By one estimate, sales excluding autos and gasoline fell at least 2% during the holiday season. The International Council of Shopping Centers classified this year as the weakest since at least 1970 — bad news for retailers, many of which count on holiday sales for half of their annual revenue. The decline underscored what’s shaping up to be a dismal January quarter for retailers. Consumer spending, which makes up two-thirds of the economy, dropped 0.6% in November, marking the fifth straight monthly decline, the longest stretch since records were first kept in 1959.
In contrast with the rest of the industry, Amazon.com ($49; AMZN) boasted of its best Christmas ever, though the company provided little statistical evidence to support that claim. The online retailer’s daily orders peaked at 6.3 million, up 17% from last year’s top day, but we do not know about overall sales, profits, or margin trends. At 34 times expected 2009 earnings, Neutral-rated Amazon.com shares already reflect very high growth.
Discount giant Wal-Mart Stores ($55; WMT) has managed modest growth in recent months and seems positioned for a decent Christmas season. Consensus estimates project a 2% gain in per-share profits for the January quarter. In other news, Wal-Mart agreed to pay between $352 million and $640 million to settle 63 lawsuits claiming the retailer cheated employees out of their wages. Wal-Mart plans to take a $250 million after-tax charge in the January quarter to cover the settlements. Claims of wage violations have haunted the retailer for years. Last month, the retailer settled a $54 million class-action lawsuit for cutting break time and fostering an environment that encouraged employees to work off the clock. Wal-Mart is a Long-Term Buy.
Lockheed Martin ($81; LMT) won $774 million in contracts from the U.S. Army Aviation Missile Command division. The deals involve providing hardware and services for the Patriot Advanced Capability-3, a guided missile air-defense system. In related news, a day before the missile-defense deal was announced, a consortium including Lockheed and Boeing ($40; BA) lost out on a $3.5 billion NASA contract for the delivery of cargo to the International Space Station once U.S. space shuttles are retired. Lockheed is a Long-Term Buy. Boeing is rated Neutral.
The U.S. Food and Drug Administration has requested more information from AstraZeneca ($40; AZN) on Seroquel’s use as a treatment for depression. Seroquel, already approved by the FDA to treat schizophrenia and bipolar disorder, generated $4 billion in U.S. sales in 2007. AstraZeneca is a Buy and a Long-Term Buy.
Citing “budgetary and logistical reasons,” Disney ($21; DIS) decided not to produce or finance the third Chronicles of Narnia film currently in preproduction. While The Lion, the Witch, and the Wardrobe earned $745 million after its 2005 release, ticket sales for 2008 sequel Prince Caspian have not been as strong, though the film is making a profit. Disney is probably concerned specifically about further erosion of demand for Narnia movies, but prolonged weakness in consumers’ entertainment spending could make the film industry as a whole less profitable in the next year. Disney is rated Neutral.
One of Ford’s ($2; F) largest investors, billionaire Kirk Kerkorian’s Tracinda investment company, has unloaded its entire 6.1% stake in what is regarded as the healthiest of the U.S. automakers. The retreat of Kerkorian, a longtime player in the auto industry, adds to the uncertainty already swirling around the Big Three. Ford shares are down 66% so far this year. Ford is an Underperform.
Kuwait backed out of a $17.4 billion joint venture with Dow Chemical ($15; DOW). Dow had planned to use the proceeds to pay off much of the debt needed to finance its $15.3 billion acquisition of Rohm & Haas ($53; ROH). The deal’s financing is now in doubt, though some reports claim Dow can finance the acquisition using a $13 billion bridge loan from unspecified banks. Dow is rated Neutral.
As 2008 comes to an end, many financial institutions face the rare prospect of recording a loss in consecutive quarters. In the September quarter, almost a quarter of U.S. financial companies posted a loss, and even more could do so in the December quarter. Wall Street anticipates operating losses for some of the biggest financial companies in North America, including Citigroup ($7; C), Merrill Lynch ($11; MER), and Manulife Financial ($16; MFC). The banking group as a whole appears set for its first quarterly loss since 1990.
For banks that manage to keep out of the red, profits will likely dip well below those seen in 2007, even though many of those year-ago numbers already reflected some pressure from the credit crunch. All but two of the bank and brokerage companies we cover are projected to post double-digit profit declines in the December quarter.
The U.S. Treasury has injected an estimated $169 billion into more than 130 financial institutions under the Troubled Asset Relief Program. But even with the federal aid, commercial banks have failed with regularity in 2008. The casualty list, now up to 25, includes big names Washington Mutual and IndyMac. Another 200 banks are at risk of collapse, according to U.S. regulators. In comparison, only 10 commercial banks failed between 2003 and 2007. While we won’t don’t expect any of the big banks we cover to fail, the value of their assets could continue to erode. Citigroup, Manulife Financial, and Merrill Lynch are rated Neutral.
American Express ($18; AXP) gained preliminary approval for a $3.39 billion loan from the U.S. Treasury Department in exchange for preferred shares that pay a 5% annual dividend for the first five years and 9% afterward. The Treasury will also receive warrants allowing it to purchase more than $500 million in common stock. In November, American Express converted to a bank holding company, thus qualifying for the assistance. American Express is rated Neutral.
The Treasury will also inject up to $6 billion into GMAC, the former financing arm for General Motors ($4; GM), in a new program to support auto-finance companies. GMAC issued the government $5 billion in preferred shares that pay an 8% annual dividend. A week earlier, GMAC had converted to a bank holding company, with the condition that GM sell most of its 49% stake in the firm. The GMAC loan is not part of the $17.4 billion in loans promised to GM and Chrysler. General Motors is an Underperform.