Markets & Finance

S&P Boosts Foot Locker to Accumulate


Foot Locker (FL): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Yogeesh Wagle

July-quarter earnings per share of 25 cents vs. 22 cents is in line with S&P's estimate. S&P is raising the fiscal 2004 (Jan.) estimate to $1.25, from $1.21, and sees $1.45 in fiscal 2005. S&P believes several factors are favorable for Foot Locker's prospects, including a trend toward higher-margin athletic "brown" shoes, strong growth in Europe, and a less promotional U.S. environment. Also, Foot Locker continues to close underperforming stores and remodel others, and, S&P thinks, is maintaining stringent cost control. S&P's target price is $20, or 14 times S&P's fiscal 2005 estimate, a premium to peers that S&P thinks is justified by stronger fundamentals.

Barnes & Noble (BKS): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Barnes & Noble posted July-quarter earnings per share of 20 cents vs. 2 cents, 7 cents above S&P's estimate. Results benefited from strong demand for the fifth Harry Potter novel, a general rebound in hardcover book sales, and improved expense leverage at its Bookstores business, which recorded earnings per share of 19 cents, well above Barnes & Noble's 10 cents to 14 cents guidance. To reflect July-quarter earnings and what S&P views as a potentially favorable mix of new book titles planned for fall, S&P is raising the fiscal 2004 (Jan.) earnings per share estimate by 12 cents, to $1.91, and sees fiscal 2005 at $2.18. At 12 times S&P's fiscal 2005 earnings per share estimate, modestly below peers, S&P would hold Barnes & Noble shares.

Monsanto (MON): Maintains 2 STARS (avoid)

Analyst: Stewart Glickman

Shares are up sharply Thursday following news of a global settlement on PCB litigation in Alabama. On a positive note, this settlement should cap Monsanto's PCB liability at $390 million, net of insurance reimbursements, and raises the likelihood that Solutia will be able to fund its own related obligations without Monsanto's assistance. However, S&P remains concerned about Europe's acceptance of genetically modified products. With shares trading at 18 times S&P's 2004 earnings per share estimate of $1.45, above peers' multiple of 12, S&P would continue to avoid Monsanto.

Longs Drug Stores (LDG): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Joseph Agnese

Lomgs posted July-quarter earnings per share of 25 cents vs. 29 cents -- 4 cents above S&P's estimate. As previously reported, sales rose 0.7% as same-store sales declined 1.9%. Despite a weak regional economy and stiff competition, gross margins benefited from improved procurement, advertising, and promotional operations. Margins were pressured by shift in product mix and increased employee costs. S&P is raising the fiscal 2004 (Jan.) earnings per share estimate to $1.00, from 95 cents. With shares at 22 times S&P's new calendar 2003 earnings per share estimate of 97 cents, slightly above peers' average, S&P would hold the shares as progress continues.

Eastman Kodak (EK): Reiterates 1 STAR (sell)

Analyst: Richard Stice

Kodak announced a realignment of its operations and management team to increase focus on growth businesses amid soft results in consumer film. S&P thinks this move is a step in the right direction, but sees near-term execution risk in implementing the plan. In addition, Kodak is still grappling with the impact of reduced overseas travel, digital film cannibalization, and an adverse pricing environment. S&P also thinks a dividend cut may occur before the end of 2003, and views Kodak's valuation as excessive, at more than double the S&P 500 on a p-e-to-growth basis. S&P's 12-month target price is $21.

Krispy Kreme Doughnuts (KKD): Maintains 2 STARS (avoid)

Analyst: Dennis Milton

Krispy Kreme reported July-quarter earnings per share of 21 cents, up 40% from a year ago and in line with S&P's estimate. Results benefited from expansion, systemwide same-store sales growth of 11%, and increased economies of scale. But the company's shares are trading at 52 times S&P's fiscal 2004 (Jan.) earnings per share estimate of 90 cents, and 64 times the fiscal 2004 S&P Core Earnings that S&P sees at 74 cents per share. While S&P is impressed with Krispy Kreme's growth prospects, S&P thinks it's overvalued at current levels. S&P's discounted cash flow model suggests that the shares are at a 20% premium to their intrinsic value.

Hot Topic (HOTT): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

July-quarter earnings per share of 18 cents vs. 13 cents is 2 cents above S&P's estimate. Sales rose 25%, with a 5.2% comp-store gain driven by a transaction count. Results benefited from lower markdowns and cost cuts. With Hot Topic planning 10 new stores for fiscal 2004 (Jan.), S&P is raising the sales projection to $553 million, from $544 million. Higher sales growth is likely to be partly offset by less expense leverage amid tough same-store sales comparisons. S&P is raising its fiscal 2004 earnings per share estimate by 4 cents, to $1.30, and sees fiscal 2005 at $1.56. With an improved outlook, Hot Topic has some appeal. S&P's 12-month target price is $37.


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