Activision Meets Walmart in Recession With Market-Share Gains

By Keith Naughton, Adam Satariano and Duane D. Stanford

Sept. 4 (Bloomberg) -- At Activision Blizzard Inc., instilling a “culture of thrift” means you wait 13 years before you change the office carpet, according to Chief Executive Officer Bobby Kotick.

“A lot of other companies, when there is some sort of economic downturn, they go into triage mode where they are trying to figure out their costs,” Kotick said. “We do that all the time.”

Kotick acted quickly during the recession, merging his company last year with Blizzard, the game division of France’s Vivendi SA. Activision got “World of Warcraft,” an online role-playing game with more than 11 million subscribers paying $14.99 a month. That helped Kotick boost market share in North America and Europe by 2.8 percentage points to 12.7 percent even as industry sales fell 14 percent.

Activision offers one example of how companies well- positioned for the worst economic slump since the 1930s have gained a competitive advantage.

Wal-Mart Stores Inc. expanded electronics offerings after Circuit City Stores Inc. liquidated, McDonald’s Corp. rolled out low-priced lattes and casino owner Penn National Gaming Inc. is looking to expand into Las Vegas. J.M. Smucker Co. added Folgers, the best-selling ground coffee in the U.S., to its market-leading jelly, jam and preserve brand; Ford Motor Co. boosted output while U.S. rivals filed for bankruptcy; and Verizon Communications Inc. bought Alltel Corp.

Beating the S&P

Six of those seven companies have outperformed the Standard & Poor’s 500 Index since the recession began in December 2007, while Penn National, the only laggard, has outpaced the S&P since the benchmark’s March 9 low.

Analysts expect the gains to continue. Each of the seven companies has more buy ratings than holds or sells. Of 150 recommendations for the group, there are 106 buys, 38 holds and six sells, based on data compiled by Bloomberg.

“To be aggressive in this recession, it took a strong stomach and a good balance sheet,” said Mark Zandi, chief economist of Moody’sEconomy.com in West Chester, Pennsylvania. “The companies that panicked will suffer more in the long run.”

McDonald’s, the world’s largest restaurant chain, and its franchisees invested $1.12 billion to add McCafe gourmet coffee drinks at about 11,200 U.S. locations.

Investing in Coffee

The company’s share of the U.S. fast-food market has increased 1 percentage point since 2006, according to a spokeswoman, Heidi Barker. That growth was driven in part by last year’s introduction of the McCafe products, said Chief Financial Officer Peter Bensen. Coffee sales have grown to 5 percent of the Oak Brook, Illinois-based company’s sales, up from 2 percent in 2006, Bensen said.

“We’re hitting or exceeding our targeted unit movement across the country,” Bensen said, while declining to specify internal goals. “We think the combined beverage strategy, conservatively, can add about $125,000 to sales per store.”

U.S. McDonald’s restaurants average $2.3 million in annual sales, Bensen said.

Lattes at McDonald’s start at $2.29, compared with $3.29 for a small latte at some of Starbucks Corp.’s New York outlets. Seattle-based Starbucks said Aug. 20 it is lowering prices on coffees and lattes by as much as 15 cents while raising prices on frappuccinos and caramel macchiatos by as much as 30 cents.

Sales Growth

“We continue to focus on providing value to our customers, an area where we have made much progress against the misperceptions about Starbucks value proposition,” May Kulthol, a spokeswoman for Starbucks, said in an e-mailed statement.

McDonald’s shares are up 9.3 percent since their March 5 low this year. They rose 20 cents to $55.57 yesterday in New York Stock Exchange composite trading. Of 21 analysts covering the stock, 12 say buy and 9 say hold, based on data compiled by Bloomberg.

“We’ve had an intense focus on improving operations,” Bensen said. “The eating-out market is shrinking in the recession, and we’re grabbing an even bigger part of the market.”

