Publish date:

TheStreet.com's DAILY BULLETIN

November 16, 1999


Market Data as of Close, 11/15/99:

o Dow Jones Industrial Average: 10,760.75 down 8.57, -0.08%

o Nasdaq Composite Index: 3,219.54 down 1.61, -0.05%

o S&P 500: 1,394.39 down 1.65, -0.12%

o TSC Internet: 859.93 up 14.25, 1.69%

o Russell 2000: 452.97 up 3.28, 0.73%

o 30-Year Treasury: 101 11/32 up 1/32, yield 6.029%

Companies in Today's Bulletin:

Guess? (GES:NYSE)

Qualcomm (QCOM:Nasdaq)

Pfizer (PFE:NYSE)

Warner-Lambert (WLA:NYSE)

American Home Products (AHP:NYSE)

In Today's Bulletin:

o Retail: Retail Focus Answers the Turnaround Question at Guess?
o Wrong! Rear Echelon Revelations: Qualcomm Isn't the Measure of the Market -- Yet
o Evening Update: Drug Wars Intensify as Pfizer Sharpens Its Lawsuit Against Warner-Lambert/American Home Merger
o Bond Focus: Bonds Wait it Out Ahead of the Fed

Also on TheStreet.com:

Biotech/Pharmaceuticals: Talk-It-Up Tuesday Approaches for Pfizer, Warner-Lambert

The press-release salvos come fast and furious.


The TaskMaster: Bringing Out the Fed

The TaskMaster looks into the stock-market effect of some FOMC scenarios. Also, Tyco provides plenty of talk but little action.


Emerging Markets: Lauder's Media Venture Shaky as Czech Partner Turns Insolent

The stock price of Ronald Lauder's Central European Media Enterprises is flagging as a Czech business partner reneges on key agreements.


Europe: The Anglo File: The eXchange Beats E-Loan to First Online Mortgage Business

The eXchange's new mortgage arm, emfinance, is one more step in its plan to become the U.K.'s largest online personal finance infomediary.


Retail: Retail Focus Answers the Turnaround Question at Guess?


Suzanne Kapner

Senior Writer

11/15/99 8:00 PM ET

Listening to Maurice Marciano talk about


(GES) - Get Report

is a turn-on.

"Everything is very young and really sexy," Marciano says of the company he founded with his brothers.

The slither tube top


sexy. The velvet tube dress with fur neckline


sexy. And the stretch animal-print pants, well, they practically



This would all be a big marketing come-on, except Guess?'s numbers are sexy, too.

For the third quarter ended Sept. 25, sales at Guess? retail stores open at least a year climbed 21%. And department store orders for the holiday, spring and early summer seasons are running 60% ahead of where they were last year at this time. The stock, meanwhile, is trading just above 16 and is up 240% this year.

With Guess? in hot demand, analysts are upping their earnings estimates for the current fiscal year, ending in December, to $1.06 a share from 83 cents. Should Guess? meet that target, it would mark its first year-over-year profit growth since 1996.

"This is a turnaround," says a money manager who owns about 185,000 shares, but asked to remain anonymous.

It's also a transformation. Guess? sells merchandise wholesale through department stores and through its own stores. But recently, its retail arm has been growing like a teenager in the throes of puberty. For the most recent quarter, retail operations accounted for 55% of sales, up from 23% in 1993. Marciano expects retail to continue outpacing wholesale growth, as the company plans to add some 250 stores to a base of 135 over five years.

That could change the way investors value the company. Investors typically award wholesalers lower multiples than higher-growth specialty retailers.

"If, as we expect, Guess? continues its strong retail expansion, it will in time be compared to other specialty retailers such as

Abercrombie & Fitch

(ANF) - Get Report

that cater to the same Generation X and Y consumer,"

Tucker Cleary

analyst Margaret Whitfield wrote in an Oct. 6 research note. "While GES is currently trading on par with the depressed valuation accorded companies in the apparel manufacturing sector, the valuation is at a sizable discount in comparison to other specialty retailers." Whitfield rates Guess? a strong buy, and her firm hasn't underwritten for the company.

Competition Knocks

Guess? was founded in 1981 by the Marciano brothers -- Maurice, CEO, Paul, chief operating officer, and Armand, senior vice president -- and they control roughly 83% of the company today. For the first 15 years, the brothers built a brand known for trendy clothes, but perhaps most of all for sex appeal. Think Guess? and an image arises of

Claudia Schiffer

, hair mussed up, looking like she just awoke from a siesta in the back of a pickup. What's more, Guess? had the luxury of little competition in the junior jeans market during its adolescence.

As Guess? was preparing to go public in 1996, competition knocked. Designers like

Tommy Hilfiger



Polo Ralph Lauren

(RL) - Get Report

, which had previously stuck to their upscale knitting, began targeting a younger audience by launching jeans lines of their own.

"We made the mistake of not anticipating" their entrance, Marciano says. "As we started to lose market share, we went into reaction mode." When Tommy Hilfiger launched a line of basic jeans that undercut Guess? prices, Marciano matched his rival on price rather than trying to differentiate Guess?. "We were paying more attention to what the competition was doing than to what Guess? was all about."

