Wednesday, May 16, 2007

Wolfowitz working on resignation deal (AP)

By Jeannine Aversa

WASHINGTON — Embattled World Bank President Paul Wolfowitz is negotiating an agreement to resign, according to an official familiar with the talks.
His departure would include an acknowledgment from the bank that he doesn't bear sole responsibility for the controversy surrounding a generous pay package for his girlfriend, the official said.

The negotiations were taking place as the bank's board resumed deliberations over Wolfowitz's fate Wednesday afternoon.

The official said Wolfowitz wanted the bank to accept some responsibility for conflicts of interest cited against him by a special bank panel. The official spoke on condition of anonymity because of the delicate state of the negotiations.

It was not clear whether the bank's 24-member board would accept Wolfowitz's terms.

Pressure on Wolfowitz to resign has grown since a special bank panel report, released Monday, found that he broke conflict-of-interest rules in his handling of the 2005 pay package of bank employee Shaha Riza.

Wolfowitz has maintained that he acted in good faith.

The White House, which picked Wolfowitz for the post, indicated for the first time on Tuesday that it was willing to consider new leadership for the bank.

By tradition, the World Bank has been run by an American, with the approval of the bank's board. The bank's sister agency, the International Monetary Fund, is headed by a European.

PlayStation 3 puts Sony in the red (Variety)

Company posts $573 million loss
By Steven Zeitchik

Sony lost more than half a billion dollars in the fourth quarter, but it was the pesky PlayStation 3 -- not the entertainment division -- that was responsible for the red ink.
Company posted a loss of 67.6 billion yen ($573 million), about 1% more than loss in comparable quarter last year, even as sales in the frame were up 13% to $16.8 billion.

Much of the loss was connected to the vidgame biz, which Sony continues to operate at a loss because of high production costs and intense competition from Nintendo's Wii.

Conglom announced Wednesday that it missed its PS3 sales targets for the year; the company shipped about 5.5 million units, roughly 500,000 short of its previous projections.

But studio was a revenue driver for the group; homevid titles like "The Da Vinci Code" and "Casino Royale" helped send profit at the division up 56% and sales up more than 30%.

Division also is expected to book solid revenue numbers in the current quarter thanks to the eye-popping success of "Spider Man 3," with b.o. having a far more meaningful impact on the bottom line than individual movies traditionally have on a company of Sony's size.

Through last weekend, sequel has earned $622 million worldwide, according to studio estimates.

At the electronics division, sales rose by the high single-digits in Europe and the U.S.

Despite the PS3 woes, Sony had a blockbuster prediction for profit this year, saying that profit would more than double to $2.7 billion for fiscal 2008, which ends in March.

Wall Street took the projections as a sign that Sony CEO Howard Stringer was turning around the company's fortunes and sent up the stock 6% in midday trading. Stringer has embarked on a policy of aggressive cost-cutting to turn around the Japanese giant.

Daimler Chief Puts Focus (Wall Street Journal)


DaimlerChrysler AG Chief Executive Dieter Zetsche said Wednesday he believed consolidation in the auto industry would continue, but there was a low likelihood that Daimler would be involved in future capital investments, at least on the Mercedes-Benz side.

However, because of higher shipping costs and more localization in products, future alliances for the company's Truck Group are a possibility, Mr. Zetsche said. Acquisitions in the U.S. or in India, where the Truck Group hopes to expand, are options that Daimler would be open to, he said. Earlier this year, the Truck Group purchased a 24% stake in China's Beiqi Foton Motor Co., which makes vans.

Mr. Zetsche added that with the sale of an 80.1% stake in the Chrysler Group to private-equity firm Cerberus Capital Management LP, he would be able to focus all of his energy on Daimler's luxury brand and pay more attention to the Truck Group. Daimler's supervisory board approved the Cerberus deal in a meeting Wednesday and the name DaimlerChrysler will be changed to Daimler AG after shareholder approval.

"The pure focus on the premium market is an easier task to fulfill rather than splitting my time," Mr. Zetsche said in an interview.

As for Daimler being a possible takeover target after the sale of Chrysler, Mr. Zetsche said the company was now less attractive because "we leveraged ourselves." He also said the management would work hard to ensure the company is not a takeover target.

Unlike other German car makers such as BMW, Volkswagen AG and Porsche AG, DaimlerChrysler has no major family shareholder acting as a buffer against hostile investors. Its biggest shareholder is the Emirate of Kuwait, which has a 7.1% stake. By contrast, at BMW, the Quandt family owns roughly 46% of BMW stock.

