Business Blog: Hoover’s Business Insight Zone

Anyone for a game of Monopoly? Or maybe Halo 3?

Whether they’re played on a brightly colored piece of cardboard or an even brighter HD screen, games take center stage for many children over the holiday season. My own kids’ pipe dream of a Christmas gift is a Nintendo Wii system, which is still selling rings around the Microsoft Xbox 360 and the Sony Playstation 3 a year and a half after its release. In fact, the Wii has been so popular this season that Nintendo has launched a “raincheck” program to pacify shoppers who haven’t been able to lay hands on one. (No comment on whether Santa will be delivering a Wii to the Walker household this year.)

Whether their kids receive a big video game console, a handheld unit like the Nintendo DS or the Playstation Portable, or a board game like the new Simpsons version of Monopoly, many parents will find themselves playing games for the first time in ages during the weeks their children stay home from school around the holidays. (If you have children of the age to play Candyland and the weather keeps everyone indoors in this month, you have my sympathies.)

Board Games Regain Popularity

Your options for games to play are endless. After some ups and downs over the past 20 years,* many classic board games that I grew up with are still going strong, starting with titans like Monopoly and Scrabble. (Both Parker Brothers, which makes Monopoly, and Milton Bradley, which makes Scrabble, are owned by Hasbro.) After playing The Game of LIFE at my sister’s house over the Thanksgiving holiday, my kids pooled their money to buy an updated spinoff from the game called LIFE Twists and Turns. In the game, each player gets a faux credit card that is used with an electronic controller that keeps track of debts, assets, and the “Life Points” each player earns for experiences like having children or taking trips abroad.

Video Games Continue to Dominate

Read more

As a follow-up to Friday’s post, here’s Eddie Lampert’s rebuttal of criticisms of Sears Holdings and its performance:

Sears’ Lampert takes media, Street to task

CHICAGO, Nov 30 (Reuters) - Sears Holdings Corp Chairman Edward Lampert on Friday took the media and analysts to task for underestimating the company, saying the retailer is being criticized for the same practices that elicit praise when used by its competitors.

“When other companies manage expenses carefully, it is often characterized as a sign of good management and prudence. In the case of Sears Holdings, meanwhile, expense controls are often cited as a root cause of poor performance,” he said.

Link.

I’ve always been impressed with Eddie Lampert’s smarts.* And he may have big, deep plans for the long run about how the cash generated by Sears Holdings will fuel amazing investment returns. But at some point, doesn’t the company have to perform well on its own terms?

Sears Profit Drops,
Bringing Forecasts
Of a Restructuring

Edward S. Lampert, lionized until recently for his ability to turn a ho-hum retailer into a dazzling financial play, finds himself in a box with Sears Holdings Corp.

Falling sales and sharply weaker earnings could force the Sears chairman to restructure the company at a time when weak credit and real-estate markets will make such a move more difficult.

The Hoffman Estates, Ill., retailer yesterday reported third-quarter profit plummeted 99% on a modest sales decline. It also forecast glum year-end results, noting markdowns on bulging inventories would hurt margins in what is historically the company’s most profitable quarter.

~

* A quick search uncovers these posts I’ve written related to Lampert:

