DJ Musicland CFO: Co May Beat 2Q Views; Web No Threat
By Scott Scholten
MINNEAPOLIS (Dow Jones)--Though analysts figure Musicland Stores Corp. (MLG) will report a
nine-cent per-share loss in the second quarter, the company "has a good opportunity to beat those
predictions," Musicland Chief Financial Officer Keith Benson told Dow Jones Newswires.
Benson said he's not making predictions about earnings, per se. A First Call Corp. survey of six analysts
predicts Musicland will lose nine cents a share in the second quarter; it posted a loss of 14 cents a share in
the year-ago period.
But 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.
Also worth noting is the fact that the company usually loses money in the first three quarters, Benson said,
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," Benson said.
The company has plenty of lost ground to recover.
Shares of the Minneapolis company, which operates 1,300 stores under names including Musicland, Sam
Goody, Media Play and Suncoast Motionpicture Co., are currently mired in the $9 range, half its 52-week
high of $18, Benson said. It trades about 7 times 1999 earnings of $1.28 a share as estimated by First Call,
compared with a retail-industry average of 33.
Shares in Musicland 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 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.
Analyst Sees Stock As Undervalued
Musicland is undervalued, according to Sutton, who rates Musicland a strong buy, with a six-month price
target of 18-20. First Call's six-analyst consensus recommendation on Musicland stock is 1.8, with 1 being
strong buy and 5 being sell.
In addition, 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-cent-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 downloadable music like MP3.com, which has an initial public offering in the works.
When the downloading and anti-pirating technology is standardized, Musicland will. But for now, Benson
said, the sites will sell music, movies and software like most other online retailers: they will be shipped
through the mail. CDnow Inc. (CDNW) and Amazon.com Inc. (AMZN), 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, 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 best-sellers," 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, 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, 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's sure the vast majority of people will keep
shopping on foot.
It's a well-established habit. Throngs of adults crowd the nation's shopping malls on weekends for
recreation and clusters of teen-agers roam them all week to socialize, 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, Benson noted, since virtually the only way to pay over the Web is
with a credit card.
- Scott Scholten; 612-335-8893 |
