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Polaroid Awaits a Positive Development


By Amy Tsao These days, evaluating Polaroid (PRD) is a lot like looking at one of the instant pictures its cameras make. It's a matter of waiting for the image to come into focus.

The company's immediate concerns are financial. Weighed down by some $860 million in debt, Polaroid is fighting to survive. In order to make a $150 million debt payment by January, the company recently announced yet another restructuring that includes the planned layoffs of some 2,000 employees, severe cost-cutting, reduced capital spending, and the elimination of some product lines. Its share price, which was above $40 as late as mid-1998 and nearly $20 a year ago, has dropped to $2.50 -- its lowest point in the past decade.

Cheap as that is, buying Polaroid stock right now carries risks. Nevertheless, a few hardy investors are taking the plunge in the belief that the Cambridge (Mass.) company can pull through. Bob Renck, an analyst at RL Renck & Co., says the company has some real estate and shuttered plants it can sell. And he's looking for it to secure a new credit line, stabilize its revenue decline, sell-off piled up inventory, and pull out of its swoon once layoff-created cost savings kick in.

PRINTS ON THE RUN? Where are the new growth possibilities? Polaroid has all but given up on boosting sales of its core instant-camera business. Its best hope is to use instant-film and digital-camera revenues to fund other projects. Management is betting the company's future on standardized digital-printing technologies. That's a first for Polaroid, which in the past has sold cameras that could be used only with its own film.

"It's logical to assume that if digital imaging continues to grow, then printing is going to grow," says Polaroid spokesman Skip Colcord. "Whoever comes out with a technology that's fast, easy, and affordable is going to have a winner."

Analysts agree that Polaroid's new printing techniques could be blockbusters. The company's Onyx technology is targeted for printing monochrome digital images from handheld electronic devices and mobile phones. The demand for on-the-go printing may not be very strong just yet, but improved capabilities in handheld computers and growth in mobile-phone use could change that.

Even more exciting is Opal, a color-printing platform, which could be used in mini photo labs and kiosks. The technology can produce a four-inch by six-inch, photo-quality print in one second, vs. the 40 to 60 seconds now required to print digital pictures. Analysts expect Polaroid to price Opal-based printing competitively, at around the same price point as traditional 35mm photo printing. "They'll have a big winner if they can save consumers a lot of time," says Ron Tussy, principal analyst at Imerge Consulting Group.

PERCEIVED NEGATIVES. Some outsiders, however, question whether Polaroid can make a success of the new business. The company says it's courting strategic partners to develop its pioneering technologies into products, but it could be a challenge to convince other companies to share its cost without also giving up a big chunk of the profits. Says Tussy: "I don't see clear-cut profit-sharing [being offered by Polaroid] -- the motivation for partners to get involved."

Polaroid's Colcord says the company will soon unveil two major corporate partners. "The [printing] competition is established, so it's going to take the right partners to move Polaroid into that [business]," says Ed Lee, an industry analyst at Lyra Research. Polaroid will have to make the most of its strong distribution channels for its instant-film business, Lee adds. "The company will have to leverage this channel and make the paper [used with Onyx and Opal] available everywhere."

Some analysts are still worried by the strategy. Relying too heavily on a single blockbuster product is seldom wise, skeptics say. "Polaroid is going to have to work on all aspects of digital imaging," Lee believes. Specifically, he says, higher-quality, more profitable cameras should be in Polaroid's product mix. Right now, he contends, Polaroid is synonymous with low-end cameras.

CHANGING FOCUS. With sales of traditional instant-imaging products on the skids, "speed is of the essence" in getting Opal and Onyx onto the market, says Jim Corridore, an analyst at Standard & Poor's. The key is not to cut too deeply into advertising and other spending that supports the existing instant-imaging businesses.

"The question is, while they're cutting costs, can they do what it takes to support existing business," says Ulysses Yannas, an analyst at Buckman, Buckman & Reid, who is bullish about a Polaroid comeback. Yannas estimates Polaroid will have to raise its ad budget from 8.8% of total sales in 2000, to 9.8% in 2002, when the company starts its launch of the printing platforms.

One way to ride out the current slowdown in consumer spending, Tussy suggests, is to focus attention on fortifying product sales in the medical, scientific, law enforcement, and real estate fields. Commercial applications account for about 60% of Polaroid's total revenues. "If I were Polaroid, I would concentrate on these parts of the business," he says.

MUTED PRAISE? Meanwhile, Polaroid's management isn't reaching out to Wall Street very well, asserts Tussy, who recently met with company Chairman and CEO Gary DiCamillo. "The meeting was not as in-depth as I was expecting," Tussy says. Coming off a successful stint at Black & Decker, DiCamillo arrived at Polaroid in 1995 as the first outsider to head the company. His performance so far draws only muted praise. "I give [the management] some credit for finally acting to try and turn the company around, but they have to take the blame for why the company is where it is now," says S&P's Corridore.

Wall Street is growing wary. Top-tier investment banks rate shares of the company a hold. As recently as April, analysts were expecting per share earnings of $0.18 for 2001. Now, the consensus forecast has dropped to a loss of $1.15.

Even if Polaroid staves off catastrophe, its future will be fraught with challenges. For one thing, the company admits that the rise of digital photography may have forced its core business into permanent decline. Its I-Zone and JoyCam mini-instant cameras are a big hit with teens, but some analysts say that success probably won't be enough by itself to offset falling sales of the higher-margin, old-line cameras.

ANOTHER LOSS? That's the main reason revenues in the first quarter of 2001 fell to just $330.8 million, off 18% from last year's first quarter. Polaroid also lost $38 million, or $0.85 per share, in the quarter and expects to lose about the same amount in the second quarter.

Can Polaroid make it? Even if it survives the immediate crisis, its long-term future is hazy. The payoff could be huge if the company finally succeeds in remaking itself. But until the picture becomes less fuzzy, this is a stock only for the very bold. Tsao covers the markets for BusinessWeek Online in New York


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