The Thursday thud:
warned of weaker-than-expected sales in the third quarter (congrats to
for a call I wish you had read here). But maybe, in retrospect, the quality of Gillette's earnings hasn't been as good as it has been cracked up to be on Wall Street. At least not good enough, perhaps, for its stock to trade at 30 times earnings. Gillette appears to have done as good a job managing its earnings, with takeover-related charges and financial derivatives, as it has done selling razor blades.
"Managing earnings" is Wall Street lingo for juggling charges and cash to help earnings show consistent growth. For example, deep inside last year's 10-K annual report, released in March, was a two-sentence disclosure that as of Dec. 31, 1996, Gillette had foreign currency put options with a strike price of $1.24 billion and a cost of $10 million. "These options," the company said, "expired $64 million in the money and were included in profit from operations in 1997."
Whoa! Stop! Time out. Results from currency hedging activities were factored into operating earnings?! (Don't ya love the flexibility under Generally Accepted Accounting Principles?) What inquiring investors would love to know is why currency gains were included in profits from operations and whether -- as it appears -- they helped lower selling, general and administrative costs, which coincidentally (wink, wink, nod, nod) happened to fall by $60 million last year. "In the very least the company should've disclosed that they were booking gains on hedging instruments in SG&A, rather than have investors assume the company was engaging in cost-cutting measures that allowed operating margins to improve," says
analyst Bill Steele. Those margins improved by 2 percentage points.
A Gillette spokesman says the hedging results are included in operating profits because they offset the negative currency exposure of Gillette's foreign operations. He adds that the company has included hedging results in profits from operations since 1994. (This, however, was the first time the company specifically said it was booking a currency-related gain to operating earnings.)
And this head's up: As of a month ago, Steele says, the company told him it had no currency puts outstanding, which brings us to yesterday, when Gillette blamed foreign operations for its latest woes. Hmmm. A convenient scapegoat for disappointing sales of
blades and/or of its
unit's new "ultra" batteries, as some skeptics suspect? As is usually the case, investors won't know until it's too late.
Fun in toyland, update:
A recent item
here suggested that
second half won't be as bright as the company has been touting thanks to a recent cutback in inventory by its biggest customer,
Toys R Us
. A Mattel spokesman insisted the company was comfy with its inventory levels. Fast forward to yesterday, when Toys R Us announced a further restructuring that includes store closings and an even greater cutback in inventory.
Does Mattel still think its second half'll be great, and is it still comfortable with inventory levels? According to a spokesman, yes and yes. The spokesman said Mattel hadn't been alerted by Toys R Us of any change in orders, and thus continues to expect biz to be bright through the end of the year.
With its price yesterday sinking below 4, why would anybody be shorting
? Eric Von der Porten of
, in San Carlos, Calif., can't speak for anybody but himself. "At that price, the total market cap is $565 million. They will be lucky to do $40 million in EBITDA
earnings before interest, taxes, depreciation and amortization, including debt." That's based on his estimates. "At today's price the stock is trading at 14 times EBITDA, which is a crazy multiple because a good restaurant chain that's growing shouldn't trade for any more than 10 times EBITDA -- and in this case the restaurant results are dropping like a stone. Additionally, as recently as January, the company was projecting EBITDA this year of $130 million." Also, Von der Porten points out that over half the EBITDA in the first two quarters was from one-time nonrecurring franchise fees and gains on sales of joint venture interest, "which aren't long-term recurring items."
According to Von der Porten, that translates into a price of about 1.
A Planet Hollywood spokesman says, "Everybody's entitled to their own opinion on valuation. If you ask 10 different people, you'll get 10 different answers."
True, some think it's going to zero and points in between.
, in giving reasons why bank stocks will rise,
, the man who hates bank stocks -- oh please, don't deny it -- has teamed up with
to tell us why this is the beginning of the end of the banks, a harbinger of the bottom just as in 1990 and 1994, although he has gotten more clever by singing the praises of snoozer
, so he doesn't seem like an evil monolith, spewing venom on all banks."
Oh, puhleazzee! Anybody have a muzzle?
Herb Greenberg writes daily for TheStreet.com
. In keeping with the editorial policy of
, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnership. He welcomes your feedback at firstname.lastname@example.org. Greenberg also writes the monthly "Against the Grain" column for