Ups and Downs Plus Top News (QuickNews) September 1, 1999

Motley Fool QuickNews

Wednesday 9/01/99

Editor's Note: One of the things readers have said they miss with our new news format is a single page with a daily market review and other Fool news and commentary. In response to that, this week we introduce The Motley Fool's QuickNews, where you'll find our mainstay Ups and Downs and the day's top news stories in one easy-to-read composite. Of course, don't forget to check out the links to the rest of our news features, published throughout the day. Comments or questions? E-mail the Fool News team at

Closing Market Numbers

DJIA           10937.88   -108.60    (+1.00%) 
S&P 500         1331.07    +10.66    (+0.81%)
Nasdaq          2750.80    +11.45    (+0.42%)
Russell 2000     430.99     +3.16    (+0.74%)
30-Year Bond  100 19/32     -5/16  6.08 Yield

Today's Market Movers:


Internet brand awareness reports bumped up a handful of Internet stocks in trading today. Online recruitment services firm CareerBuilder (Nasdaq: CBDR) climbed $1 21/32 to $9 1/32 after research group Media Metrix reported it has the third-largest base of employees seeking jobs on the Web. HeadHunter.Net (Nasdaq: HHNT) romped $3 to $14 1/4 when Media Metrix reported it too had cracked the top three. Internet-based recruiting company (Nasdaq: HOTJ) surfed up $4 1/4 to $29 1/4 when the Opinion Research Corp. dubbed it the sixth most recognized e-commerce brand name on the Web.

Performance improvement and optical plastics holding company GP Strategies (NYSE: GPX) bounced up $3 9/16 to $11 3/8 after an affiliate of Veronis Suhler & Associates and members of GP management tendered an offer to purchase all outstanding shares of GP for a minimum of $13 per common share and $14.63 per class B share. The company's board of directors formed a negotiating committee to explore terms of the buyout.

Stylish computer maker Apple (Nasdaq: AAPL) ripened $3 3/8 to $68 5/8 after unveiling its newest product, the desktop supercomputer. Apple officials claim the Power Mac G4, designed to run slick graphic applications like Adobe (Nasdaq: ADBE) Photoshop, is the fastest personal computer in history.

Online Web portal company StarMedia Network (Nasdaq: STRM), which is targeting its services to Latin America, jumped $4 21/32 to $43 11/32 after launching its Internet access service in Brazil and announcing plans to expand quickly to Argentina, Chile, Columbia, and Mexico.

Medical device maker Staar Surgical (Nasdaq: STAA) eyed gains of $2 11/16 to $14 9/16 after receiving approval from the FDA to start selling a foldable intraocular lens for cataract patients.

Warehouse management software firm Catalyst International (Nasdaq: CLYS) bolted $2 1/2 to $17 3/4 after German business software giant SAP (NYSE: SAP) took a 10% stake in the company.


Wireless communications giant Qualcomm (Nasdaq: QCOM) dropped $23 1/2 to $168 11/16 on a report from Everen Securities analyst Mark Roberts that price pressures and component shortages would keep the company from walloping estimates, Bloomberg reported.

Network processor manufacturer MMC Networks (Nasdaq: MMCN) skidded $4 1/8 to $26 3/4 on concerns that a pact between Cisco (Nasdaq: CSCO) and IBM (NYSE: IBM), two of its biggest customers, could cut into its sales.

Cold weather apparel company The North Face (Nasdaq: TNFI) cascaded $7/8 to $7 7/8 after an agreement to sell the outfit to a group controlled by Leonard Green & Partners fell through. Jim Fifield, the company's president and chief executive, resigned today. He'll remain on the company's board.

Drugmaker Alkermes Inc. (Nasdaq: ALKS) slid $3 7/8 to $33 1/4 after Merrill Lynch analyst Eric Hecht downgraded the stock to "neutral" from "accumulate" on concerns that its growth hormone deficiency drug Nutropin Depot will run into problems at the FDA and fail to be commercially successful.

