All’s in Order With UPS; Why Toys R Us Can’t Come Out to Play
Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
United Parcel Service (UPS)
Jim: Well, Mike, this outfit has been around for nearly 100 years, but it just made history by launching the biggest U.S. initial public stock offering ever, raising about $5.5 billion.
Mike: Yes, and now that United Parcel Service has the cachet of being listed on the New York Stock Exchange, shouldn’t we find a way to stop calling it “Big Brown”?
Jim: Actually, I had hoped to see a headline that said “Big Brown Finally Joins the Big Board,” but it didn’t happen. Seriously, I’ll say upfront this is a great company, well-managed, and it now has a stock worth owning.
Mike: There’s no “but” coming after all that?
Jim: Not exactly. I would, however, wait a bit until the price settles down from the frenzy of the IPO. UPS went public at $50 a share, immediately jumped as high as $77 and has now come back to the mid-$60s. I’d watch it closely for a few days and, if it looks as though it has bottomed, then I would buy.
Mike: Me, too. This is the leading package-shipping company in the world by a wide margin, dominating a sector that by all estimates is growing sharply because of all the “dot-com” companies doing electronic commerce and trying to get our long green.
Jim: Yeah, how ironic. You have this century-old company that has an even brighter future because of the Internet explosion. UPS ships the lion’s share of all those catalog goods and other items bought online.
Mike: That’s not all. UPS is a company run by legendarily conservative and skilled management, and its work force has an esprit de corps that’s widely envied, despite the Teamsters strike of two years ago.
Jim: Which did UPS a fair amount of harm. But the company has recovered nicely.
Mike: In fact, one thing that gave the Teamsters some leverage in that labor dispute was that everybody knows and appreciates the efficiency of the UPS driver. Simply put, though, what’s not to like with this stock?
Jim: Like I said, my only caveat is the price, which is about 30 times UPS’ projected 2000 earnings per share, much higher than the multiples given to FDX, the parent of Federal Express, or to Airborne Freight.
Mike: So what? With UPS you’re paying for class and breadth.
Jim: And you’re paying for the benefits UPS will reap from all that e-commerce, which mostly involves goods that don’t have to be shipped overnight and thus end up in UPS’ planes and trucks.
Mike: Right, it wasn’t long ago when FedEx was thought to be the big beneficiary of e-commerce. The idea was, if you didn’t know which e-commerce company to invest in, the easiest thing to do was buy FDX. That gave FDX’s stock a temporary boost early this year because it was the main e-commerce transport play around. UPS wasn’t publicly held yet.
Jim: Temporary is right, Mike. FDX’s stock has been slumping ever since the spring, as lots of investors realized that FedEx isn’t the big winner in shipping those online goods to consumers.
Mike: A firm called Zona Research found that UPS shipped 55% of all items bought on the Internet last Christmas, compared to 32% for the U.S. Postal Service and only 10% for FedEx.
Jim: And there’s no reason to expect those market shares to change this holiday season, which naturally will be much bigger for the online firms than ever.
Mike: As we speak, I have three shipments from various catalog or Internet vendors wending their way to my house...
Jim: Something from Victoria’s Secret for the wife?
Mike: You’re blowing my cover. Anyway, two of the three are coming by UPS.
Jim: There you have it. Well, it took nearly a hundred years for the public to get a shot at Big Brown’s business, but now that it’s available, I’d buy the stock.
Toys R Us (TOY)
Mike: Now we come to a company, Jim, that should be putting more merchandise in the trucks of UPS--if only it could figure out an Internet strategy of its own.
Jim: Frankly, that’s the least of the problems at Toys R Us.
Mike: You’re right. But I was looking for a clever segue.
Jim: Keep looking. Toys R Us, of course, is the nation’s largest toy retailer, but boy, it has been hurting for the last year or two.
Mike: More than that, really, if you look at the stock. It’s been four or five years since the shares have beaten the broad market, as measured by the Standard & Poor’s 500 index.
Jim: We should start by reiterating what we said in discussing Hasbro and Mattel, namely that there has been a fundamental change in the way people go about buying toys in this country.
Mike: You mean they don’t like buying toys in dirty, dark, obnoxious, noisy, poorly serviced stores with nobody around to answer a question, much less man the cash register?
Jim: Easy, Mike. Yes, that’s part of it. But more broadly speaking, it seems kids’ interest in traditional toys is peaking at ever younger ages. They’re moving on to video games, compact discs and clothes. And as for Toys R Us, it’s now facing fierce competition from Wal-Mart Stores and other mass merchandisers. And then there’s the whole toy market on the Internet, such as EToys Inc.
Mike: Yeah, it wasn’t that long ago that when, if my kids got a check from Grandma for a birthday or something, they would insist on going right to Toys R Us. Now they insist on going to Target.
Jim: Or to give you another example, youngsters who were already into video games would often go to Toys R Us, but now they can go to Best Buy or some such retailer. Point is, all this has wreaked havoc on Toys R Us’ performance and its stock price.
Mike: The stock has dropped from the mid-$30s two years ago to the high teens today. So it’s selling for only 11 times its expected earnings per share for its fiscal year ending in January.
Jim: We should note that the stock has moved a tad higher recently, mostly because Toys R Us had a decent third quarter. Their same-store sales--those of stores open at least a year--showed an unusually high double-digit gain.
Mike: But we know that can’t be sustained in the fourth quarter, even though that’s the peak season for retailers.
Jim: Yes, the third quarter was an anomaly, helped in good part by the current craze for merchandise related to the Pokemon video game and TV show.
Mike: And it would be nice to say there’s light at the end of this tunnel because Toys R Us’ management is stable. But it isn’t, and that doesn’t help its prospects, either.
Jim: Right, its chief executive, Robert Nakasone, abruptly quit in August, and the company is still searching for a permanent replacement. However, in Toys R Us’ defense, I have noticed major changes in the layout of some of its stores. The stores seem brighter, and there’s sale merchandise in the aisles to catch your eye. So you can see it’s making an effort to change its image.
Mike: But that will take time, to make over all 1,500 stores, and the effort still doesn’t convince me to buy the stock. And to get back to my initial point, its Web site isn’t going gangbusters, either, partly because it’s continuing to suffer technical snags, according to industry analysts.
Jim: I wouldn’t buy it either. Frankly, this chain is in need of a massive make-over, whether we’re talking about merchandising, its product offerings, its service, the whole works. I mean, let us start by getting rid of that goofy giraffe mascot that’s been around forever, and get in sync with today’s kids.
Mike: You mean turn the giraffe into a turbo-charged alien with a laser gun?
Jim: Whatever it takes.
Mike: In the past, people were willing to put up with Toys R Us’ lousy retail experience because it was the low-cost leader. But now it isn’t, so Toys R Us has to make its stores more appealing if it hopes to recapture its past glory.
Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book, “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.
You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).
Ups
Monday: $58.13
Toys R Us
Monday, $18.00
