The Wall Street Journal-20080216-The Week Ahead - Our Take On Coming Events
Return to: The_Wall_Street_Journal-20080216
The Week Ahead / Our Take On Coming Events
Full Text (1474 words)Retailing:
Wal-Mart Unlikely to Serve
As Profit Gauge for Rivals
----
By Gary McWilliams
Grim retail news has been spilling out for weeks now. From Macy's Inc. to Goody's Family Clothing Inc., U.S. retailers are cutting their work forces and store expansions amid sliding consumer demand. Although retail sales eked out a modest 0.3% gain in January after a 0.4% drop in December, analysts still expect a first-half recession to crash industry profits.
Tuesday, the world's largest retailer, Wal-Mart Stores Inc., weighs in with results for its fiscal fourth quarter, ended Jan. 31. The company typically is a barometer on the state of consumer spending. But this year, the results are less likely to point the way for others.
Unlike most rivals, the Bentonville, Ark., discounter felt the pinch of rising energy and credit woes more than a year ago. It was early to cut back on new-store construction and deploy advanced scheduling systems to reduce labor costs. That earlier slide means Wal-Mart's comparison with last year's fourth quarter will be relatively easy. Its rivals, in contrast, had bumper results into late 2006.
Wal-Mart's report Tuesday should follow the path blazed by big multinational companies, such as Coca-Cola Co., more closely than rival retailers. Wednesday, the Atlanta beverage company reported strong gains outside the U.S. The weaker dollar contributed nine percentage points of Coke's 19% increase in continuing operating profits. Productivity improvements begun before the U.S. downturn also enabled it to beat Wall Street expectations.
For Wal-Mart, geographic and sales diversity likely offset the U.S. consumer-led slowdown in the most recent fiscal year. The retailer's growing businesses in Canada, Brazil and the United Kingdom benefited all year long from a weak dollar, boosting reported sales and earnings. In the year's first nine months, the falling dollar added $2.7 billion to Wal-Mart's sales and $119 million to the company's profit.
Worsening conditions in Japan are the only sour note to the retailer's international profit picture. Wal-Mart this past week reported that the expected calendar-2007 loss at its Seiyu Ltd. retail unit would be double what it had expected, or about $195.5 million. Wal-Mart in December paid about $850 million to increase its stake in the company to 95.1% from about 51%.
Wal-Mart also is benefiting from accelerating inflation in food and drugs. The grocery business, which accounts for more than 40% of the company's U.S. revenue, has been picking up as customers shift spending from luxuries to daily needs. By passing inflation through to customers, price increases in staples such as corn flakes and milk should help boost revenue without sapping profit.
Indeed, the company recently said holiday gift cards were being used for food and other consumables. As a result of all these forces, Wal- Mart should post results near the top of earnings estimates.
Retail analyst Neil Currie, of UBS Securities LLC, expects the company to post a profit of $1.03 a share, up 8% from the 95 cents it reported a year earlier, amid revenue of $106 billion, up 7% from $99 billion.
"Wal-Mart is in a slightly different place than other retailers," Mr. Currie says.
Regulators:
Glaxo's Rotavirus Vaccine
Seeks to Clear FDA Hurdle
----
By Jennifer Corbett Dooren
A Food and Drug Administration panel of vaccine experts will decide Wednesday whether it thinks a GlaxoSmithKline PLC vaccine, Rotarix, should be approved in the U.S. to help protect infants from a sometimes deadly gastrointestinal illness caused by rotavirus.
Rotavirus infection hits most children before age 5. Although rotavirus deaths in the U.S. are rare, the infection still causes about 50,000 to 70,000 hospitalizations each year. Rotarix, like a similar vaccine by Merck & Co., is designed to protect infants against rotavirus during their first two years of life, when the infection is most likely to be severe.