"I don't know if a majority shareholder is exclusively helpful and it doesn't mean absolute protection," Mr. Zetsche said.

On Tuesday, DaimlerChrysler said the Chrysler Group posted a €1.49 billion ($2.02 billion) loss before interest and taxes in the first quarter, compared with a €641 million profit a year earlier, as the company suffered from tough conditions in the U.S. Overall, DaimlerChrysler reported first-quarter net profit of €1.97 billion, up from €781 million a year earlier. The Mercedes division contributed €792 million to the group's earnings before interest and taxes, or Ebit, compared with a €735 million loss a year earlier.

Now that Daimler is no longer exposed to the risk and volatility of the Chrysler Group, Mr. Zetsche said he wants to concentrate on improving efficiency and operations excellence at Daimler's divisions, including cutting costs. And with a stronger balance sheet, he also hopes to develop growth potential in Daimler's businesses and pursue new opportunities.

Moody's Investors Service on Wednesday affirmed the Baa1 long-term ratings and Prime-2 short-term ratings for DaimlerChrysler and changed its outlook to positive from negative. Falk Frey, a Moody's senior vice president and lead analyst for DaimlerChrysler, said he believed "Mercedes and the Truck Group display many characteristics of a single-A rated company. A transitioning towards that rating category largely depends on the degree of ongoing exposure which DCX retains in an independent Chrysler," Mr. Frey said in a research report.

Mr. Zetsche said he has more ambitious targets for Mercedes beyond the 7% of return on sales the company has as a target for this year. He added that Mercedes ambitions are not to have the highest volume in sales but to be the most profitable luxury brand, which he thought could be reached in the near future. Mercedes faces strong competition from BMW, which surpassed it as the world's top luxury brand, and Toyota Motor Corp.'s Lexus division is also making inroads as a global player.

Focusing on Mercedes's future and growth was more promising than adding other luxury brands to Daimler's portfolio, Mr. Zetsche said. In March, Ford Motor Co. sold its Aston Martin brand for $925 million to a group of investors and there has been speculation that Jaguar could be next, although Ford officials have said the brand was not on the market at this time.

With governments in the U.S. and Europe looking at tougher environmental standards, Mr. Zetsche said Mercedes would spend more on research and development that focused on fuel efficiency. Because of rising gas prices in the U.S. market that are resulting in higher demand for smaller cars, Mr. Zetsche said there was a potential market for a Mercedes A-Class or B-Class in the U.S., but the euro exchange rates have not been favorable toward introducing these models in the U.S.

However, Mercedes has lower cost targets for the next generation B-Class, which may provide more opportunity for bringing that model to the U.S. market.

Macy's Loses Sales as It Weans Shoppers From Coupons (Bloomberg)

By Cotten Timberlake

May 16 (Bloomberg) -- Federated Department Stores Inc. is trying to break its shoppers' addiction to clipping coupons in order to boost earnings. In the process, it's losing customers once loyal to the Marshall Field's, Filene's and Hecht's stores it bought in 2005.

Federated's aim is to transform shopping habits by getting consumers hooked on consistent prices instead. The second- largest department-store chain, which plans to change its name to Macy's Inc. in June, may fail as companies such as Dillard's Inc. have had little success after shoppers resisted such changes.

The strategy is risky for Federated and its investors because coupons can be ``tough drugs to come off,'' Charles Grom, a New York-based analyst with J.P. Morgan Securities Inc., wrote April 30. He has a ``neutral'' rating on the stock.

Federated today reported a first-quarter profit of $36 million, or 8 cents a share, on lower costs to integrate the acquired stores, now called Macy's. Sales fell 0.2 percent to $5.92 billion in the three months ended May 5.

Excluding one-time costs for integrating the May stores, Federated said it had a profit of 16 cents a share, trailing the average analyst estimate of 19 cents in a Bloomberg News survey.

Shares of Federated slipped 15 cents to $39.79 as of 1:39 p.m. in New York Stock Exchange composite trading. They had declined 7.9 percent since Feb. 27 when the company's annual profit prediction trailed analysts' estimates. The Standard & Poor's 500 Index gained 7.3 percent over that time.

$11 Billion Acquisition

Since paying $11 billion for May Department Stores Co., Federated has toned down promotions, added more expensive merchandise like Coach handbags, and sold more exclusive goods from designers like Oscar de La Renta and private-label brands under names like Alfani.

