1 EPS: $0.32 vs. loss of $1.33 last year (including charges); estimate: $0.26