U.S. restaurant-industry traffic fell 2.6 percent for the three months ended May 2009, according to market researcher NPD Group, the steepest drop since 1981. Sales at McDonald’s U.S. stores open at least 13 months gained 3.5 percent in the second quarter, the company said.

Breakfast Boost

While it’s too early to say whether the drinks strategy will meet McDonald’s goals, the coffee is “bringing people into McDonald’s more often and they’re spending more on breakfast and the rest of the menu,” said Richard Jeremiah, a restaurant analyst with marketing researcher IBISWorld Inc. in Los Angeles. “The key thing at the moment is getting that traffic.”

Smucker, the 112-year-old maker of Smucker’s jams and Jif, the top-selling peanut butter in the U.S., has also taken advantage of the decline in dining out.

“The shift to ‘at-home’ consumption is on an upward trend and we are well prepared to continue to play an important role,” Co-CEO Tim Smucker said in an Aug. 21 e-mail.

Net income at Orrville, Ohio-based Smucker more than doubled to $98.1 million for the three months ended July 31. Revenue nearly doubled when it acquired the Folgers coffee business from Procter & Gamble Co. for about $3 billion in November as Wall Street turmoil fueled a global financial collapse.

“Folgers was a sleeper that they have been able to reinvigorate,” said Edward Aaron, a Denver-based analyst with RBC Capital Markets.

On the Prowl

Folgers captured more than a quarter of ground-coffee dollar sales in the 13 weeks ended June 28, according to Information Resources Inc., a Chicago-based market researcher. IRI’s data does not include sales at Walmart.

Aaron, who advises buying Smucker, has a 12-month share- price target of $59, 14 percent more than yesterday’s NYSE close at $51.59. Of 11 analysts covering the company, 9 say buy and 2 say hold. Smucker has surged 51 percent since touching a 2009 low of $34.22 on March 11.

Penn National has $800 million in cash and is on the prowl for new casino licenses in states including New York, Kansas and Ohio, as well as existing properties being sold by debt-laden rivals, Chief Executive Peter Carlino has said since October.

“We are probably busier at the corporate office than we have ever been in terms of looking at new opportunities,” CFO Bill Clifford said in an Aug. 21 interview. “We have a lot more firepower, a lot more options available to us to take advantage of the opportunities being created indirectly by the bad economy.”

‘Distressed Property’

The prize the Wyomissing, Pennsylvania-based casino and race-track company is seeking: a mid-sized resort on the Las Vegas Strip. Troubled owners now reluctant to sell may have little choice next year after MGM Mirage’s CityCenter opens in December, adding almost 6,000 new hotel rooms amid the city’s worst decline.

“There are going to be some distressed property situations out in Las Vegas,” Clifford said. “It will play itself out early next year, and at that point in time I think it will be much easier to get something done.”

Of 16 analysts covering Penn National, 12 recommend buying and 3 say hold, according to data compiled by Bloomberg. The shares have soared 68 percent since a March 6 low. They rose 13 cents to $28.64 in Nasdaq Stock Market composite trading.

As U.S. auto buying fell to the lowest level in three decades, Ford CEO Alan Mulally forced the 106-year-old automaker to deal with its diminished place in a changing market.

“There was a move by the company to accept the reality of today rather than thinking things are going to get better,” CFO Lewis Booth said in an Aug. 21 interview. “This very strong view, led by Alan, is, ‘Accept reality and react to it. Don’t hope it’s going to go away.’”

Avoiding Bankruptcy

That attitude led the Dearborn, Michigan-based automaker to borrow $23 billion in late 2006. The move saved Ford from the bailouts and bankruptcies that beset the predecessors of General Motors Co. and Auburn Hills, Michigan-based Chrysler Group LLC.

Ford has cut its North American workforce by 42 percent, or 50,400 jobs, since December 2006 as it revamped its product line. It dropped the 10-miles-per-gallon Excursion sport-utility vehicle and added the 41-mpg Fusion hybrid.

