Whole Foods: A Sale on Stakes

Faced with further declines in its same-store sales, Whole Foods Market (WFMI) announced Wednesday it had sold a 17% stake in the upscale grocery chain to a private-equity investor.

The capital infusion from the $425 million deal will allow the company to pay down debt, but will also dilute shareholder value. In a conference call CEO John Mackey said the broad economic slump made the stake sale a prudent option.

"While we are still producing strong cash flow, the challenged economic environment is negatively impacting our sales and bottom line," he said Wednesday. "The uncertain environment combined with our commitment to maintaining financial flexibility and investing prudently in our long-term growth has led us to announce that we have raised $425 million of additional equity from the sale of a Series A preferred stock to Green Equity Investors VLP, an affiliate of Leonard Green & Partners, LP."

The deal garnered an upgrade from Jefferies & Co. analyst Scott Mushkin, who boosted his rating to Hold from Underperform in a Wednesday note.

"When we downgraded the stock last month, we noted a worsening macro climate and liquidity concerns," he wrote. "Now the investment by Leonard Green should largely remove the liquidity overhang on the shares. Nevertheless, the company operations continue to contract with slowing comps and gross margin pressures continue to mount."

Robert Summers, an analyst at Pali Research, took a harsher view.

"The substantial dilutions that management was willing to accept reflects a certain level of desperation and foreshadows further deterioration, in our view," he wrote. While a private-equity deal beats a liquidity crisis, it's an indicator that foodies won't be flocking to Whole Foods in a recession.

Bottom Line: Sell
The stock's gotten a boost from this that may be the only near-term opportunity for investors to recoup even a fraction of their losses in Whole Foods, which has shed 70% of its value year to date.

Macy's: Sales Stale in October

Macy's (M) reported a 6% drop in same-store October sales on Thursday but reaffirmed its guidance for the second half of what's proved a brutal year for retailers.

A calendar quirk that pushes Thanksgiving back to the end of November will put a full week of sales activity into the December period, and that will prompt a double-digit decline for this month, Macy's said in its monthly sales results release. The double-digit increases notched by many retailers last year will be reversed, says Atlantic Equities analyst Daniela Nedialkova.

The Cincinnati-headquartered department store chain said same-store sales in the fourth quarter are expected to be down by 1% to 6%.

"It's in line with Q4 comps, and on an absolute level, it did look a lot better than some of its peers," Nedialkova says.

The retailer once again began reporting monthly sales figures, the first time it has done so since the start of the year. Third-quarter total sales hit $5.5 billion, a hair above analysts' expectations of $5.48 billion.

Because of a dramatic year-over-year calendar shift that resulted in a same-store sales increase of 13.4% in November 2007, the company expects a same-store decrease in the low double digits this November as a full week of sales shifts back into the December period.

Nedialkova says the 150th anniversary celebration of the brand lends itself to a promotional environment that will drive traffic, even though the effect on operating margins won't be clear until Macy's reports sales Nov. 12.

"I'm sure everybody is promoting to a greater extent than last year," she says. "You'll have to offer considerable value to the consumer in order to get them into stores."

Bottom Line: Hold
It's bad for the retail sector, but the worst-case has been priced in and Macy's seems to be able to offer consistency, if not improvement.

News Corp.: Guidance Turns Conservative

News Corp. (NWS) missed Street estimates for the September quarter and forecast a weaker showing in 2009, prompting investors to reach for the off button in Thursday trading. Global economic weakness forced the media conglomerate to reverse earlier forecasts of a revenue increase.

"Looking at the change in our outlook from August to today, roughly one-third of the change in this outlook is due to the strengthening U.S. dollar," Chief Financial Officer Dave DeVoe said in a Wednesday conference call. "A further 40% of the change is from the challenge in the advertising markets in our U.S. television and international newspaper businesses and the remainder reflects our view on business trends in the rest of our business operations.

Credit Suisse analyst Jolanta Masojada wrote that the numbers were unexpected, but could be a means of lowering expectations.

"While we had expected these factors to result in a reduction to guidance, the magnitude of the downgrade was a surprise," she wrote in a note published Thursday. "In our view guidance could ultimately prove somewhat conservative and likely reflects limited visibility."

Chairman Rupert Murdoch said News Corp. had a strong balance sheet that will help the company, but said the revised guidance "is a clear reflection of the current economic downturn, which we believe will persist throughout 2009 and prove extremely challenging for the media sector." (Dow Jones, a division of News Corp., is co-owner of SmartMoney.)

The end of a long, free-spending presidential campaign will create difficult revenue comparisons over the next year, and other key categories such as auto advertising are also down.

Gabelli & Co. analyst Christopher Marangi cut his rating on the stock to Hold from Buy.

"With the stock down 52% YTD, we realize the horse is out of the barn, but we would not run after the horse," he wrote. "Exposure to international markets and several GDP-levered businesses were helpful in expansion; they are now liabilities."

Bottom Line: Hold
This is a question of riding out the rough spots. Global reach and scale will serve News Corp. better than smaller media organizations, although the sector will not be waving banner headlines about its performance any time soon.