Networking products ace Juniper Networks (Nasdaq: JNPR) shed $24 3/4 to $180 1/4 after the company announced plans to sell 5 million shares of common stock. Of the 5 million shares, 1.5 million will be offered by the company and 3.5 million will be offered by existing shareholders.

Today's Top Stories:

FOOL ON THE HILL An Investment Opinion
Gap: The Challenge of Branding Basics
By Louis Corrigan (TMF Seymor)

The stunning rise of Gap Inc. (NYSE: GPS) to retail superstardom status in recent years has come courtesy of a number of initiatives. Not the least of these is the artful way CEO Mickey Drexler launched and rapidly expanded the firm's Old Navy discount chain while revamping Banana Republic for the higher end of the mainstream apparel market. These moves have created a three-tiered attack that's been unbeatable in sucking customers away from competitors in each segment of the company's expanded market. It's also enabled Gap Inc. to focus each unit's merchandise and revamp inventory management to offer a deep selection of core products, thus boosting sales and improving customer satisfaction.

Nonetheless, the Gap wouldn't have become the ubiquitous pop culture touchstone that it is today without advertising. Actually, massive amounts of hip ads that have managed to turn commodity products (apparel basics) into branded items that get people feeling good and paying up. And that's the idea since customers will seek out the well-branded product rather than accept ready substitutes -- and also pay a premium for that product. The numbers alone paint the general picture. Ad spending has soared from $96 million in 1996 to $175 million in 1997 to $419 million in 1998. Even noting that total sales increased 71% between FY96 and FY98, the uptick in ad spending is striking. The ad budget has risen from 1.8% of sales in 1996 to 2.7% in 1997 to 4.6% last year. The company reportedly aims to hike ad spending to 5% of sales this year.

This aggressive ramp-up on advertising reflects a major shift that occurred during the latter half of 1996. As Fortune magazine pointed out in an August 1998 cover story, Drexler had been preoccupied with expanding Old Navy while repositioning Banana Republic when he realized that the core Gap chain had lost its focus. This was most evident in print ads that featured a male model with an androgynous look and an obvious attitude problem. "It was so incompatible in my mind with what made Gap right," Drexler told Fortune. Shortly thereafter, Maggie Gross, the company's longtime ad director, resigned. That in turn led to the departure of other folks in Gap's ad department.

Drexler refocused on the flagship Gap chain, but now with the aim of answering those critics who felt like the retailer was mature and offered only moderate growth opportunities. He began comparing the overall company to Coca-Cola (NYSE: KO), which has masterfully combined one of the strongest distribution systems on the planet with exceptional brand marketing. "We started to think about our business in different terms," Drexler told Fortune. "Before, for example, we would have had one store in a particular market. But if you think about great brands in America and the world, they usually dominate a much larger percent of market share than any apparel company does."

So Drexler decided to become more aggressive about opening new stores. The company also reevaluated the type of marketing it needed in order to become a truly ubiquitous consumer brand. In April 1997, the Gap launched its first TV ads in more than five years.

Part of expanding the company's market share, though, meant refocusing on basics while going easy on the fashion component. Fashion, after all, is almost inevitably hit-or-miss and thus presents inventory risks. Moreover, too much fashion can dilute the company's mainstream appeal, confusing the very customers that the Gap needed to become the no-brainer first choice for casual apparel.

For all of these reasons, last year's "Khaki Swing" TV ads have got to go down as one of the most successful ad campaigns of the decade. By combining a new version of a Louis Prima classic with innovative stop-action filming techniques and a cool-looking but still cleancut group of dancers, the Gap managed to turn perhaps the most boring of basics into an actual fashion item that drove traffic into its flagship stores.

Of course, it didn't hurt that the campaign took direct aim at Levi's wildly successful Dockers franchise, which had been riding the business casual trend in men's apparel. Moreover, according to industry data, customers buy two tops with every new pair of pants they purchase. That makes pants the optimum vehicle for generating not just traffic but added sales. Indeed, it's just hard to imagine an ad campaign that could have been more appropriate both as a branding enterprise and as a sales driver.