As Chrysler and Detroit-based GM slipped into Chapter 11 in April and June, Ford boosted output 16 percent to win more buyers. Ford had 15.8 percent of U.S. auto sales through August, up from 15 percent in 2008. It’s faring better than it did after the 2001 recession, when its market share slid to 21.5 percent in 2002 from 24.1 percent two years earlier.

“We didn’t think of just surviving,” Booth said. “We thought that, as we went through this, we would continue to invest in the new products for the future.”

‘Stealing Share’

Ford has combined “cost cutting, product improvement and pricing enhancement,” said Brian Johnson, a Chicago-based Barclays Capital analyst who has a “neutral” rating on the stock. “Ford is not just stealing share from GM and Chrysler, they’re taking it from the Japanese as well.”

Ford rose 45 cents to $7.48 yesterday in composite trading on the New York Stock Exchange. The shares have more than tripled this year for the third-largest gain in the S&P 500.

Analysts still aren’t convinced a turnaround is at hand. Six recommend the shares while five say hold and five say sell.

Walmart, the world’s biggest retailer, loaded up on laptops, mobile phones and Blu-ray disc players as Circuit City liquidated in March. In the U.S., operating profit advanced 5 percent to $4.9 billion in the quarter ended July 31.

Walmart and Target

Customer visits during the period increased by 1.3 percent, reflecting store improvements that will help the Bentonville, Arkansas-based company keep shoppers when the recession ends, Eduardo Castro-Wright, U.S. stores chief, said on an Aug. 13 earnings call.

Sales by Walmart’s U.S. stores open at least a year rose 1 percent in the 26 weeks through July 31 as Target Corp. posted a 5 percent decline. Walmart had a 3.2 percent gain in 2008, when same-store sales for Minneapolis-based Target slid 2.9 percent.

“Based on same-store sales performance over the past year, Walmart has been outperforming the competition, which implies that the company is gaining market share,” Joseph Feldman, an analyst at New York-based Telsey Advisory Group, said Aug. 27.

A Target spokesman, Eric Hausman, said the second-largest U.S. discount chain “has continued to gain market share in many categories.”

“Market share is not a zero-sum game between these two companies,” he said.

Verizon’s Leap

Walmart’s ability to keep increasing sales in a slumping economy echoes the company’s experience in the 2001 recession. For the 52 weeks ended Feb. 1, 2002, Walmart’s same-store sales climbed 6.1 percent.

Walmart rose 82 cents to $51.74 in NYSE trading yesterday. Walmart has gained 11 percent since a 2009 low on Feb. 4, and 21 analysts recommend buying the stock, based on data compiled by Bloomberg. Six say hold.

Verizon used an acquisition to leapfrog AT&T Inc. and become the largest U.S. wireless provider this year. The Jan. 9 purchase of Alltel for $28 billion helped New York-based Verizon increase second-quarter sales by 11 percent amid a slowing market for phone services, and boosted the number of mobile customers by 18 percent.

Mobile Web Access

“Our business relationships have held up very well,” Verizon CFO John Killian said in an Aug. 19 interview from his office in Basking Ridge, New Jersey. “We’ve not lost any contracts.”

Verizon announced contracts this year with the Bank of New York Mellon Corp., Siemens Enterprise Communications and federal agencies such as the Department of Health and Human Services.

Revenue from mobile plans that let customers surf the Web jumped 53 percent last quarter from a year earlier. They will eventually comprise half of customers’ monthly wireless bills, up from 29 percent in the second quarter, Killian said.

Mobile Web access will speed up when Verizon rolls out its “fourth generation,” or long-term evolution, network next year. Verizon said it will be the first to deploy its LTE network in the U.S., ahead of AT&T’s planned 2011 rollout.

While global mobile-phone sales slid 6 percent in the second quarter, smart-phone sales rose 27 percent, according to research firm Gartner Inc.

“People want the cool thing,” said Brian Marshall, a technology analyst at Broadpoint AmTech Inc. in San Francisco. “They view that as a necessity.”

