Friday, May 14, 1999
DJIA 10951.41 -155.78 (-1.40%) S&P 500 1343.92 -23.64 (-1.73%) Nasdaq 2550.69 -31.31 (-1.21%) Russell 2000 444.35 -6.49 (-1.44%) 30-Year Bond 90 13/32 -2 15/32 5.94 Yield

An Investment Opinion
by Dale Wettlaufer

Nordstrom Marked Down

High-end retailer Nordstrom, Inc. (Nasdaq: NOBE) was marked down $2 11/16 to $32 7/8 today after the company turned in a disappointing first quarter report. It wasn't so much disappointing in that it missed estimates -- that's about the least of the issues. The foremost issue is a 2.6% decline in quarterly comparable store sales and a one-tenth of one percent decline in total store sales. The company's been undergoing a restructuring, thinning down inventories and the like, but working capital management is only going to take you so far; it isn't going to cover you when your merchandising is not going well.

That's what looks to be the problem at the moment for Nordstrom. First, the working capital management: The company generated cash from inventory of $75.8 million in fiscal 1999. At the same time, square footage grew 7.8%, so that trend is welcome. That may have had a direct effect on sales, however. Sales per square foot in fiscal 1999 fell 3.6%. That's certainly not the worst thing in the world, especially when net cash from operations (excluding changes in receivables) more than doubled in fiscal 1999. I left out receivables changes because the company sells those into a trust and it muddles the picture.

The sales per square foot trend too a nastier turn this quarter, however. Annualized sales per square foot in Q1 fiscal year 1999 were $323. This quarter, Q1 fiscal 2000, annualized sales per square foot were $303. I annualize these for presentation purposes, realizing the seasonality in this retail segment. The 6% drop in sales per square foot is a pretty ugly trend. Reducing inventories is fine, but if it means you don't have the selection available for the customer and the inventory that you do have isn't moving, then flat sales are going to result. The company did generate better gross margin, however, and taking out a charge to operating expenses for the relocation of a data center, operating income from retailing was up approximately 26% for the quarter. Aggregating those results with financing, which is an integral part of the business, results were less robust, with pre-tax income before the charge rising 6.7%.

It appears as though the company is making progress with its initiatives, but investors would probably welcome better sales trends. Put together with the share buybacks, however, the company's financial engineering looks solid as long as they don't leverage things up too much to repurchase the shares.


Broadband Internet services company @Home (Nasdaq: ATHM) won $2 7/8 to $152 3/16 on news that software giant Microsoft Corp. (Nasdaq: MSFT) will become a strategic technology partner to @Home Solutions. Microsoft will provide support and resources to help market @Home Solutions. In exchange, the companies will collaborate to incorporate the Microsoft Windows NT Server operating system into @Home's network.

Pegasystems (Nasdaq: PEGA), which develops software that streamlines a company's interactions with customers, was lifted $2 1/32 to $7 1/16 after announcing a deal to provide online services giant America Online (NYSE: AOL) with contact center technology. Pegasystems said Q1 per share losses were $0.29, well off First Call's four-analyst $0.13 loss estimate. President & CEO Alan Trefler said new cost controls are working and should bear financial fruit in coming periods.

Networking equipment company 3Com Corp. (Nasdaq: COMS) plugged in $2 5/16 to $28 7/8 as Business Week's "Inside Wall Street" column said the company may be in the sights of acquirers. The magazine named as possible bidders Swedish wireless phone maker Ericsson AB (Nasdaq: ERICY) and telecommunications equipment maker Lucent Technologies (NYSE: LU).

Also benefiting from coverage in the magazine was digital cable television programming company ACTV Inc. (Nasdaq: IATV), a recent Foolish Double that moved up $3/4 to $16 11/16 today. The column said Liberty Media Group (NYSE: LMG.A, LMG.B) may buy what ACTV stock it doesn't already own; according to Southwest Research Partners analyst Anthony Stoss, News Corp. (NYSE: NWS) and General Instrument Corp. (NYSE: GIC) may also get involved.

Contact lens maker Ocular Sciences (Nasdaq: OCLR) cleared up $2 3/8 to $31 3/4 after it said last night its recall of 1.3 million lenses -- a problem with package seals may have affected sterility -- isn't expected to have an material effect on financial results. The shares gave up $5 1/4 yesterday on news of the recall.

Musical instruments and equipment retailer Guitar Center Inc. (Nasdaq: GTRC) strummed ahead $7/16 to $17 3/16 after agreeing to acquire privately held Musician's Friend Inc. -- the company operates a catalog and an e-commerce website -- in exchange for stock and assumed debt. The deal is valued at about $50 million.