Guessing Game
Guess? shares' recent rally only pulls them back near their IPO price

Source: BigCharts

Customers noticed. After peaking in 1996 at $552 million, sales declined 14% to $472 million in the most recent year. Earnings were sliced in half, to 59 cents a share, over the same period. The stock, which went public at 18, traded as low as 3 and change.

Two years into the decline, in January 1998, Marciano gathered his top 24 executives at Guess? Los Angeles headquarters for a strategy session. "I asked them to tell me how we would take back our market share," the CEO recalls.

A Simple Plan

The first move was to regain focus by eliminating 35% of Guess? products. Then Marciano reshuffled his design team, giving himself final say on which items appear in Guess? stores and which hit the cutting-room floor.

To minimize the risk of selling trendy clothing, Guess? added a fashion basics category, which now accounts for 35% of its business. The idea was to pick one or two classic items a season and sell them at a competitive price. For fall it's a three-quarter-sleeve, high-necked, ribbed sweater for women priced at $54.

Next, Marciano focused his attention on selling. Sales clerks now undergo extensive product training and work on a commission basis.

The result: Sales per square foot, an important measure of a retailer's productivity, climbed by $80 over the past year to $400, which is still well below other high-growth chains like Abercrombie that boast more than $600 in sales per square foot.

"It takes a long time to kill a strong brand," says Candace Corlett, a partner with

WSL Marketing

, which hasn't done consulting for Guess?. Even as sales declined, Guess?'s sexy image remained intact, which made it easier to revive sales once the clothes were back on track, she says.

Now Guess? is looking to expand. Next year, it plans to open 25 regular stores and 10 outlets. It will also launch a Guess? kids retail store for the first time and plans to have 10 open in the next 12 months. The company launched


last March and is taking an aggressive stance with e-commerce. (


looked at Guess?'s online efforts in a separate


"This stock could trade in the 20s next year," the money manager says.

Now that's sexy.

Wrong! Rear Echelon Revelations: Qualcomm Isn't the Measure of the Market -- Yet


James J. Cramer

11/15/99 5:46 PM ET



(QCOM) - Get Report

the true measure of this market? Both

Jeff Berkowitz

, my partner, and I were staring at each other during the Qualcomm reversal, wondering whether this stock had become such a bellwether that its reversal could send a whole bunch of stocks down.

I don't think Qualcomm is such an important name yet that it could bring down the market as


(INTC) - Get Report



(MSFT) - Get Report

could have at one time, or


(GM) - Get Report



(IBM) - Get Report

in another era. But there is no denying that the stocks that are important to this market sure aren't General Motors and IBM.

When Qualcomm traded down, almost immediately I saw a pronounced decline in a bunch of highfliers. That move, plus a decline in DRAM pricing over the weekend, spelled red ink for many stocks that had been phenomenal.

To me, today was a day of consolidation for the winners and a day of continuing recovery for those stocks that have been stalled, if you can call that



move from 135 to 145 marking time!

And it was a day of continued bullishness, as interpreted by stocks moving up on good news, such as

Global Crossing


(China deal) and


(AMTD) - Get Report

(brokerage push.)

It's when stocks don't move on good news that I get worried. There was nothing worrisome today.

Which is why we chose to ignore the Qualcomm reversal. For now.


James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Global Crossing, AOL, Microsoft and Intel. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at


Evening Update: Drug Wars Intensify as Pfizer Sharpens Its Lawsuit Against Warner-Lambert/American Home Merger


Eileen Kinsella

Staff Reporter

11/15/99 8:07 PM ET


(PFE) - Get Report

stepped up its efforts to throw a wrench into the proposed merger of




American Home Products



Today, Pfizer sharpened its legal tools by filing an amendment to its Nov. 4 lawsuit against Warner-Lambert and American, to request that their proposed merger be blocked by a Delaware court until Warner considers Pfizer's competing offer. Pfizer also wants the court to grant it the right to wage a proxy fight to unseat the current Warner board, reduce the size of the board to seven directors and elect an independent slate.

The amendment comes ahead of Pfizer scheduled meeting with analysts tomorrow to discuss pipeline drugs and projected earnings growth.

The initial public offering of communications software developer



was priced at $18 a share, above the expected $15 to $17 estimated range. Lead underwriter

Donaldson Lufkin & Jenrette

said the number of shares was raised to 4.5 million from 4 million.

After-Hours Trading





after releasing its first-quarter earnings.


joint newsroom has the


Due to technical difficulties,

Island ECN's

list of most active stocks was not available this evening.

In other post-close news (earnings estimates from First Call/Thomson Financial; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews


(CR) - Get Report

said it sees fourth-quarter operating net between 15% and 20% lower than last year. The company said its expectations exclude restructuring charges.


(DCI) - Get Report

posted first-quarter earnings of 36 cents a share, beating the four-analyst estimate of 34 cents and the year-ago 28 cents.

Gibson Greetings


posted a third-quarter loss of 63 cents a share, worse than the single-analyst estimate of break-even results and the year-ago loss of 6 cents.

