Thursday, July 1, 1999
DJIA 11006.58 +35.78 (+0.33%) S&P 500 1374.59 +1.93 (+0.14%) Nasdaq 2701.60 +15.48 (+0.58%) Russell 2000 453.75 -3.93 (-0.86%) 30-Year Bond 88 27/32 -1 6/32 6.06 Yield

An Investment Opinion
by Louis Corrigan

Wal-Mart Deals With Books-A-Million

Why would Wal-Mart (NYSE: WMT) -- the nation's largest retailer, one of its major booksellers, and a supposed sleeping giant in the e-commerce arena -- form an online alliance with small fry Books-A-Million (Nasdaq: BAMM)? It's not clear that investors have a satisfying answer to that question, but Books-A-Million holders are booking fat profits today on the news. Its stock is up $7 7/32 (or 96%) to $14 3/4. Meanwhile, shares of Wal-Mart are off $7/16 at $47 13/16.

According to today's press release, Books-A-Million will become the exclusive provider of books and related products to Wal-Mart's Internet customers, who will now enjoy access to an expanded selection of titles. Books-A-Million will handle the orders from its Florence, Alabama distribution center.

This agreement follows a similar June 21 outsourcing deal between Wal-Mart and the Fingerhut direct mail unit of Federated Department Stores (NYSE: FD), owner of the Macy's and Bloomingdale's department stores. Fingerhut processes Web and phone orders from start to finish. Its services include order fulfillment, warehousing, shipment, payment processing, and customer service functions. Fingerhut will apparently handle Wal-Mart's orders from its Provo, Utah warehouse and distribution center starting later this summer. Fingerhut CEO Will Lansing told Reuters that its Internet fulfillment business, which includes other clients such as eToys (Nasdaq: ETYS), could generate $40 million in revenues in 1999 and over $100 million next year.

Wal-Mart has spun these deals as part of its strategy to improve its online operations, including its customer service. Yet, they beg some basic questions about what Wal-Mart is up to in the online market. The company is known for a tightly run distribution system that relies on sophisticated point of sale inventory management and squeezes suppliers for the best prices. According to those skeptical of competitive advantage on the Web, Amazon.com (Nasdaq: AMZN) and other e-tailers are sitting ducks waiting to get blown out of the water by Wal-Mart, which simply needs to stick an improved Web interface on its substantial, high-tech, brick-and-mortar assets.

Are Wal-Mart's moves to outsource fulfillment simply temporary holding actions until Wal-Mart really gears up for action? Or, do they suggest that mail order sales are a different kettle of fish compared to Wal-Mart's traditional business? In that case, perhaps the old line retailers with the really meaningful assets would include companies like Fingerhut and home shopping networks like Comcast's (Nasdaq: CMCSK) QVC and USA Networks' (Nasdaq: USAI) Home Shopping Network.

At any rate, today's news certainly is a shot in the arm for BAMM, the nation's number three independent bookseller, with 177 stores in 17 states. This small-town bookseller punched its way into the Internet frenzy late last year with the relaunch of its online store, but the stock has been mostly in retreat since. The company did report improved results for the first quarter ended May 1. Sales rose 14% to $85 million on a 4.9% gain in same-store sales, and earnings rose to $0.02 a share from a break-even period in 1998. It remains to be seen, though, whether Books-A-Million's deal with Wal-Mart will generate meaningful sales, or even how long it will remain in place.


3D graphics accelerator chipset maker S3 Inc. (Nasdaq: SIII) jumped $2 9/32 to $11 3/8 on news that it expects to report Q2 EPS $0.15 to $0.20 better than First Call's estimated $0.20 per share loss. "Our anticipated financial performance in Q2 puts us ahead of our plan to achieve profitability by the end of the year,'' said CEO Ken Potashner. Revenues are seen coming in at $50 million.

Hearst Corp. will invest $100 million in Hearst-Argyle Television (NYSE: HTV), which owns and operates network-affiliated TV stations. The investment raises Hearst's stake in the company to about 52.3 million shares, or 56.3% of total shares outstanding. Hearst is buying around 3.69 million new shares of Series "A" common stock at a price of $27.125 per share. Hearst-Argyle stock grabbed $1 3/16 to $25 3/16.

Illinois savings and loan holding company Eagle BancGroup (Nasdaq: EGLB) rose $2 1/4 to $24 3/8 after agreeing to be bought by First Busey Corp. (Nasdaq: BUSE) for $26.6 million in cash. The $25.74 per share deal represents a 16.3% premium to yesterday's closing price.

Telecommunications billing and customer service software maker LHS Group (Nasdaq: LHSG) gained $3 1/4 to $36 3/8 after last night reporting a strategic partnership with Germany's Siemens Business Services through which Siemens will market and distribute LHS' customer care and billing software to telecommunications customers worldwide.

Electronic communication network equipment supplier C-COR Electronics (Nasdaq: CCBL), which told investors fiscal Q4 EPS was expected to come in ahead of Wall Street's $0.36 consensus estimate, got $1 7/8 to $29 3/4. The company expects record revenues and income from continuing operations; results will be reported Aug. 18.