Continued rumors or merger talks between agricultural and construction equipment makers New Holland NV (NYSE: NH) and Case Corp. (NYSE: CSE) made it into today's edition of The Wall Street Journal. Shares of Case rolled up $2 1/16 to $44 7/8 this morning, while New Holland lost $1/2 to $17 1/2.

Marketing firm Marketing Services Group (Nasdaq: MSGI) improved $2 1/4 to $39 5/8 after completing its acquisition of CMGI's (Nasdaq: CMGI) CMG Direct Corp., which includes its PermissionPlus Internet marketing services unit. CMGI will own more than 10% of Marketing Services in connection with the transaction.

Telecommunications services provider Primus Telecommunications Group (Nasdaq: PRTL) dialed up gains of $1 1/2 to $17 1/8 following an upgrade to "strong buy" from "outperform" at Morgan Stanley Dean Witter. Analyst Myles Davis lifted his 12-month share price target to $27 from $21.

Retailer Venator Inc. (NYSE: Z), operator of the Foot Locker chain, scored gains of $1 1/4 to $10 7/8 after Merrill Lynch upgraded the stock's near-term rating to "buy" from "neutral," holding fast its long-term "accumulate" rating.

Earnings Movers

Bell Industries (NYSE: BI) up $13/16 to $11 1/8; Q1 EPS $0.06 vs. loss of $0.20 last year; no estimate

Crescent Operating Inc. (Nasdaq: COPI) up $2 5/8 to $6 1/2; Q1 EPS $0.31 vs. loss of $0.11 last year; no estimate

Global TeleSystems Group (Nasdaq: GTSG) up $1 5/16 to $70 7/16; Q1 EPS loss of $1.22 (before items) vs. loss of $0.60 last year; estimate: loss of $0.94

Pacific Gateway Exchange (Nasdaq: PGEX) up $4 13/16 to $41 3/4; Q1 EPS $0.22 vs. $0.22 last year; estimate: $0.23

The Pep Boys-Manny, Moe & Jack (NYSE: PBY) up $2 1/8 to $17 13/16; Q1 EPS $0.20 vs. $0.16 last year; estimate: $0.18


Forage and turf seed company AgriBioTech (Nasdaq: ABTX) was mowed down for a $1/4 loss to $6 5/8 after posting a fiscal Q3 loss of $0.05 per share (including special charges) as rising operating expenses and "duplicative overhead" eroded operating margins to 1.2% from 4.6% a year ago. However, the company reiterated its plan to trim its annual operating expenses by $14 million by the end of its fiscal year on June 30.

Corporate meeting and event planner Caribiner International (NYSE: CWC) dropped $1 9/16 to $6 1/16 after saying difficult timing comparisons for its communications division and seasonally lower Q4 revenues will result in only "modest" revenue growth this year and full-year EPS "substantially below" the First Call mean estimate of $0.47. The company said it has hired Salomon Smith Barney to help review pending divestitures and possible asset sales.

Investors got rid of shares of Iridium World Communications (Nasdaq: IRID) this morning, sending the global satellite communication company's stock down $3 9/16 to $10 15/61. Late yesterday, the company said it hired Donaldson, Lufkin & Jenrette to help it restructure its debt and reduce its financing costs. Additionally, Iridium does not expect to meet the May covenants for an $800 million line of credit, which required the firm to have at least 27,000 subscribers to its service this month.

Semiconductor technologies licensor MIPS Technologies (Nasdaq: MIPS) slipped $2 1/16 to $34 9/16 after parent and Silicon Graphics workstation maker SGI (NYSE: SGI) sold 6 million Class A shares of the company in a public offering at a price of $34.50 per share, below MIPS' closing price of $36 5/8 per share yesterday.

Disposable food packaging maker EarthShell Corp. (Nasdaq: ERTH) was shelled for a $2 3/8 loss to $8 5/16 after reporting a Q1 loss of $0.08 per share compared to a loss of $0.06 per share a year ago. William McLaughlin, the company's president and COO, also resigned for personal reasons. Credit Suisse First Boston cut its rating on the stock to "hold" from "buy."

Cancer and autoimmune disease treatment developer IDEC Pharmaceuticals (Nasdaq: IDPH) slid $3 7/16 to $56 3/4 following a U.S. Bancorp Piper Jaffray downgrade to "buy" from "strong buy."

Singapore-based Internet services provider Pacific Internet Ltd. (Nasdaq: PCNTF) was routed $3 5/8 lower to $62 after saying it will sell 2.125 million shares, including more than 1.9 million shares held by existing shareholders, in an offering to raise money for the expansion of its business in Australia, India, China, and South Korea and fund acquisitions.


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