The lingering question, though, is can the Gap keep it up? After all, at some point, customers don't need to buy as many new khakis as they have in the recent past, even with the continuing trend towards business casual. And when everyone's wearing khakis, even the modest cachet they held begins to fade. It's pretty easy to start hating khakis.

Moreover, how can the company continue to offer modest amounts of fashion without either growing stale or going overboard? When I see the dozen or more flavors of cargo pants, I think here's a phenomenon that cries out for a postmodern Marxist critique. There's just a process of hyper-differentiation at work here that embodies both the fetishizing of the commodity and the exhaustion of that fetishization. Cargo pants were a great idea, but that's one idea that's now run its course, in my opinion. What comes next? Though I'm focusing on the Gap chain alone, Old Navy, in particular, faces the same problem of constantly refashioning the basics. That's a challenge Coca-Cola really doesn't face.

It's also a problem that's recently hurt the Gap's stock. Second quarter comp store sales reported August 12 rose a solid but modest 8% after swinging to a 19% gain a year ago. July comps reported August 5 were particularly weak, registering merely a 2% gain versus a 19% increase a year ago. Gap chain store comps were the weakest link in these tallies, simply indicating the high hurdles created by the company's success over the last two years.

What's striking here are the limitations of advertising. A visit to Gap's hometown of San Francisco proves just how well the company manages its blanket ad campaigns. You simply can't travel a mile in the city without encountering outdoor signage that reflects the Gap's casually hip models sporting vests. And personally, I like the new TV ads for the vests featuring a group of Gap-pies singing Madonna's "Dress You Up (In My Love)." In fact, I'm particularly smitten with the young woman featured near the end ("...all over your body..."), which I'd say makes it a successful ad except that she offers a rather too powerful distraction for me.

But vests? You might need vests in San Francisco but you don't need them in Atlanta anytime soon. Also, unlike khakis, a vest whispers fashion. So it doesn't lend itself particularly well to driving store traffic or additional sales since folks who buy a vest don't necessarily buy pants as well. On the flipside, though, the focus on basics alone makes it easy for others simply to trade off of the Gap's brand, where the relatively generic merchandise becomes highly dependent on the marketing for its appeal. Apple's (Nasdaq: AAPL) iMac ads in the CompUSA (NYSE: CPU) window in San Francisco can be easily mistaken for Gap ads, for example.

None of this means that Gap Inc. isn't a great company. It is. The company still managed to grow sales 29% in the second quarter to $2.45 billion while boosting earnings by 47% to $0.22 per share. And Old Navy and Banana Republic are still relatively early in their life cycles relative to the Gap chain itself. Still, investors might ponder whether the Gap's terrific marketing may now be coming up against decreasing returns, in part because it's already been so successful and in part because, well, apparel retailing ultimately depends on the apparel.

FOOL PLATE SPECIAL An Investment Opinion
Does Hilton Think It Happens at Promus?
By Warren Gump (TMF Gump)

Promus Hotel Corp. (NYSE: PRH), the operator of Embassy Suites, Hampton Inn, Doubletree, and others, soared for a second day in a row after The Wall Street Journal reported that Hilton Hotels Corp. (NYSE: HLT) is trying to acquire the company. Details on the potential transaction are scarce. The Wall Street Journal article stated that the transaction was for "significantly more" than Promus' closing price yesterday, but didn't specify whether it was a cash or stock deal. Although the newspaper's sources say that the companies want to settle on a transaction shortly, the deal is not imminent and could fall through.

From a business perspective, combining Promus and Hilton makes a lot of sense. At the end of last year, Hilton spun off its gaming operations into Park Place Entertainment (NYSE: PPE) making it a pure lodging company. A majority of its profits come from owned hotels, the most important of which are its 10 largest convention properties in major markets such as New York, Chicago, and Honolulu. While these are wonderful flagship properties, earnings for such properties tend to be quite cyclical. To reduce the impact of this cyclicality on the overall company, Hilton has been trying to increase recurring fee income streams by expanding its franchising operations.

