Earnings Warnings Foreshadow Less-Robust Earnings Season Ahead (AA, BTU, LIZ, LOCM, YHOO, AMZN, EBAY, XRTX, TGT, BBY, TRID, WMT, AAPL, GOOG, MSPD, CSCO, JNPR, FDO)

January 7, 2011 by Jon C. Ogg

The next round of earnings officially kicks off next week with Alcoa Inc. (NYSE: AA) first out of the blocks on Monday. We’re taking advantage of the occasion to preview some developments in a number of business sectors.  We have seen some warnings and many other quasi-warnings from companies such as Liz Claiborne Inc. (NYSE: LIZ), Local.com Corp. (NASDAQ: LOCM), Peabody Energy (NYSE: BTU), Xyratex Ltd. (NASDAQ: XRTX), Target Corp. (NYSE: TGT), Best Buy Inc. (NYSE: BBY), Trident Microsystems Inc. (NASDAQ: TRID), EMC Corp. (NYSE: EMC), Mindspeed Technologies Inc. (NASDAQ: MSPD), Family Dollar Stores, Inc. (NYSE: FDO) and others.  All of these may set the robust expectations a bit softer than the most wildly bullish expectations for earnings season.

Alcoa Inc. (NYSE: AA) has seen its shares climb back out of a deep hole, returning to the high end of their 52-week range of $9.81-$17.60. The company announced last week that it was restarting production at three of its smelters, creating about 260 new jobs. The company expects to boost production by 137,000 metric tons in 2011.

Alcoa’s outlook for 2011 is positive as well, as aluminum on the London Metal Exchange, LME, reached a two-and-a-half-year high on January 4th of $2,485/metric ton. Prices are expected to climb higher as automakers look to increase fuel economy. Reducing a car’s weight will require more aluminum and less steel, and that’s good for the aluminum industry.

The coal mining business, though, is taking a hit from the flooding in Queensland, Australia. Peabody Energy (NYSE: BTU) has said that it expects 2010 EBITDA to be near the middle of its forecast range of $1.7-$1.9 billion. The previous estimate was $1.9 billion. The rains will eventually stop and the mines will re-open. The question remains how long will that take, and will the price for coal continue to rise once the mines re-open. At least one estimate for metallurgical coal has the price rising in the second quarter of 2011 to $250/metric ton, about 20% higher than today’s price. That should be good news for coal miners everywhere, not just in Australia.

Fashion house Liz Claiborne Inc. (NYSE: LIZ) lowered its outlook for the second half of 2010 and the fourth quarter, from an $80 million operating profit to a range of flat to a -$10 million loss. The company blames the weather and very competitive pricing. The weather will change, of course, but the competitive pricing will remain a factor for the apparel business.

Local.com Corp. (NASDAQ: LOCM) reported that it posted an EPS loss of -$0.04 on revenue of $19.9 million, far short of its guidance for revenue of $22-$23 million and EPS of $0.20-$0.21. The company attributed the loss to a reduction in advertising revenue from Yahoo Inc. (NASDAQ: YHOO). Competition for local advertising will heat up even more in 2011, as start-ups like Groupon, Foursquare, and others, like Amazon.com (NASDAQ: AMZN) and Ebay Inc. (NASDAQ: EBAY) compete even harder for local businesses’ advertising dollars.

Xyratex Ltd. (NASDAQ: XRTX) builds enterprise-class data storage solutions and is forecasting softer demand for storage products in 2011. Industry leader EMC Corp. (NYSE: EMC) was shown as having lowered earnings expectations by the Boston Business Journal due to non-cash charges on transferring acquisitions into its international holding company.  Analysts are also indicating that EMC’s earnings will grow considerably less in 2011 than they did in 2010. The storage business could be in for more consolidation in 2011 as a result of the softer forecasts.

Target Corp. (NYSE: TGT) posted poor same-store sales numbers for December and blamed customers for buying low-margin items instead of higher priced goods. Go figure. In any event, price will drive retailers, just like it will drive apparel makers like Liz Claiborne. Margins will get narrower and the stores will have to invest in expansion, which will pressure profits even more.

Best Buy Inc. (NYSE: BBY) saw its December same-store sales fall 4%, again as a result of shoppers seeking bargains. Shoppers followed promotions, and Target led in that area early in the holiday shopping season. Target couldn’t sustain its lead, and Best Buy never really had a chance. How well Best Buy can compete on price remains to be seen. If it can’t, 2011 could be a tough year for the electronics retailer.

Trident Microsystems Inc. (NASDAQ: TRID) produces set-top boxes and chips for TV applications. This is a very crowded market that is still searching for a leader. Trident does have deals with the VUDU movie streaming service now owned by Wal-Mart Stores Inc. (NYSE: WMT) and other online music and movie providers. Licensing content for affordable prices is the big problem here. Relatively small players like Trident could have a hard go of it competing with Apple Inc. (NASDAQ: AAPL), Google Inc. (NASDAQ: GOOG), and others.

Mindspeed Technologies Inc. (NASDAQ: MSPD) is another chipmaker, and the company has lowered its forecast for the first quarter of 2011. Because the company’s chips are used in a variety of networking products, lower demand for network devices could affect other large players like Cisco Systems Inc. (NASDAQ: CSCO), Juniper Networks, Inc. (NASDAQ: JNPR), and others.

Family Dollar Stores, Inc. (NYSE: FDO) posted solid December same-store sales numbers, but the company and other deep discounters face a potential drop in traffic if the economy improves. Family Dollar has aggressive expansion plans for 2011, but those plans would probably be the first things to change if business sours.

The big issue not a poor earnings season nor a poor round of guidance.  Many of the warnings have been selective and very specific rather than coming out in a much broader sense.  It is very important to pay attention to all of the trends in the week to two weeks ahead of earnings season.  As a year starts, that is even more of the case as analysts will begin to set their 2011 to 2012 targets.

Paul Ausick