• Interesting re Eddie Lampert.
• Just how smart is Eddie Lampert?
• Oooh, I love me some buyout rumors . . .

~~~

Harry Potter and the Deathly Hallows got thorough coverage here — not least because your devoted blogger’s daughter is a Harry Potter fan of epic devotion. But for all that the book sold like hotcakes, it didn’t make money for its #1 purveyor, Amazon.com. The online retailer racked up boffo sales of HP7 and no doubt made lots of friends among its customer base in the process . . . but it took a loss on all those sales because of heavy discounting.

Henry Blodget of Silicon Alley Insider has more.

Wal-Mart remains by far the biggest retailer in the world and the largest company in the US, but it may not enjoy the clout it did even a few years ago, according to this detailed Wall Street Journal piece by Gary McWilliams:

Wal-Mart Era Wanes
Amid Big Shifts in Retail

Using a combination of low prices and relentless expansion, Wal-Mart Stores Inc. emerged from rural Arkansas in the 1970s to reshape the world’s largest economy. Its co-founder, Sam Walton, taught Americans to demand ever-lower prices and instructed businesses on running a lean company. His company helped boost America’s overall productivity, lowered the inflation rate, and strengthened the buying power for millions of people. Over time, it also accelerated the drive to manufacture products in Asia, drove countless small shops out of business, and sped the decline of Main Street. Those changes are permanent.

Today, though, Wal-Mart’s influence over the retail universe is slipping. In fact, the industry’s titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions to $4. But success is no longer guaranteed.

Whether you give as much weight as McWilliams does to the factors that face Wal-Mart, the article is well worth reading, not least for the strong dose of historical perspective it offers. I think that McWilliams is particular apt when he stresses how other retailers have not only competed with Wal-Mart on price, but have used other factors like convenience and style to trump Wal-Mart’s pricing advantages.

The giant, durable firms that have changed the world’s business landscape — GE, IBM, Siemens, and so on — have seldom done so by standing pat. Even if they hew to the same basic principles over time, they must forever reshape their businesses to cope with changes in their markets and the constant rise of new entrants to those markets. As sound as Sam Walton’s “Everyday Low Prices” approach has been for the past 40 years, it may turn out not to be as permanent a concept as Wal-Mart has thought.

Some brand names manage to become so prominent that they stand in for a whole class of goods — Kleenex, Coke, Xerox, Frigidaire. But not many brands can be used as shorthand for a social class. Since it was founded in 1818, Brooks Brothers has come to enjoy that cachet, with its name used as a stand-in for prep school, Wall Street, quiet money, and conservative sartorial style. Abraham Lincoln was wearing a Brooks Brothers suit the night he was killed, and when Katharine Hepburn first wore trousers on screen, they came from Brooks Brothers. The clothier of the east-coast Establishment is now trying to rebuild its relevance for new generations of businesspeople who have little connection to neckties and suits, much less old money.

To aid these efforts, Brooks Brothers has rolled out the largest print advertising campaign in its history, one example of which is the 24-page black-and-white spread in the current issue of American Express’s luxe Departures magazine. While the ads evoke the clothier’s long history, they’re meant to promote its spanking-new Black Fleece collection, with which designer Thom Browne aims to maintain Brooks Brothers’ classical style while updating it for today’s consumers. (This includes women, who account for about one-fifth of the retailer’s sales.) Retail Brand Alliance, the clothier’s parent company, has divested most of its other businesses to focus on Brooks Brothers, which is extending its brand into new markets by opening stores in Britain and on the Continent. All of these efforts should allow Brooks Brothers to take advantage of booming sales of luxury items, and to compete better with a range of rivals that includes specialist retailers like shirtmaker Thomas Pink and high-end clothiers with global aspirations such as Burberry and Polo Ralph Lauren.

~~~

* This article originally appeared on our Company of the Day page on 22 August 2007. Unless I’m mistaken, this catches us up on Company of the Day postings that didn’t originally appear in simulcast on this blog. From here on out, you should see only “current edition” Companies of the Day.

The bidding on that question starts at “Really, really smart” and goes up from there, but it will be interesting to see how the hedge-fund wizard will be regarded if his Sears Holdings keeps performing like it has been.

Sears Holdings profit falls 40 percent

Mind you, this is only one facet of the company’s performance, because Lampert doesn’t run the holding company of Sears and Kmart like most retailers run their operations. He’s still a financier at heart, and throughout the time he’s owned the retail chains, he’s used them as cash-generating machines that provide him with ample coin for further investment. Nat Worden of TheStreet.com offers a detailed analysis here:

Lampert’s Sears Strategy Could Pay Off

. . . At $140, the company is trading at approximately 10 times its annual cash flow after taxes. That means that by buying back shares, Lampert is essentially investing his money at a 10% cash return — a good deal considering that 10-year Treasury bonds are yielding less than 5%.