Federated, which doubled the number of Macy's to more than 800 with the May stores, has also been sprucing up its locations by reducing clutter, improving dressing-room areas and adding televisions to them, and providing better signs in the stores.

The goal is to boost revenue, and ultimately Federated's stock price, said spokesman Jim Sluzewski. The decision to cut the number of days coupons can be redeemed has hurt sales.

``May is going to take a longer time to turn around, partly because of the coupons,'' said Arun Daniel, an analyst at ING Investments LLC in New York, which manages $40 billion. Federated's ``earnings could come down, and that would be bad for the stock,'' he added.

ING funds reduced their Federated stake by 425,000 shares in the six months ended March 31, according to Bloomberg data. Daniel doesn't rate Federated shares.

Fewer Days

Federated has cut the number of days coupons can be used by almost a sixth at the May locations, which previously offered coupons about 256 days a year.

``Does Macy's have the willpower and stamina to withstand the pain?'' said Stephen Hoch, marketing professor at the University of Pennsylvania's Wharton School in Philadelphia. ``The pressure of being a publicly traded company is going to make it very hard for them.''

Quarterly sales at stores open at least a year at the former May stores fell as much as 11 percent in the year ended in February, said UBS Securities LLC., more than twice the biggest drop of 5 percent a year earlier. Federated won't provide those May figures. Federated's such sales, excluding May, increased as much as 5.9 percent in the latest fiscal year.

Without coupons, former May customers may shop instead at J.C. Penney Co. and Kohl's Corp., where the discounts remain plentiful, according to Hoch and Mary Brett Whitfield, senior vice president at TNS Retail Forward, a Columbus, Ohio-based retail consulting firm. The two companies' sales have outpaced those at the former May locations.

`Hurt the Business''

``By cutting back as hard as we did, we clearly hurt the business,'' Federated Chief Financial Officer Karen Hoguet said at a Bank of America investors conference March 14 in New York. Hoguet called coupons an ``ugly'' way to promote merchandise.

Coupons were born in 1894 when Asa Candler, the druggist who bought the Coca-Cola formula, gave out handwritten tickets for a free soda, according to New York-based Promotion Marketing Association's Coupon Council. In 1895, C.W. Post distributed coupons toward Grape Nuts cereal.

In 2005, 46 percent of U.S. retailers offered them. Today, 80 percent of Americans use coupons, saving $3 billion a year, the Coupon Council says. Federated's coupons are typically issued via the mail and in newspapers, offering 15 percent off.

`Part of Americana'

``Coupons are really part of Americana,'' said Matthew Tilley, council co-chairman. ``There is a group of people that is addicted to them.''

Federated, which also owns Bloomingdale's, has been trying to reduce coupons for years. From February 2001 through February 2007, the number of days coupons could be redeemed fell almost 25 percent.

Bloomingdale's is ``significantly less promotional'' than Macy's, Sluzewski said, without being more specific. Bloomingdale's same-store sales have been among the strongest of Federated's divisions.

``I would think they would want to keep the coupons that bring us in,'' said Missty Wise, a 43-year-old homemaker in Claremont, California, who shops at former Robinsons-May stores that are now Macy's. ``If it's not broken, don't fix it, because it was working for me.''

Wise says she spends $200 to $300 every other month at Macy's, one-quarter of what she used to.

Not Alone

Federated isn't alone in trying to wean customers from discounts. Ruby Tuesday Inc., the Maryville, Tennessee-based restaurant chain, and department-store operator Dillard's of Little Rock, Arkansas, have reduced or eliminated coupon use, and sales or net income declined.

Analysts are skeptical that Cincinnati-based Federated will win the coupon tug of war.

``You do one event and you see that bump in sales,'' said Whitfield of TNS Retail Forward. ``It becomes a self-fulfilling cycle.''

Federated will still have coupons, mainly for credit cardholders, who are more profitable because they spend more and pay interest on outstanding balances. Federated deducts the discount from balances.

``We're all rats,'' said Hoch. ``If you don't get a food pellet, after a few more times you will say, `Screw it, I'm going somewhere else.'''

Amazon to start selling digital music (MSNBC)

By Joshua Chaffin and Aline van Duyn in New York

Amazon on Wednesday moved to shake up the online music business by setting up a direct rival to Apple's iTunes which will sell tracks without copyright protection.

The online retailer's decision to enter the music market could bolster the fortunes of the largest record companies. They have been desperate for an alternative to iTunes in order to gain more leverage in negotiations over pricing and other issues for the burgeoning digital market – particularly at a time when sales of compact discs are plunging.

