Fallout Hits Third-Quarter Results.

Recession Crimps Public Companies

While the brunt of the recession is still to hit many parts of the economy, third-quarter results from local public companies showed that the effects of the downturn already are being felt.

Of the 115 L.A.-based public companies that had reported third-quarter results as of last week, 53 posted higher operating earnings than in the year-ago period, 57 reported lower earnings, and five reported flat earnings, according to a survey prepared for the Business Journal by Thomson Financial/First Call.

Of the 98 reporting L.A. companies for which analyst consensus estimates were available, 56 beat the estimate, 14 met the estimate and 28 came in below the estimate. These estimates aren't always reliable measures of company performance, as they are often created with company input.

With the third quarter reporting season almost completed, earnings among companies in the S&P 500 Index are on track to fall 21.7 percent from last year, according to Chuck Hill, director of research at Thomson Financial/First Call, which tracks Wall Street earnings estimates. That's the biggest decline since the second quarter of 1991.

"We feel pretty confident that the fourth and first quarters are going to be worse than is currently projected," Hill said.

Indeed, earnings from a broad swath of local industries -- communications, leisure, tourism, technology, biotech and insurance -- failed to meet analysts' downward-revised projections. But there are bright spots as well, as some industries, including mortgage lending and home buying, show unexpected strength.

Los Angeles companies, represented by the LABJ 200 Index, are a microcosm of the S&P, closely tracking its performance. LABJ stocks are down 25 percent year-to-date, slightly more than the S&P 500.

Some of the largest L.A. companies have been the hardest hit.

Avery Dennison Corp., the Pasadena-based maker of adhesives, labels and stamps for the U.S. Postal Service, is perhaps the best local barometer of the current economic climate.

Avery, whose operations tie it to a worldwide swath of industries and consumers, saw sales contract in light of "sustained weakness in global economic conditions," Chief Executive Philip M. Neal said in the company's third-quarter earnings statement.

Some thriving pockets

Earnings fell to 63 cents a share from 73 cents in the like year-earlier period. "The uncertain economic climate has made it unusually difficult to provide guidance over the past few quarters, and this quarter is perhaps the most challenging," Neal said. Fourth quarter earnings are likely to fall between 57 and 63 cents a share, from 69 cents in the fourth quarter of 2000, Neal said.

Yet amid the deflation, several pockets are thriving.

Specifically, public companies catering to budget-minded adults -- as well as teens, who as a group have continued to spend freely -- are doing quite well.

Wedbush Morgan.

"Teens have money in their pockets. And, except for that one week of Halloween, when (Attorney General John) Ashcroft was on TV warning people to stay out of malls, teens have been generally oblivious about the economy," said Michael Pachter, director of research at Wedbush Morgan.

That has kept the good times rolling for apparel retailer Hot Topic Inc. and video gamemakers THQ Inc. and Activision Inc.

Hot Topic's same-store sales fell 13 percent during the Halloween week terrorist scare, but immediately rebounded.

"Our core teen customers, both before that Halloween week and since seem to be back on a more normalized pattern of shopping," said Hot Topic Senior Vice President Jay Johnson.

Last week, Hot Topic reported that its net sales for the third quarter ended Nov. 3 were $92.1 million, up from $72.2 million in the year-ago quarter. While it will not report third-quarter earnings until Nov. 19, analysts are projecting 39 cents per diluted share, up from 34 cents a year ago.

Also benefiting are discount retailers like Commerce-based 99 Cents Only Stores, which reported a 31 percent increase in earnings for the third quarter ended Sept. 30.

Wary consumers are also scrambling to save money on their mortgages, and that's bolstering the earnings of companies like Calabasas-based Countrywide Credit Industries Inc.

'Positive environment'

While Countrywide's fiscal third quarter doesn't end until Nov. 30, it is originating a record number of mortgages amid a refinancing boom brought on by the lowest interest rates in 40 years.

"This is a very positive environment," said Stanford L. Kurland, Countrywide's chief operating officer, adding that Countrywide is "very comfortable" with previous earnings guidance of $1.20 to $1.25 a share for the fiscal third quarter. That would compare with 80 cents in the like year-earlier period.

"Right now our biggest issues are maintaining pace with the very high volume of activity that we have today," he said.

As for the fiscal year ending March 29, 2002, Kurland said he is "very, very comfortable" with analysts' consensus earnings projection of $4.50 a share.

Likewise, builders of affordable homes are thriving, most notably KB Home, which reported earnings per share of $1.58 for the third quarter ended Aug. 31, easily beating analysts' consensus of $1.42. "The things that drive our business are affordability and job growth," said Jeff Mezger, KB Home chief operating officer.

Despite higher unemployment, jobs are still being created in the Southwest, where KB is most active. As a result, KB Home is on track to earn $5.24 a share for the year ending Nov. 30, up from $4.25 in fiscal 2000.

While Mezger said he's "cautiously optimistic" for another increase in fiscal 2002, analysts expect a decline to $5.08 a share.

While the housing market is just beginning to show cracks, other industries keep deteriorating.

Late last week, Walt Disney Co. reported operating earnings of 6 cents a share for its fourth quarter ended Sept. 30, down from 16 cents in the like year-earlier period. Analysts' consensus was for 7 cents.

In a statement, Disney Chairman and Chief Executive Michael Eisner said these are "challenging times for American business," but that he expects Disney to emerge in an even stronger position to deliver long-term earnings growth and cash-flow increases.

Another local company whose earnings have been battered by the Sept. 11 attacks is Beverly Hills-based Hilton Hotels, which reported earnings of 6 cents a share for the third quarter ended Sept. 30, down from 16 cents in the like year-earlier period. Analysts' consensus was for 10 cents a share.

Hilton Chief Executive Stephen Bollen-bach has predicted a swift return to normal travel patterns, but analysts aren't as optimistic. For the current fourth quarter, Hilton is expected to break even, according to Thomson Financial/First Call's consensus estimate.

One of the areas where L.A. companies have seen an outsized impact from the attacks is in specialty apparel categories, where footwear companies like Vans Inc. and Skechers USA Inc. saw rapidly growing earnings cut off at the ankles. "The recession is going to hit the footwear industry, and I believe it'll hit casual footwear more than athletic," said Pachter.

Third Quarter Earnings Surprises

Upside

                           30       30    Year-Ago
Company                 Estimate  Actual   Actual


THQ Inc.                 $0.11    $0.14    $0.12
Mattel Inc.               0.46     0.48     0.41
Ryland Group Inc.         2.19     2.91     1.67
K-Swiss Inc.              0.61     0.79     0.59
Overture Services Inc.    0.02     0.16    (0.22)

Downside

                           30       30    Year-Ago
Company                 Estimate  Actual   Actual


Hilton Hotels Corp.       0.10     0.06     0.16
Northop Grumman Corp.     1.47     1.28     2.11
Skechers USA Inc.         0.37     0.30     0.40
Walt Disney Co.           0.07     0.06     0.16
Homestore.com Inc.       (0.03)   (0.06)   (0.19)


Estimates trcked bt Thomson Financial/First Call
All EPS Figures figures represent operating earnings per share