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Archive for Sunday, October 27, 2002

The Motley Fool

October 27, 2002

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Last weeks answer
Nobody doesn't like me. Based in Chicago, I employ more than 140,000 people, and my wares are sold in almost every country on Earth. My food and drinks, underwear and household products sport more than 100 brands, such as Champion, Hanes, L'eggs, Bali, Playtex, Wonderbra, Jimmy Dean, Ball Park, Hillshire Farms and the Kiwi shoe-care brand. My 32 "megabrands" each generate more than $100 million in annual sales. I aim to hold the No. 1 or No. 2 brand position in every category in which I compete. One of my biggest brands is my own name. Who am I? (Answer: Sara Lee)

Know the answer to this week's question on page 1E? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, VA. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

Sears' softer side of earnings

Sears, Roebuck (NYSE: S) is the latest casualty of weakened consumer spending, recently announcing that 2002 earnings will come in below expectations. Shares have traded near a 52-week low.

The news isn't that shocking. Sears posted weak sales results for July and August, and even Wal-Mart is warning of a dismal September. Some of Sears' pain is self-inflicted. It's remodeling and updating many stores, and that upheaval has hurt sales. The disruptions peaked in the third quarter and should be less of an issue in the future.

The challenge for Sears is to capitalize on its vital fourth quarter, which would keep it on track to improve upon last year. Store remodels should help, as should the integration of Land's End, which the company bought in June. Clothing and other soft goods have been a sore spot for a while.

The environment may not cooperate with Sears. Few expect a hardy holiday shopping season. A war with Iraq could keep already-nervous shoppers away from stores. Rising consumer debt levels and increasing late payments could also hurt Sears, since it gets about 60 percent of its operating profits from its consumer credit division. Its accounts receivable (money owed the company) and allowances for doubtful accounts already have been rising.

Sears is in the same boat as most other retailers right now, with the tide very low. Shareholders need patience if they choose to drift along.

Laughing last

In 1994 my employer, Citibank, offered its employees a stock purchase plan in Citicorp stock. Citicorp was trading at a high of $38 per share at the time, and my co-workers laughed at me for buying shares through the plan. I participated in Citicorp's purchase plan again in 1997, when shares were trading around $70. My co-workers were skeptical this time, but didn't laugh. In 1998, Citicorp merged with Travelers and became Citigroup. A few months ago, Citigroup spun off Travelers Property Casualty. My combined investment of $2,100 is now worth $7,000 after reinvesting the dividends. Warren Kelley, Ellisville, Mo.

The Fool Responds: Employee stock purchase plans can be terrific. They sometimes even permit you to buy shares of your employer at a slight discount.

Still, as the Enron debacle has reminded us, never keep too many of your financial eggs in one company's basket. You were also smart to have your dividends reinvested in additional shares. That's a powerful way to gradually (and painlessly) build up your number of shares.

Top jobs

What are the job responsibilities of a typical chief executive officer (CEO), president and chief operating officer (COO)? David Stone, Aventura, Fla.

It varies a bit from company to company, but here's a good explanation in a nutshell, from Entrepreneur.com: "The CEO is responsible for articulating the vision/strategy, and the president is responsible for executing that vision/strategy." In many companies, the president and the COO are the same people.

A typical CEO focuses on overall strategy, as she communicates with the media, employees and customers. She'll spend a lot of time networking with other companies' executives, meeting with financial partners, and trying to get the public and investors interested and confident in the company.

Meanwhile, the COO/president keeps the company chugging along, managing day-to-day operations. He'll deal with consultants and customers, sales, marketing and finance department employees, and others. He and the CEO will work with the CFO (chief financial officer) to make sure the firm is financially healthy.

Splitting shares

Many people get excited over stock splits. But they're mostly meaningless.

Imagine shares of Buzzy's Broccoli Beer (ticker: BRRRP), trading around $50 each. If you own 100 shares, they're worth about $5,000. Now imagine that Buzzy's splits its stock 2-for-1. For each share that you own, you get another, so you end up with 200 shares. Did you just get a lot richer? Nope, because while the number of your shares increases, the value of each share decreases proportionately. After the split, the shares will trade around $25 each. The total value of your shares? Still $5,000. (Two hundred times $25 equals $5,000.)

Splits can take many forms: 2-for-1, 3-for-2, etc. There are even "reverse splits," which reduce the total number of shares and plump up the price. But beware of reverse stock splits of low-priced stocks. Companies use them to create a sense of higher value. That's a false sense, though, since splits don't affect the value of a business. (Many high-flying stocks of yesteryear, such as Nortel Networks, AT&T, Palm and InfoSpace, have recently announced or executed reverse splits.)

One reason companies split their shares is to keep prices low enough for individual investors. If, in its 83-year history as a public company, Coca-Cola had never once split its stock, one share would be currently priced at more than $200,000.

Few folks today could afford a single share.

In fact, Coke has split so often in its history that if you'd bought just one share when it went public in 1919, you'd have more than 4,600 shares today. It's rare for investors to be shut out of a stock because of a steep price, though. Even with a $500 stock, shallow-pocketed investors can just buy one or two shares.

While a split can make a stock's price more psychologically inviting and does technically make it cheaper, it doesn't make it a sudden bargain. A stock selling at more than $250 per share might seem "expensive," but it can be a much better value than many $20 stocks. Stock prices matter only when you compare them to other numbers, such as earnings.

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