However, their excitement about Amazon's new service, which will debut later this year, may be tempered by its decision to sell tracks for MP3s without the so-called digital rights management, which prevents consumers from freely copying and transfer their music among a variety of devices – from iPods to personal computers and compact discs.

"Our MP3-only strategy means all the music that customers buy on Amazon is always DRM-free and plays on any device," said Jeff Bezos,'s chief executive.

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So far, EMI is the only major record company to endorse such an approach. Six weeks ago, it announced an agreement with Apple to sell its catalogue on iTunes without copyright protection. It has also signed on to the Amazon service, along with thousands of smaller labels.

Its major competitors – Universal Music, Sony-BMG and Warner Music – are testing such an approach, which Apple's chief executive, Steve Jobs, has advocated as a way to grow the digital music market. However, they are still concerned that selling in MP3 could lead to a spike in piracy or cut into their burgeoning sale of music to mobile phone users. Several said on Wednesday that they had no immediate plans to sign with Amazon.

However, David Card, an analyst at Jupiter Research, predicted that Amazon's move could ratchet up the pressure for other labels to follow EMI's lead. "Getting another big, big player to endorse DRM-free is a big deal," Mr Card said.

Amazon, the pioneering online retailer, sells CDs online and has also begun to offer digital versions of films and videos. It did not release pricing information for the new music service, except to say that it would be "competitive."

Itunes has maintained its roughly 80 per cent share of the legal online music market in spite of competition from a variety of companies, including Microsoft, which last year released its Zune player.

Barney Wragg, EMI's top digital executive, predicted that Amazon's participation would "take the whole digital music business onto the next level" and give consumers greater choice.

Sony plans to ship 11m PS3s (Forbes)

Tokyo - Sony said on Wednesday that it aims to ship 11m PlayStation 3s worldwide this year, ramping up competition against its rivals after missing its recent targets.
Sony shipped 5.5m PS3 consoles in the year to March, below its target for 6m due to production problems with its high-definition DVD player that gave rivals Nintendo and Microsoft an early lead in the console war.

Sony said it expects losses in its game division to narrow this year after swallowing the huge start-up costs of the console.

"Although it seems to be difficult to fully turn around the performance at the game division in the current fiscal year, increased sales of the PS3 should help narrow losses here notably," chief financial officer Nobuyuki Oneda said.

The electronics giant is aiming to increase sales of the PS3 in Japan, the US and Europe, although Oneda admitted that rival Nintendo's Wii console continues to eat into its market share.

Nintendo, which has long dominated portable consoles, is seeing strong sales of its next-generation Wii, known for its innovative motion-sensitive controller, while Microsoft's Xbox 360 beat both to market.

Nintendo's Wii took 58% of the Japanese home video game market in March, while the PS3 had a 20% share, Oneda said.

The PS3 enjoyed a sell-out launch in Japan and overseas but this was largely because there were limited supplies.

Sony was forced to delay the global launch of the PS3 by about six months to last November due to problems with the high-definition DVD player and pushed back the rollout again until March in Europe and some other markets.

Sony is also pinning its hopes on sales of software and expects to release new titles including "Hot Shots Golf 5" and "The Eye of Judgment" this year.

It has established a worldwide software studio and is working "aggressively" to deliver new titles, said corporate executive Takao Yuhara.

Sony said earlier on Wednesday that it suffered its biggest quarterly loss in four years partly due to huge investments in the PS3.

The so-called "Father of the PlayStation," Ken Kutaragi, said last month he was stepping down as head of Sony's game division, which is sliding deeper into the red.

Ahead of the Bell: Limited Brands (AP)

Three analysts downgraded Limited Brands Inc. after the clothing retailer cut its outlook for the year late Tuesday, saying stiff competition and shrinking profit margins are squeezing the company's Victoria's Secret brand.

The Columbus, Ohio-based operator of the Victoria's Secret, Bath & Body Works, and C.O. Bigelow brands said it agreed to sell a two-thirds stake in its Express division to private equity investor Golden Gate for $548 million cash. Express booked $1.7 billion in sales last year at 631 stores.

Limited Brands said it is also thinking of selling its Limited Stores division, which reported $493 million in sales last year through 253 stores. Limited Stores and Express combined accounted for about a fifth of the company's $10.67 billion in sales in 2006.

Analysts said the bigger story was in the company's updated 2007 profit target, which sank to $1.55 to $1.65 per share from an initial range of $1.75 to $1.90 per share.