Generic drug maker Watson Pharmaceuticals (NYSE: WPI) improved $2 13/16 to $37 7/8 after it said Q2 EPS is seen in line with market expectations. IBES' analyst survey has a $0.43 consensus projection. The company said it issued its statement in response to "misinformation in the marketplace." The company also said Chairman and CEO Allen Chao underwent successful surgery for stomach cancer.

Analog and mixed-signal integrated circuits maker Exar Corp. (Nasdaq: EXAR) climbed up $1 1/8 to $25 7/8 after Prudential Securities upgraded the stock to "strong buy" from "accumulate," setting a 12-month share price target of $35.

Media streaming technologies developer RealNetworks (Nasdaq: RNWK) tuned in $7 1/8 to $76 this morning. The company said it will make its latest RealAudio format compatible with Microsoft's (Nasdaq: MSFT) WebTV products, also agreeing to develop a new RealPlayer G2 for the software company's Windows CE operating system platform.

Office-furniture maker Herman Miller (Nasdaq: MLHR), which reported fiscal Q4 EPS of $0.48 -- beating both last year's $0.40 mark and Wall Street's $0.38 consensus -- hammered out gains of $2 1/8 to $23 1/8. New orders were down from last year's levels. CEO Mike Volkema said in an interview yesterday that while the company didn't meet internal growth or profitability goals because of reduced demand, he sees the tide turning.


Trouble is brewing at coffee retailer Starbucks (Nasdaq: SBUX), which was scorched $12 to $25 9/16 after warning late yesterday that slower-than-expected growth in its non-core businesses and rising costs related to its Internet strategy will lead to fiscal 1999 EPS of $0.54 instead of the $0.60 analysts had been expecting. Deutsche Banc Alex. Brown cut its rating to "buy" from "strong buy" and Goldman Sachs downgraded the company to "market outperform" from "recommended list."

Well, so much for the Efficient Market Theory. Benefits administration outsourcer ABR Information Services (Nasdaq: ABRX), which surged 203% in the closing minutes of trading yesterday to close at $90 1/16 per share, completed its round-trip back to reality this morning and fell $61 5/16 to $28 3/4. While the company said it can't explain the rise, various news outlets have attributed the spike to traders mis-typing the firm's ticker, weighting changes in the Russell 2000 Index, or perhaps even both. Whatever the case, Ceridian Corp. (NYSE: CEN) has already acquired 98.3% of the firm's shares at $25.50 per share, raising questions as to why anyone is still willing to buy the remaining ABR shares out there for more than the buyout price.

TV and Web content provider CNET (Nasdaq: CNET) was kicked $4 15/16 lower to $52 11/16 after saying a planned $100 million ad campaign over the next 18 months to establish the CNET brand name in consumers' minds as "the place to go for computer and technology information" will result in unspecified net losses this year. The First Call estimate had called for full-year EPS of $0.21.

"It's a Small World After All" originator Walt Disney Co. (NYSE: DIS) got a little smaller this morning, dropping $1 3/4 to $29 1/16 after Morgan Stanley Dean Witter cut its rating on the firm to "neutral" from "strong buy."

Athletic footwear giant Nike (NYSE: NKE) stumbled $4 to $59 3/8 after posting up and scoring fiscal Q4 EPS of $0.38 before charges, beating analysts' expectations by a penny. Revenues for the quarter fell 5% from last year to $2.18 billion as U.S. apparel sales sank 19%, though worldwide futures orders for merchandise to be delivered between June and November are 4% higher. Gross profit margins improved in the period to 39% from 32%.

Multi-family apartment communities operator Lexford Residential Trust (NYSE: LFT) fell $4 to $19 7/8 after agreeing to be acquired by apartment real estate investment trust (REIT) Equity Residential Properties Trust (NYSE: EQR) for about $203 million in stock and $530 million in assumed debt. Lexford's shares had risen 42% in anticipation of a merger since the company hired Morgan Stanley Dean Witter in April to find a buyer.

Aerospace structural materials maker Hexcel (NYSE: HXL) slid $1 1/8 to $9 after saying softness in some of its markets and lower build rates from plane maker Boeing (NYSE: BA) will result in Q2 EPS between $0.13 and $0.16 and full-year EPS between $0.60 to $0.70. The Zacks mean estimate had called for Q2 EPS of $0.26 and full-year EPS of $0.93.

Specialty electrical contracting and maintenance services firm Quanta Services (NYSE: PWR) was zapped $3 3/8 to $40 5/8 after BancBoston Robertson Stephens lowered its rating to "long-term attractive" from "buy," citing valuation concerns.

Integrated circuit electronic connectors maker PCD Inc. (Nasdaq: PCDI) slid $3 1/8 to $7 7/8 after saying soft demand and falling prices for its products will result in Q2 EPS between $0.03 and $0.05, short of the Zacks mean estimate of $0.17.


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