Verizon rose 10 cents to $30.24 yesterday in NYSE trading, pushing its gain to 16 percent since a March 9 low. Of 31 analysts covering the company, 17 say buy, 13 say hold and 1 recommends selling.

‘Even Out Earnings’

Like Verizon, game maker Activision looked to a merger to expand in the recession by combining with Vivendi’s Blizzard.

“Doing that merger and having a subscription base for a game such as ‘Warcraft,’ that really helps even out earnings,” said Geoff Chamberlain, a research analyst with Appleton Partners in Boston, which owned 272,000 Activision shares as of June 30, based on data compiled by Bloomberg.

Adding market share in an economic contraction isn’t new for Santa Monica, California-based Activision. In 2001’s fourth quarter, when the last recession ended, game titles featuring professional skateboarder Tony Hawk helped boost global market share by 1.7 percentage points from a year earlier to 12.4 percent, the company said.

Activision has surged 41 percent since its low for the year on Jan. 6 in Nasdaq trading. The shares fell 9 cents to $11.55 yesterday. All 29 analysts following the stock rate it as a buy.

As for the 13-year-old carpet at company headquarters, CEO Kotick said he recently replaced it at the landlord’s expense.

Bill Clinton Visits North Korea, Meets With Leader Kim Jong Il

By Heejin Koo

Aug. 4 (Bloomberg) -- Former President Bill Clinton met in North Korea with leader Kim Jong Il during a surprise visit that may help defuse tension over the communist regime’s nuclear program and secure the release of two jailed U.S. journalists.

The White House denied a report from North Korea’s official Korean Central News Agency that Clinton delivered a message from President Barack Obama to the country’s leadership during today’s meeting in Pyongyang. “That’s not true,” White House spokesman Robert Gibbs said in Washington, referring to the report by KCNA.

Clinton was met at Pyongyang airport by Kim Kye Gwan, the country’s chief negotiator at talks to dismantle North Korea’s nuclear capability, KCNA said. The mission to secure the release of the journalists wouldn’t last long, an official traveling with Clinton’s wife, U.S. Secretary of State Hillary Clinton, said during a stopover in Spain.

The former president and the North Korean leader “had an exhaustive conversation” and a “wide-ranging exchange of views on the matters of common concern,” KCNA said without giving further details. The country’s National Defense Commission hosted Clinton at a dinner in his honor that was attended by officials including Kim Kye Gwan, the agency said.

The U.S. journalists, Euna Lee and Laura Ling, were sentenced in June to 12 years of “reform through labor” for charges including an illegal border crossing from China. The imprisonment coincided with increased tension with the U.S., with Hillary Clinton pushing through United Nations sanctions against the North following the regime’s detonation of a nuclear device in May.

‘Private Mission’

The White House spokesman earlier today declined to comment on Bill Clinton’s visit, saying in a written statement, “While this solely private mission to secure the release of two Americans is on the ground, we will have no comment. We do not want to jeopardize the success of former President Clinton’s mission.”

Photographs were later released showing Clinton and Kim standing together and smiling. Kim had a stroke in August 2008, according to U.S. and South Korean intelligence officials. He appeared at North Korea’s Supreme People’s Assembly in April limping slightly and looking gaunt and aged. He is grooming his third and youngest son, Kim Jong Un, as heir, Japanese and South Korean media have reported. The elder Kim will soon transfer power to Jong Un, a South Korean government official has said.

Yu Ho Yeol, a professor of North Korean studies at Korea University in Seoul, said the visit “will certainly serve as a turning point in the U.S.-North Korean dialogue.”

Carter Trip

“A visit by Bill Clinton is certainly a more than acceptable level for North Korean officials, and will likely achieve good results in winning the journalists’ release,” the professor said.

Clinton’s visit echoes a similar trip by former President Jimmy Carter in June 1994. Following that visit, Clinton, as president, reached an agreement with Kim to freeze the communist nation’s nuclear activities.