On the other hand, most of the properties in the Promus system are owned by franchisees. Instead of being subject to property-level profitability, Promus takes a chunk of each property's gross revenues for letting owners use its brand names and operating systems. These income streams can fluctuate, but they are much less volatile than earnings at the underlying properties. While Promus has leading brands in several of the categories in which it competes, the company has struggled to conquer the upper-tier full-service market where Hilton shines. Merging these two companies would result in a hotel powerhouse that should be able to effectively compete against strong multi-brand companies like Marriott International (NYSE: MAR) and Starwood Hotels & Resorts Worldwide (NYSE: HOT).

Making the timing of this potential merger appealing, Promus has been suffering from management upheaval following its late-1997 "merger of equals" with Doubletree. Several months after that deal was consummated, key leaders and board members from both companies resigned because they couldn't agree on how to run the company. Promus brought in an outsider, Norm Blake, to take control of the company, but it has not yet regained its prior momentum. Hilton CEO Steve Bollenbach, a renowned dealmaker, has been trying to complete a major transaction for quite some time, having lost out to other bidders in attempts to acquire ITT and parts of Wyndham International (NYSE: WYN).

A big question that will need to be answered is how Hilton plans to finance the potential purchase of Promus. Today's article didn't state whether Hilton is trying to negotiate a cash, cash and stock, or all stock deal. Given the low price of Hilton stock, it's hard to imagine that its management team would want to issue many shares (or that Promus shareholders would want to own Hilton stock). At the same time, Hilton already has a hefty $3.4 billion debt load (compared to book equity of $213 million and a market capitalization of less than $3 billion). While the company could borrow lots of money against Promus' relatively stable and substantial cash flow, equity investors generally shy away from debt-laden hotel franchising companies.

While it looks like Hilton is facing a financing dilemma, one should never underestimate the ability of Bollenbach to structure an innovative deal. In prior jobs, he was the mastermind behind the split-up of Marriott and Host Marriott (NYSE: HMT), as well as Disney's (NYSE: DIS) purchase of Capital Cities/ABC. We'll have to wait and see if he can come up with an attractive structure for a Hilton/Promus combination.

More of Today's Best:

Day Runner Stumbling
By Dave Marino-Nachison (TMF Braden)
-- How much longer can Day Runner Inc. (Nasdaq: DAYR) keep slogging along? Last night, the calendar and organizer maker reported fiscal Q4 results that were pretty much a downer across the board.

Sbarro Rolls Past Q2, Investors Yawn
By Richard McCaffery (TMF Gibson)
-- Italian eatery Sbarro (NYSE: SBA) posted earnings of $6.2 million, or $0.30 per diluted share, for the quarter ended July 18, up from $5.1 million, or $0.25 per diluted share, from the same period a year ago.

Restatement Wilts Q2 Profits For Flowers
By Brian Graney (TMF Panic)
-- Baked goods and frozen foods maker Flowers Industries (NYSE: FLO) turned into a cactus this morning and pricked investors by restating its second-quarter results. Instead of the profit of $0.10 per share (excluding charges) reported two weeks ago, a tweaking of the company's books has prompted those results to be changed to a loss of $0.03 per share (excluding those same charges).

Delia's Disappoints
By Brian Graney (TMF Panic)
-- Generation Y-tailer Delia's (Nasdaq: DLIA) turned in second-quarter earnings today, reporting losses of $0.42 per share, well off last year's penny loss and a penny worse than First Call's four-analyst consensus estimate for the apparel and "lifestyle gear" chain.

Olde Puts New Face on H&R Block
By Brian Graney (TMF Panic)
-- Tax preparer H&R Block (NYSE: HRB) announced this morning that it will acquire the country's fourth largest discount broker, privately held Olde Financial Corp., for $850 million in cash. With the purchase, H&R Block adds Olde's 181 branches in 35 states to its existing network of nearly 9,000 tax offices and also picks up Olde's 600,000 active accounts with $37 billion in aggregate equity. Olde will help smooth out H&R Block's earnings and revenue streams and boost EPS by $0.06 to $0.08 in fiscal 2000. In fiscal 2001, the earnings accretion from the deal is expected to be between $0.20 and $0.30 per share.