Hot Topic


posted third-quarter earnings of 87 cents a share, blowing past the four-analyst estimate of 74 cents and the year-ago 36 cents. The company said same-store sales were up 26.1% in the latest quarter.



reported first-quarter pro forma earnings of 1 cent a share, in line with the 18-analyst estimate and up from a year-ago loss of 3 cents a share. The company told analysts that acquisitions will remain an important part of its growth in the coming months. For a closer look at the

results, check out the story from


joint newsroom.

MMC Networks


said it expects to report revenues of $11 million to $13 million in the fourth quarter and a possible slight loss per share. The company said its results for the quarter will be significantly below current expectations because of lower sales to its largest customer

Cisco Systems

(CSCO) - Get Report

. The current 13-analyst estimate for MMC calls for earnings of 10 cents a share in the fourth quarter.


(REV) - Get Report

posted a third-quarter loss of $3.12 a share, slightly narrower than the seven-analyst expected loss of $3.15 a share, but down sharply from year-ago earnings of 11 cents a share. Revlon also said it expects 1999 losses to be worse than the earlier estimates of between $70 million and $80 million, but did not say by how much.

Roper Industries

(ROP) - Get Report

said it expects fourth-quarter earnings to range between 46 and 48 cents a diluted share. The current nine-analyst estimate calls for earnings of 47 cents a share.


(TOO) - Get Report

posted third-quarter earnings of 15 cents a share, beating the six-analyst estimate of 12 cents a share, and the year-ago 11 cents a share. The company said third-quarter same-store sales rose 7%, and said year-ago results reflect interest expense on the company's current capital structure.

Mergers, acquisitions and joint ventures

American Airlines'





British Airways

(BAB) - Get Report

said they asked the

U.S. Department of Transportation

for permission to code-share on some routes. The two airlines said they intend to share flights to about 75 destinations including Europe, the U.S. and Africa.

Forest Laboratories


said it was negotiating for an early end to a co-promotion deal with Warner-Lambert involving a top-selling antidepressant, Celexa. Forest said it wants to phase Warner out of the co-promotion so that it can use more of its own sales force to promote the drug. The agreement was originally expected to end in 2001.


(PKI) - Get Report

said the

Federal Trade Commission

approved its announced $62.5 million acquisition of

Vivid Technologies




(QCOM) - Get Report

said it will invest $200 million in

Korea Telecom Freetel


Bond Focus: Bonds Wait it Out Ahead of the Fed


David A. Gaffen

Staff Reporter

11/15/99 4:38 PM ET

Treasury prices were virtually unchanged today, one day before the


meets to make a decision on monetary policy.

Lately, the 30-year bond was down 2/32 to 101 8/32, leaving the yield at 6.03%. Tracker


reported volume of just $38.6 billion, 22.6% less than the average Monday this past month.

The market, in the last several days, has become more convinced that the

Federal Open Market Committee

, the Fed's monetary policy setting committee, will raise the fed funds target to 5.5% from 5.25% tomorrow, even as a


poll shows 30 economists to be evenly split.

Futures traders upgraded their expectation for a rate hike today. The November fed funds futures contract, listed on the

Chicago Board of Trade

is currently pricing in an 81.4% probability of a hike. Just last Tuesday, the futures were pricing in only a 50% chance of a rate hike.

The sentiment among bond traders is that a rate hike is the best of any outcome tomorrow. It would show the Fed's commitment to fighting inflation, and the market seems to have convinced itself that another rate hike would be the last one for a while. Several traders have said in recent days that they're expecting a rally if the Fed does raise the fed funds rates tomorrow.

"People talk that

another hike gets you normalization," said Larry Dyer, government strategist at

Credit Suisse First Boston

. The Fed cut rates three times last fall, and Dyer said, "it's sort of a freebie to take back what you gave."

Join the discussion on


Message Boards.

Longer-dated Treasury securities are likely to benefit most from a rate hike. In the weeks leading to the meeting, the yield spread in basis points between the two-year note and 30-year bond has narrowed, reflecting the market's increased expectation for a rate increase and for continued low inflation. (The two-year note is most directly affected by changes in the funds rate, while the 30-year bond trades on inflation expectations.)

The difference in yield between the two-year and 30-year is currently 25 basis points, compared with 46 basis points on Oct. 15. Dealers will sometimes ride that wave by putting on so-called "curve flattening" trades, selling a shorter-dated Treasury while buying up the longer-dated ones.

The bet is that the curve will continue to flatten, whereby dealers can at some point reverse that, buying back the cheaper two-year note and sell the 30-year.

"It suggests the market is ready for a hike," said Roseanne Briggen, market strategist at

MCM Moneywatch

. "These curve-flattening events are put on because they think it's going to get flatter."

However, she thinks those in the market expecting an ongoing rally are playing with fire. "We don't know if it's going to be the last one," she said.

Any changes in interest rates will be announced tomorrow around 2:15 p.m. Fed Chairman

Alan Greenspan

spoke about banking supervision to the

American Council of Life Insurance

in Washington this morning. He didn't give the market any clues about his view of the country's current economic performance. Fed officials generally don't comment on the economy in the two weeks prior to a Fed meeting.



Copyright 1999, TheStreet.com