The guidance reflects "deteriorating fundamentals" at Victoria's Secret, said Citigroup analyst Kimberly Greenberger, who downgraded Limited Brands to "Hold" from "Buy."

About a year ago, Victoria's Secret began stocking up its inventory, beefing up product launches and pushing promotions to try to steal market share from other retailers and boost sales, said Banc of America Securities analyst Dana E. Cohen.

That strategy has come at the expense of profit margin, Cohen said. Cohen downgraded Limited Brands to "Neutral" from "Buy."

Wachovia Securities analyst John D. Morris downgraded Limited Brands to "Market Perform" from "Outperform."

New York Sues Dell for Fraud

Ben Ames, IDG News Service

The New York attorney general has filed a lawsuit charging that Dell Inc. used fraud and false advertising to increase profits on PC sales.

New York state Attorney General Andrew Cuomo filed the lawsuit in Albany County Supreme Court on Tuesday, according to the county clerk's office. Cuomo plans to give more details at a press conference on Wednesday.

A report in The Wall Street Journal, however, said that the lawsuit alleges that Dell misled its customers by applying high credit rates to their computer purchases although it had promised cheap financing. The suit also alleges that Dell failed to deliver rebates, warranties and technical support as simply as it had promised, the report said.

Dell denies the charges and plans to fight the suit, according to an e-mailed statement from spokesman Bob Kaufman.

"Dell will vigorously defend itself in court," Kaufman said. "We are confident that our practices will be found to be fair and appropriate. While even one dissatisfied customer is too many, the allegations in the AG's filing are based upon a small fraction of Dell's consumer transactions in New York."

The charges strike directly at the improved marketing image Dell has tried to build in recent months. After several quarters of disappointing sales in 2006, Dell promised to rebuild itself by investing US$100 million to improve customer service and by eliminating its complex rebate system in favor of more predictable prices.

Dell also fell behind rival Hewlett-Packard Co. in market share last year, dismissed its CEO in January and struggled with a financial investigation by the U.S. Securities and Exchange Commission (SEC). The company has missed the deadlines for filing its last two quarterly earnings reports, and admitted in March that its own internal investigators had found evidence of accounting misconduct.

Privacy Beckons For Bausch & Lomb (Forbes)

Joshua Lipton

The public eye is a harsh place, harsher still when a company makes a mistake. So Bausch & Lomb, the maker of eye-care products and recently a faulty contact-lens solution, is planning to step out of the public market and into the arms of private-equity firm Warburg Pincus, the company announced on Wednesday.

Warburg is offering $65 a share for Bausch & Lomb, a total of $3.7 billion in cash, and assuming about $830 million of debt, for a total value of $4.5 billion. If somebody thinks the eyecare company is worth more, they're welcome to it. Warburg is entitled a modest break-up fee of just $40 million, less than 1% of the purchase price.

Investors seem to think a better offer is coming. In morning trading, shares of Bausch & Lomb (nyse: BOL - news - people ) quickly kited up 8.8%, or $5.40, to a new 52-week high of $66.90. That's above the $65 bid, but the company traded in the $80s in 2005 and 2006, before its well-publicized contact-lens solution problems.

"Investors are saying that they expect a higher deal," noted Jeff Johnson, senior medical technology analyst at Robert W. Baird. "I think $65 does make sense but private equity seems willing to accept lower returns and pay more."

Bausch & Lomb is still dealing with the financial and legal mess created after a fungus-related mishap undercut its 2006 results. The company's ReNu with MoistureLoc contact lens solution was linked with a greater incidence of a potentially blinding eye fungus. (See: "More Recalls Ahead For Bausch & Lomb?")

The product may no longer be on the shelves but that didn't stop the lawyers from circling the company. Johnson said there are now more than 300 product-liability lawsuits pending against Bausch & Lomb.

It makes sense, given those litigious headaches, that a private equity firm would be the one swooping in to take over the company, said Johnson. "It would be a surprise to see a public company take on that risk," the analyst contended. "These are issues better handled out of the spotlight. Then the company can come back when the issues are all resolved."

Despite the headline-grabbing news plaguing Bausch & Lomb over the past year, it remains the most well-recognized eye care company in the world, said Johnson.

"They have significant brand equity. Some consumers do remember that Bausch & Lomb was associated with a scare last summer. But there a lot of consumers that have forgotten about that or decided not to hold it against them."

He added, "It's the costs associated with litigation and accounting that concerns the public. They could use a couple years to get these issues in order."

The Associated Press contributed to this article.