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The Friday Five

Thu, 11 Apr 2013

Five stats from the market and the stories behind them. This week: 17 months and no turnaround at J.C. Penney, a 14% drop-off for PCs, and more.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stats from the market and the stories behind them. Joining me as always with the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Thanks, Jason.

Stipp: So, what do you have for the Friday five this week?

Glaser: Were going to look at the number 17, minus 14%, 150, 3, and 7.

Stipp: 17 months is the tenure of Ron Johnson at J.C. Penney. He came in with quite a big splash. He left and the stock took another tumble. What should we think about J.C. Penney now that he wasn't able to turn the ship around?

Glaser: Ron Johnson came into J.C. Penney really with a bang, and he is leaving with a whimper. He had a very illustrious career in retail, starting from Target, then starting at Apple stores, and I think the hope was that bringing him into J.C. Penney was going to be a way to add some more luster and shine to that brand. It just didn't really work out.

He had a grand vision that he was going to build the "stores within stores." They were going to make them a little bit more upscale. They were going to get rid of discounts and just have everyday low prices. His strategy just did not resonate with the consumers.

They saw their same-store sales continue to decline pretty precipitously at times. They were burning through cash pretty quickly as the store renovations were not inexpensive, and it was just in untenable position. And although they started to make some adjustments--he brought back some discounting in a very limited way--it just wasn't enough for the board. They dismissed him and are bringing back [Mike] Ullman, who was the CEO before [Johnson] started. And this is hardly a panacea that's going to all of a sudden make J.C. Penney a very attractive proposition to consumers again.

Paul Swinand, who is our J.C. Penney analyst, thinks there is still a lot of transformation that needs to happen in order for J.C. Penney to really be on sustainable footing. And it's going to take a lot of changes, a lot of decisions about how much of what Johnson did do we want to keep? How much are we going to roll back? What you do with pricing? I think that until we know more about Ullman's vision for J.C. Penney, it's harder to say exactly what that company is going to look like, but I think we're anxiously waiting to see if he has a plan that can help turn around that decline and that tailspin really that they're in right now.

Stipp: Speaking of downward trends, 14% is the drop in PC sales. It's not surprising to see PC sales go down, but is the magnitude a surprise?

Glaser: This first-quarter drop was enormous. It's the biggest in more than two decades, and it shows just how much pressure PCs are under right now--your traditional desktop and laptop PCs. Windows 8 was supposed to be a bit of a savior. A lot of talk [hypothesized that] maybe the weak sales [were] because people [were] waiting for the new Windows. And when it came out, people just weren't excited enough about it to go to the store and replace their aging laptop. Instead people are out buying smartphones, they're out buying tablets. … It's not that they're not spending on technology; it's just that PC vertical is one that's under a lot of pressure. We see that when we talk about Dell and look at the buyout and the controversy over there; you see that with HP as that business is under pressure for them.

PC sales are still large. It's still a big segment of the tech industry, but one that is not going to be a big growing force anymore. And I think this has been apparent for some time, and these numbers really just underscore the kind of pressure that those traditional players are under.

Stipp: 150 is the number of people that got a sneak peek at the Fed minutes this week, so a few people got an early look. What are the implications of this?

Glaser: A bit of a fat finger mistake at the Fed this week, where the minutes of what happened at the Fed meeting were accidently released to a distribution list that includes some congressional staffers and some lobbyists, and they got a little bit of a notice. And then after the Fed realized it, they rushed out the release earlier than expected to all investors.

And although this is somewhat of a disconcerting issue that they are kind of releasing these in a way that is not uniform, I think the thing that would really be disconcerting to investors is if they decided to end QE early. I think that's the early release from those ideas that would be potentially more damaging.

And in those conversations, in the minutes about what to do with this Fed stimulus, it seemed that most members of the board were still OK with continuing the course that they're on now and not really thinking about tapering off from those purchases yet. There are some dissents there. This is not a uniform agreement. I think we're bound to see more and more members, as we go on throughout this year and into next year, probably want to pull back a little bit, but I think particularly after last month's pretty poor employment report, that's something that obviously the Fed is focused on. They've explicitly said that they want employment to come down substantially before they're willing to pull back. So, I think we don't have to worry about too much of an early release from QE.

Stipp: Three is the number of years of financial statements that Herbalife is going to have to take another look at. Now this is more about their auditor than about Herbalife, but this stock just can't catch a break.

Glaser: This story really continues to get stranger. This week KPMG said that they do have to pull their support over the last three years of audited financial statements because their senior partner was selling information about Herbalife and also Skechers to a friend for some cash and some gifts, and that just means that KPMG wasn't independent, and they weren't really able to sign off on the audited statement as an independent auditor.

Now, this doesn't mean that Herbalife did anything wrong. Chances are another auditor will come in, and it's unlikely that there are going to be any big changes. But it is just another distraction for management there. They've had to deal with hedge funds battling out over the stock. People accusing it of being a Ponzi scheme, big swings in the stock price. Now having to go back and find another auditor, go back through the past three years [of] statements, is probably a distraction that they wish they didn't have to deal with.

Stipp: 7% is the amount of growth in demand for aluminum that Alcoa expects for 2013. They reported first-quarter earnings this week; they kick off earnings season. What's your take on their outlook?

Glaser: Alcoa's earnings are pretty unremarkable. They're about flat from last year's quarter, and really that was because aluminum prices remain extremely low. So even though they were more productive, they weren't really able to turn that into earnings. But they still expect about a 7% rise in demand for aluminum this year, coming from China, coming from aircraft manufacturers, as there is still pretty high demand for aircraft. And this is something that they're hoping will translate into higher prices, and that they will be able to translate into a better profitability.

Our analyst Bridget Freas thinks this isn't a completely unreasonable assumption. She thinks that aluminum prices were somewhat unsustainably low, and that when they start moving up, there could be some upside to Alcoa stock. She rates the narrow-moat company 5 stars right now and thinks that the shares look pretty attractive.

Stipp: Jeremy, five interesting stats, five interesting stories. Thanks for joining me.

Glaser: Thanks, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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