Merck's vaccine, RotaTeq, has been on the U.S. market since 2006 and federal health officials have been monitoring it for links to a rare bowel problem called intussusception. A Wyeth vaccine was pulled off the market in 1999 after it was linked to the ailment, which is marked by a twisting or obstruction of the intestine that can be fatal. About a year ago, the FDA issued a public-health advisory discussing 28 reports of intussusception seen among infants given Merck's vaccine. The Centers for Disease Control later cleared the vaccine, saying intussusception rates seen among vaccinated infants were lower than what would be expected in the general population.
So far, clinical studies of Glaxo's vaccine involving about 70,000 children also don't show an increased risk of intussusception, with six cases reported among children receiving the vaccine in clinical studies compared with seven cases seen among patients receiving a placebo, or fake vaccine.
A staff review released Friday by the FDA raised other safety concerns, noting a higher rate of pneumonia-related deaths among vaccinated infants in the studies. The review said it wasn't clear if the vaccine played a role in those deaths and noted the overall death rate was similar between the vaccine and placebo groups. The staff review also said it saw a higher rate of convulsions among infants in the vaccinated group in one of the two main clinical studies submitted to the agency.
Jeff McLaughlin, a Glaxo spokesman, said the drug maker believes the vaccine is safe and effective, and added that it is already on the market in more than 100 countries. He said a review of the deaths and other side effects doesn't suggest a link to the vaccine.
The FDA's vaccine advisory panel is expected to vote on whether it thinks the benefits of Rotarix outweigh the risks, and a positive vote would amount to a recommendation that the agency approve the vaccine. The FDA makes the final decision but typically abides by its panel's advice.
On Thursday, the panel members will discuss the selection of three influenza strains to be included in the vaccine for the 2008-2009 season and are likely to recommend a strain change. More than 10,000 viruses can cause the flu, but world health officials monitor for the most predominant ones and try to choose the three to be included in flu vaccines that are the most likely to offer protection in any given year.
Banking:
Virgin May Win Backing
For Its Northern Rock Bid
----
By Ragnhild Kjetland, Margot Patrick and Anousha Sakoui
The saga of mortgage lender Northern Rock PLC, one of the highest- profile casualties of the global credit crisis and an embarrassment for Prime Minister Gordon Brown, could move one big step closer to resolution next week.
The United Kingdom government, which has been reviewing two bids for the bank, is expected to decide which to back. The leading candidate: British entrepreneur Richard Branson's Virgin Group.
Despite shareholder opposition, a consortium led by Virgin Group has largely won the government over to its plan to take a majority stake and inject GBP 1.25 billion ($2.46 billion) into the bank, people familiar with the matter said Friday. Final details of the proposal were being worked out over the weekend.
Northern Rock's future has been in limbo ever since September, when news that it had turned to the Bank of England for emergency loans triggered the country's first bank run in more than a century. As the global credit crisis has deepened and the lender's debts to the government have grown to some GBP 25 billion, an initially long list of private-sector suitors has dwindled. By Friday, two remained: Virgin and Northern Rock's own management.
Shareholders, including two hedge funds that collectively control nearly 20% of the shares, have thrown their support behind the management bid, which -- after a revision late Friday -- would involve a new share issue to raise at least GBP 700 million. Both of the funds -- SRM Global Fund, a fund of Monaco-based SRM Advisers, and RAB Special Situations, operated by London's RAB Capital PLC -- oppose Virgin's plan since it would dilute their holdings.
The government, though, has the final say on who runs the bank, and it has made it clear that its priorities are to protect taxpayers and consumers and promote financial stability, not to act in the interest of shareholders. It has agreed to guarantee new bonds that would be issued by the revamped Northern Rock in order to pay off the Bank of England loans, and it has said it wants an "appropriate share" of any potential upside equity returns.
The people familiar with the matter said Virgin's chances of success had increased because of revisions to its proposal that largely meet those criteria.
The government may still reject the Virgin bid, choosing instead to nationalize Northern Rock temporarily, the people said. But choosing Virgin would allow the government to avoid the risk of taking the company over from shareholders and the potential embarrassment of a long and expensive legal battle.
