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Still Accumulate Toys R Us

Toys R Us (TOY): Reiterates 4 STARS (accumulate)

Analyst: William Donald

The company lowered Q2 and full fiscal 2002 (Jan.) guidance, citing the soft economy and heavier investment spending. S&P expects a Q2 loss of roughly $0.15, vs. $0.08 loss that was Street consensus. S&P cut its fiscal 2002 estimate by $0.15, to $1.30. The company is moving to improve store formats, service and product mix. Costs will hurt the first three seasonally slow quarters of fiscal 2002, but the moves will boost holiday and future sales and profits. Toys R Us has over 20% of the market for video game hardware and software, and will benefit mostly in fiscal 2003 from new game platforms. S&P sees EPS jumping to $1.75 in fiscal 2003.

Avon Products (AVP): Downgraded to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Howard Choe

The downgrade is based on S&P's concerns about foreign currency effects and the company's retail launch. Avon derives some 60% of its sales from outside of North America. Despite its competent currency hedging practices, continued forex pressures will weigh on revenue. Concerns about Latin America have risen amid deteriorating economic conditions in Argentina with potential spillover into the rest of the region. Also, the recent pull-out by Sears dealt a serious blow to Avon's retail initiative. Though the company will be compensated by Sears to 2002, S&P believes the impact of Avon's Becoming brand launch will be seriously diluted.

Kimberly-Clark (KMB): Downgraded to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Howard Choe

Kimberly-Clark's ranking was lowered because of a deteriorating operating environment. The company lowered its Q2 EPS guidance, and sees full-year 2001 results lower as well, citing currency, energy, capacity limitations, and start-up costs related to moist toilet tissue. Kimberly-Clark claims capacity issues are resolved. Energy costs should subside but S&P doesn't see any relief from forex pressures. Competition is up as well from Procter & Gamble and private label goods. S&P would hold the shares, however, since Kimberly-Clark is well-managed and financially sound. S&P lowered its 2001 EPS estimate to $3.40 from $3.54 and the 2002 forecast to $3.71 from $3.90.

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