Musicland Plans To Do Better Than Forecasts
June 1, 1999
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Chief Financial Officer Says
Second-Quarter Results
Should Beat Last Year's
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By Scott Scholte
Staff Reporter of The Wall Street Journal
MINNEAPOLIS -- Though six analysts surveyed by First Call forecast Musicland Stores Corp. will report a nine-cents-a-share loss for the second quarter, the company "has a good opportunity to beat those predictions," Musicland Chief Financial Officer Keith Benson said.
Mr. Benson said he isn't making predictions about earnings. Musicland posted a loss of 14 cents a share for the year-earlier period.
But Mr. Benson predicted that Internet competition, which has spooked investors away from Musicland stock over the past year, will pose little threat to the company's retail stores.
He said the company usually has losses in the first three quarters and counts on the fourth quarter, which typically accounts for 40% of sales, to push it into profitability.
"We're still alive and getting better," Mr. Benson said.
Shares of the company, which operates 1,300 stores under names including Musicland, Sam Goody, Media Play and Suncoast Motionpicture Co., are mired in the $9 range, half its 52-week high of $18, Mr. Benson said. The stock trades at about seven times 1999 earnings of $1.28 a share as estimated by First Call, compared with a retail-industry average of 33.
Musicland's shares have had an inverse relationship to Internet stocks, a pattern that in a broad sense says investors believe the Internet will present a significant challenge to brick-and-mortar music sellers, said Dean Ramos, an analyst with George K. Baum & Co. in Minneapolis.
"The valuations that have been put on Internet companies are a direct contradiction to the way Musicland has struggled as a stock," said Mr. Ramos, who rates the stock a "strong buy" and has a 12-month target price of 18.
"It's a fear vs. fact scenario," said George Sutton, an analyst with Dain Rauscher Wessels Corp. in Minneapolis. "The fear is everyone will download CDs from the Internet and not go to record stores anymore. We believe downloading will enhance the retail model significantly."
For instance, he notes, music companies have been boosting sales by offering free music via the radio for decades.
Musicland is coming off what may have been its best first quarter in a decade. The company reported earnings of $1.4 million, or four cents a share, on sales of $401.8 million for the period, surpassing the First Call estimate of a four-cents-a-share loss. The company reported a loss of 11 cents a share in the 1998 first quarter.
To cover all its bases, Musicland is launching four Web sites in late June (one for each of its retail chains), but they won't offer down-loadable music such as MP3.com, which has an initial public offering in the works. When the downloading and antipirating technology are standardized, Musicland will. But for now, Mr. Benson said, the sites will sell music, movies and software like most other online retailers: They will be shipped through the mail. CDnow Inc. and Amazon.com Inc., two firms that sell music through the Internet, also deliver by mail orders placed online.
Typically, after factoring in shipping charges, music bought online costs just about the same as music bought in an actual shop, Mr. Sutton notes.
"Generally, we found there's not a value to buying products online if you're just wanting a lower price, particularly when you're talking about bestsellers," Mr. Sutton said. "Stores are aggressive on new releases."
But it looks like Musicland won't price aggressively online. It should have a slight operating-cost advantage over other Web retailers in that orders placed through its Web sites will be filled from established inventory systems. Still, Mr. Benson said, Musicland's pricing isn't likely to be lower than other Internet mail-order music retailers.
To say the Internet will stifle shopping at real stores is to imply the demise of the shopping mall, Mr. Sutton said. Musicland is entering e-commerce because the company believes there is a portion of the market that hates shopping or would rather order things from home, but it is sure the vast majority of people will keep shopping on foot.
Throngs of adults crowd the nation's shopping malls on weekends for recreation, and clusters of teenagers roam them all week to socialize, Mr. Benson said. These people like to touch things before they buy them, gather shopping momentum by feeding off one another when they shop in groups, buy impulsively and buy the same things as a means of social bonding.
Sales in malls account for 90% of Musicland's sales and 70% of those are in cash. And Internet shopping doesn't compete for cash transactions, Mr. Benson noted, since virtually the only way to pay over the Web is with a credit card. |
