Williams-Sonoma Has Woes; Conexant a Good Hookup

Williams-Sonoma (WSM)

Jim: Don’t buy

Mike: Don’t buy

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Mike: I’d like to start our chat about Williams-Sonoma, Jim, by briefly telling you the story of my family room cabinet.

Jim: This should be compelling.

Mike: I’m not saying it’s “War and Peace.” Anyhow, a few months ago we ordered said cabinet from a catalog company called Hold Everything. When we called the 800-number, we were told that the cabinet wasn’t in stock, but we could place the order and they would put through the charge on our credit card only when the cabinet got shipped to us.

Sure enough, a couple of weeks later I got my credit card statement and they had billed me for it.

Jim: And you didn’t have your cabinet?

Mike: No, and when I called, it turned out that they were no longer carrying the item at all. They said, “Oh, we must have billed you by mistake.” Of course it was a mistake in their favor.

Jim: Imagine.

Mike: There ensued a comedy of several months’ duration in which the words, “I’ll never buy anything from your outfit again,” may have been uttered at one point or another. We finally got the cabinet.

Jim: I’m glad for you.

Mike: But it was as twisted and tortured a process as the recent election. I suspect the Florida State Supreme Court may have gotten involved at one point. It’s a perfectly nice cabinet, but life is too short to go through this to get it.

Jim: I’m going to take a wild guess here that Hold Everything is one of the catalog operations owned by Williams-Sonoma.

Mike: Yes, and if they run all their businesses like this, I’m not surprised that their stock has come down 50% in just the last couple of months.

Jim: You’ve put your finger on one of their major problems, but let’s back up: Williams-Sonoma is the upscale-housewares chain based in San Francisco that runs the Pottery Barn stores and a bunch of catalog firms. Now, I had to laugh the other day because one of the analysts who follows this company said “it epitomizes the new breed of retailers” because it sells through stores, the Internet and catalogs. To which I say, big deal. What retailer doesn’t any more?

In any case, at every level Williams-Sonoma has tons of competition, from the likes of Crate & Barrel on the upscale end to Cost Plus on the Pottery Barn end.

Mike: For companies like this the key issue is “fulfillment,” which means the ability to quickly fill customers’ orders and keep them satisfied. Williams-Sonoma has a habit of running into fulfillment-and-sales problems in the holiday season.

Jim: Not just during the holidays, and that’s my main problem with this stock. The company has gained a reputation for missing its sales and/or earnings targets too often, period.

Mike: It happened in 1996. At that time the company attributed some of the problems to its order fulfillment-and-distribution center in Memphis, Tenn., which, by the way, is where I believe my cabinet was shipped from.

Jim: Williams-Sonoma came up short again last March with its fiscal fourth-quarter results, and it happened again two months ago, when its fiscal third-quarter numbers didn’t hit analysts’ estimates. That clocked the stock some 30% that day alone. It didn’t help that the firm’s CFO quit the same day, after 18 months on the job.

So I don’t blame Wall Street for being very skittish about this stock.

Mike: Plus, when you operate a catalog-sales operation and you announce in mid-November that the holiday season looks disappointing, as Williams-Sonoma did, to me the message is “look out below.”

Jim: One could, however, argue that this is a cheap entry point for shares of a solid brand, a solid franchise. Williams-Sonoma does have lots of new marketing initiatives, though you have to wonder if they shouldn’t be fixing what they’re already doing first.

Anyway, one of the firm’s new ideas is a chain to be called Elm Street, which will sell lower-priced housewares--and will run smack into Bed, Bath & Beyond and other well-entrenched rivals. The company also is talking about a Pottery Barn for Kids that would sell kids’ furniture and the like.

Mike: Still, the bulk of Williams-Sonoma business is selling merchandise to people with too much money. And since there are likely to be fewer of those around in the coming year, given the economic outlook, I really consider this a stock to avoid.

Jim: Good point. Nearly everyone expects the economy’s growth to slow next year, which will mean even fewer people to buy all of these overpriced gourmet foods, pots and pans and other things they don’t really need.

Conexant Systems (CNXT)

Jim: Buy

Mike: Buy

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Jim: Now it’s my turn to tell a little story, Mike. Recently I spoke to a group of executive MBA students at USC. One of them brought up Conexant Systems and wondered why this outfit doesn’t get the plaudits or the stock valuation of many of its rivals, starting with its Orange County neighbor Broadcom. That got me to wondering what’s up at Conexant.

Mike: It got me to wondering: What the heck is Conexant?

Jim: This Newport Beach-based outfit was spun off from Rockwell International two years ago. It makes semiconductors and other components used in communications and networking equipment. It’s got a nice list of customers, including Cisco Systems, Lucent Technologies and so on.

Mike: We’ve talked a lot about the virtues of investing in the companies that are building the infrastructure for the Internet and telecom systems. And here’s a company that makes the infrastructure stuff for the infrastructure builders. I think it’s a great business, and I’d buy this stock.

Jim: Shoot, I was sure I would scoop you this time and recommend the stock before you could announce your choice.

Mike: You can’t give me that much of an opening. If you’ve got something to say, spit it out!

Jim: Now, you’d never know that Conexant has such a promising future judging by its share price, which has plunged more than 80% from its peak this year in the market’s ongoing tech wreck.

Mike: So much the better, because you can get in now at a cheaper price.

Jim: Granted. But our USC student was right. Conexant doesn’t get the attention of Broadcom or some others in its field. But I see that changing: Conexant is planning to spin off a division that makes chips and other components for Internet switches and related gear. Some of the division’s new stock will be offered to the public, and the rest will go to existing Conexant holders.

I think it’s a good move, because I see strong long-term demand for these products even though there may be a near-term slowdown in spending for Internet and telecom equipment.

Mike: Yeah, one of Conexant’s problems has been that Wall Street analysts--whose attention spans are so short they must struggle to sit through an episode of “The Simpsons”--have a hard time getting their arms around the different fields that Conexant serves. That makes it hard for them to put a valuation on the stock. So the spinoff will help the market figure out the value of what Conexant will have left.

Jim: What is Conexant keeping?

Mike: It’s keeping the businesses that make chips and other components for products like digital cameras, computer and cable modems, wireless phones, set-top video boxes and so on--all of which seem bound to be growing markets, by the way.

Jim: And of course, the main idea behind the spinoff is that the share price of the new company and the share price of the remaining Conexant will be worth more than Conexant’s stock is today by itself. I believe that’s exactly what will happen.

Mike: In fact, even though we tend to take many analysts’ words with a pound of salt, some have estimated that the two stocks will be worth almost twice what Conexant is trading for today, which is in the low-$20s. But I must warn you, their estimates are all over the map.

Jim: Doesn’t matter. I still believe the two will be worth much more than Conexant alone today.

Mike: Agreed. One analyst said he now regards Conexant as a “value” stock in the tech sector. That sounds like an oxymoron but in this case I agree. This is a company whose stock is selling for well below the firm’s real value.

Jim: I’m not sure I’m that taken by the stock, Michael, but I would still recommend it as a speculative play. We should note, though, that the company in October warned of slowing sales.

Mike: But I think that’s a temporary issue. Over time, say the next six months or so, I think demand for the company’s equipment is going to pick up again and Conexant will roar back. The global Internet and telecom infrastructure is still a work in progress.

Jim: Fair enough, but even after the drubbing this stock has taken, it still sells for a rich 33 times the per-share earnings Conexant is expected to earn in the fiscal year ending next Sept. 30. That doesn’t leave much room for error. Still, I’d take a chance with this stock.

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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” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

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).