Maytag's Earnings Show No Signs of Second-Half Turnaround - TheStreet

Maytag's Earnings Show No Signs of Second-Half Turnaround

Results meet low expectations; restructuring efforts are hampered by eroding market share.
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Expectations were running pretty low for



, and the household-appliance maker met them -- signaling that its long turnaround process isn't bearing fruit just yet.

Maytag posted second-quarter net income Tuesday of $25.2 million, or 32 cents a share. Excluding restructuring charges, the company earned 56 cents a share, in-line with expectations and below the 86 cents a share posted in the year-earlier quarter. Sales, meanwhile, declined 2.5% to $1.16 billion.

While the company affirmed full-year earnings guidance, Wall Street focused on Maytag's continued difficulty in fending off lower-cost rivals and the lack of any upside surprises. Maytag's shares eased 49 cents, or 1.9%, to $25.86 in midday trading.

"The quarter was as disappointing as we were warned it would be," said Charles Bath, manager of

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Diamond Hill Large Cap, which owns Maytag's stock. "I'm disappointed in their inability to turn earnings around," Bath added.

Hill said Maytag's efforts to reposition itself as the high-end appliance maker is the right move, but it has been hard to pull off in this weak economic environment. While Hill didn't see any signs that things are getting better, "it's also not getting any worse."

No Second-Half Recovery Here

Amid management changes and restructuring, some on Wall Street were optimistic that Maytag, the nation's third-largest home-appliance retailer behind

General Electric

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, would show signs of strength. David Macgregor, an analyst at Longbow Research, had predicted Maytag, whose product lines include Hoover and Amana, would post earnings of 60 cents a share.

"While there's been a price-point slide from the midrange to low-end products in appliances, the high end is actually staying up pretty nicely," Macgregor said on Monday. "I'm expecting to hear good news from these guys

Tuesday." Maytag's stock climbed 4.36% on Monday to $26.35.

However, Chairman Ralph Hake signaled continued weakness for the company, especially in floor-care sales, which were off 20% from year-earlier levels, compared with an 8.7% decline across the industry, due in part to weakness in its higher-end product line.

"I do not anticipate that we'll have a recovery here in the next six months," Hake said in a conference call.

Hake did tout the company's cost-cutting and restructuring efforts, which should help boost second-half results.

On Tuesday, Macgregor expressed disappointment with Maytag's results. "The appliance business did very well, but the floor-maintenance business really disappointed us. For that part of the business, the quarter was really a disaster," Macgregor said. "They've got to introduce new products at lower price points in that area to steal back market share. It sounds like they're starting that process, but it'll take a little while before we start seeing the results."

Maytag said it expects full-year 2003 earnings of $1.80 to $1.90 per share, in-line with expectations. That forecast includes pretax restructuring charges of approximately $60 million, or 50 cents a share, for a plant closing and salaried-workforce reduction. Excluding the charges, the company is expected to earn $2.27 a share, according to Thomson First Call estimates.

More Restructuring

Laura Champine, a consumer-products analyst at Morgan Keegan, was less critical of Maytag's report, although she does believe that more restructuring is on the way. "This news is kind of a nonstarter," she said. "They're not great results, but they're not terrible either."

After flying high in the late 1990s, the company lost significant market share in 2001 as retail stores started selling lower-end products to consumers looking for bargains. Meantime, Maytag's balance sheet has some big red flags: Its debt-to-capital ratio stands at 92.6%, while its pension and benefits liabilities have grown to $458.7 million and $530.5 million respectively, inspiring credit-rating companies like Standard & Poor's to lower its debt rating to one step above junk.

Maytag has been slashing jobs, relocating its production to lower-cost plants in Mexico and overhauling its Hoover vacuum business -- shuffling executive ranks and cutting jobs and rolling out lower-priced models to counter competition.

The key to Maytag's turnaround lies in the strength of its brand and the ability of its new management team to adjust to a changing environment. Hake took over in 2001 and began fixing missteps taken under Lloyd Ward, his predecessor who was ousted for venturing into unprofitable businesses. Also, Maytag hired a new executive Vice President and Chief Financial Officer, George C. Moore, last week to replace Steven H. Wood. Wood had come under fire after the company's overly optimistic earnings projections for 2003 at the beginning of the year. The estimate was originally for 7% sales growth.

"I think the company's financial projections are conservative," said Moore during a conference call on Tuesday.

Diamond Hill's Bath said he isn't hitting the sell button -- at least, not today -- because he has confidence in the new management. He added that if Maytag can start to see the type of margins it has seen historically, "this is a cheap stock."

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