In 2000, Clinton met Vice Marshall Jo Myong Rok, the first encounter between a U.S. president and senior North Korean official since the end of the Korean War. Later that year he sent Madeleine Albright, then secretary of state, to Pyongyang to meet Kim, the highest-ranking U.S. government official to visit the country.

The Clinton accord, known as the “Agreed Framework,” fell through in 2002, after North Korea admitted it had secretly restarted the nuclear program. It kicked out international inspectors and conducted a first nuclear test in 2006.

‘Higher Standing’

“Clinton in some ways has a higher standing now than Carter had in 1994, since he was the U.S. president who made the most tangible progress in relations with North Korea,” said Paik Hak Soon, a researcher on North Korean issues at Sejong Institute outside Seoul.

North Korea fired more than a dozen missiles this year in defiance of international pressure. Hillary Clinton has been gathering allies for her attempts to isolate the North, winning over China to impose the UN sanctions in June.

North Korea in April said it would never return to talks involving the U.S., China, Russia, South Korea and Japan. Last week Pyongyang signaled a softening of its stance, saying it may be open to negotiations outside the six-party setting.

North Korea had asked in unofficial contacts through its UN mission in New York that Clinton or a high-ranking Obama administration official visit for negotiations, South Korea’s Yonhap News said, without citing a source for the information.

Bill Richardson

Kim’s administration also used the “New York channel” to contact former Congressman Bill Richardson for informal talks in 2003, the White House said at the time. Richardson, who was Bill Clinton’s ambassador to the UN, negotiated the freedom of a U.S. helicopter pilot shot down in 1994 and a U.S. citizen who crossed into North Korea in 1996 and was accused of spying.

The State Department won’t comment until Bill Clinton’s mission is over, said an official, who declined to be identified. He was commenting in Rota, Spain, where Hillary Clinton’s plane was refueling.

Ling and Lee were detained in March while reporting for San Francisco-based Current TV, co-founded by Clinton’s former vice president, Al Gore.

Asked about their status last month, Hillary Clinton said the two women had expressed “great remorse for this incident.”

“Everyone is very sorry that it happened,” she said. “What we hope for now is that these two young women will be granted amnesty.”

By seeking an amnesty, the U.S. appears to be conceding that the two reporters broke North Korea’s laws, Paik said.

“The visit indicates that the U.S. and North Korea are willing to resolve this matter through dialogue,” he said. “We’ll have to see if this expands to the nuclear issue.”

Cuba's Raul Castro meets U.S. officials

HAVANA (Reuters) - A U.S. congressional delegation met on Monday with Cuban President Raul Castro in his first talks with U.S. officials since taking office last year -- a sign that U.S.-Cuban relations may be thawing.

Castro was host to six black Democrats from the U.S. House of Representatives who came to Cuba last week to explore ways of normalizing relations between the two countries, which have been at odds for five decades.

The television report showed Castro, attired in a business suit, sitting down with the delegation, but gave no details of what was discussed.

Delegation leader U.S. Rep. Barbara Lee has said the group did not carry a message from President Barack Obama but had come only to "listen and talk" with the Cubans.

Castro succeeded his ailing older brother Fidel Castro as president in February 2008.

Fidel Castro on Sunday wrote a column in which he said Cuba did not fear dialogue with the United States and on Monday wrote another recounting the visit of what he described as "an important political delegation."

There was no word that he had met with the group, but he wrote that one member had said "it was necessary to use this moment in which there is a black president in the White House and a current of opinion favorable to normalization of relations" between the two countries.

Hopes that U.S.-Cuba relations would improve have risen since Obama took office in January after promising to ease the 47-year U.S. trade embargo against the communist-led island and seek talks with Cuban leaders.

News reports have said Obama will shortly lift restrictions on family travel and remittances between Cuba and the United States, perhaps before the Summit of the Americas in Trinidad and Tobago on April 17.

Bills are pending in the House and Senate that would eliminate a ban on Americans visiting Cuba.

Day Ahead: Obama Meets with Senior Bankers