The cheaper the stock goes, the higher his return. Meanwhile, public shareholders who bought the stock at $150 are banking that the market won’t let Lampert get his 10% return for long. Eventually, the value of Sears Holdings’ cash generation will have to be recognized in its market price, as long as the cash flows hold up.

With its sales declines showing signs of digging into its bottom line, Sears Holdings could soon find its cash flows dwindling rapidly — especially in a consumer-led economic slowdown. In that worst-case scenario, some consumers may turn to discount retailers for their shopping needs, but as they build stores, retail titans like Wal-Mart, Target, and Costco are in a much better position to win that business.

The key issue: somewhere down the line, Sears Holdings still must succeed as an actual retailer. Right? Right? That’s the question its non-Lampert shareholders are asking; the answer to that question in, say, two more years will help us to answer the question of just how smart Eddie Lampert is.

Another sour reminder of the erstwhile Bob Nardelli regime for Home Depot: thanks to the still-unfolding credit crunch, the private-equity shops buying the HD Supply unit have negotiated a lower price — $8.5 billion instead of $10.3 billion.

Home Depot Cuts Supply Unit Price to $8.5 Billion

… Buyers Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice negotiated a reduction after the firms’ lenders demanded better terms, said the people, who declined to be identified because the accord hadn’t been signed. Home Depot agreed to sell the unit, HD Supply, for $10.3 billion in June.

Home Depot will finance $1 billion of the purchase, the people said. Home Depot also will take about a 13 percent stake in the unit, one person said.

The sale was threatened by a slump in demand for private- equity debt and the worst U.S. housing market in 16 years. Banks, which usually finance transactions and then offload the debt into the capital markets, are pushing for lower purchase prices as they grow increasingly concerned that they’ll be left with billions of dollars of loans.

HD Supply was Nardelli’s baby when he ran Home Depot. It was an effort to move Home Depot squarely into the wholesale supplier business, providing commercial-grade fixtures and materials to contractors and the like. It didn’t work as planned, and after Nardelli left, the company decided to hive it off so that they could focus on their traditional retail operations. And now they’re having to sell it at a discount. Better than not selling it at all, I guess, but still — it’s got to hurt.

No common theme here — just a follow-ups and one-offs on items that intrigue me:

• Ryan Paul of Ars Technica has a nice summary of litigious saga of SCO, which we discussed the other day. Well, the summary isn’t nice for SCO, which Paul believes is headed for “financial oblivion.” Paul has a complementary piece on the precipitous decline of SCO’s stock price — which, as I write this, is 39 cents.
• Kara Swisher of AllThingsD has an interesting video conversation with political-media blogger extraordinaire Jeff Jarvis. Jarvis classifies Yahoo as an “old media” company and thinks it’s just as doomed as the newspapers unless it “blows up” its business model. (We discussed Yahoo’s future a couple of weeks back.) You can read some of his further thoughts on media innovation in this column posted on his blog.
• The latest news in the mortgage meltdown/credit crunch: Merrill Lynch analyst downgrades Countrywide Financial. (What — don’t they read this blog at Merrill?) Yesterday, the NYSE halted trades in Thornburg Mortgage shares after prices fell 47%. But Thornburg has assured the markets that it will soldier on, and the share price has bounced right back up.
• The old rule makes sense in Indian grocery stores as well as anywhere else: give your customers what they want.
• Not related to the business world at all, but interesting in its own right: The Sun in Motion.

Quick notes on a few stories we’ve covered before:

• Along with all his other admirable qualities, the Boy Wizard is generous:
  Aided by Harry Potter Fans, Amazon Triples Its Profit
• After testing the waters above $75/barrel, oil has slipped alllll the way down into the $74 range. It looks like refinery capacity will better handle crude volumes later in the summer, and OPEC may open its taps further.
• Newsweek’s Daniel Gross suggest that maybe Blackstone should take Blackstone private.