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Tough Times for Tarnished Icons

Shares of marquee American brands like Kodak and Gap have languished as upstarts conquer their turf. What will it take to restore their luster?

Would a brand by any other name smell as sweet? Last week's business headlines saw a bid for—and reports of takeover interest in—two companies that stand behind gold-plated American brands that have lately been lackluster. Dow Jones (DJ), publisher of The Wall Street Journal, disclosed receipt of a bid from Rupert Murdoch's News Corp. (NWS), and press reports swirled of Microsoft's (MSFT) interest in Yahoo! (YHOO) as a strategic move to counter search giant Google's (GOOG) online ad dominance.

In both cases the acquired companies would have impressive assets and name recognition. But both have seen disappointing stock performance, meaning the Street thinks both have been less than proficient at creating shareholder value. And it's not just Dow Jones and Yahoo. With increased competition from overseas and an ever-tougher market environment, other American companies with highly recognizable brands have fallen into the doldrums.

A New Angle for the Overexposed

One of the toughest slogs for any of the tarnished icons is faced by photography giant Eastman Kodak (EK), whose struggle continues as consumers flee en masse to digital cameras. Kodak lagged in the field despite a name that's almost synonymous with photography—indeed, George Eastman pioneered the roll film camera and was awarded the patent back in 1888. The company, which hasn't seen an annual profit since 2004, suffered its latest ignominy on May 4 when it announced first-quarter losses of $151 million worse than analysts predicted. The stock closed the day down 4.8 % at $24.72.

To redevelop itself, Kodak is investing in its inkjet printer business, which it believes will bring customers to the other imaging services it offers online and in kiosks. In this area, however, Kodak faces healthy competition from the likes of Hewlett-Packard (HPQ) and Lexmark International (LXK). Despite its sell rating on the stock, a recent report from Cross Research found itself "pleasantly surprised" by the quality of the Kodak inkjet line and that customers "perceived quality" in the name.

But a well-received printer will only take the Rochester (N.Y.) giant so far. With the renewed focus on retail, it just sold its health-care unit to Canadian outfit Onex for $2.35 billion. As sales of its staple photographic film shrivel, it is also in the midst of a massive series of layoffs expected to total more than 20,000 (see, 5/4/07, "Kodak Prints More Red Ink").

Analysts find the company's overhaul intriguing but remain wary of the stock. In a typical report, Standard & Poor's emphasizes the continuing risk and says the stock is trading at high levels. (S&P is owned by parent company the McGraw-Hill Companies (MHP).)

What's Eating Sara Lee?

While the situation doesn't appear quite so dire for another marquee American name, Sara Lee (SLE), Wall Street continues to yawn at the food and consumer staples group. Though most famous for its baked goods, the company is actually a constellation of brands encompassing everything from Jimmy Dean sausages to Kiwi shoe care products.

Morningstar's (MORN) Greggory Warren says the company's ills are representative of too many players in the food segment. Before Wal-Mart Stores (WMT) began pushing food and other supermarkets consolidated, Sara Lee and others could essentially raise prices at will. Without any incentive their investment in key 21st century requirements including technology and supply chain management was left lagging.

Warren says Brenda Barnes, who took over as CEO in 2005, erred in raising Wall Street expectations too high for a speedy recovery. Warren does see some bright spots; the company has been able to advance its Jimmy Dean breakfast meat brand into a line of breakfast meals, and spent enough to market it well. But not all of the company's units have done so well. Sara Lee's success in the future will depend on consolidating control of the disparate outfit and focusing on products that garner strong brand loyalty among consumers.

Warren says that a private equity outfit could potentially eat up some of the company's attractive brands. But before taking the company private, buyers will probably wait for Sara Lee to pay for its own modernization. Factors such as rapidly shifting technology have gnawed at Sara Lee and Kodak.

Falling Into the Gap

The Gap (GPS), perhaps the best-known American apparel chain, has been hit below the belt by shifting trends and savvy competitors. Nimble, stylish European chains including H&M and Zara have been able to expand rapidly and reach the U.S. market with attractive clothes and fast-moving inventory. H&M has also enlisted fashion stars Karl Lagerfeld and Stella McCartney, among others, to lend the company a shimmer of sophistication that the Gap lacks. The chain's recent stab at mass-market chic, the Audrey Hepburn skinny black pant launched last year, underwhelmed customers.

A recent S&P report says Gap has been hit by "mature and overdistributed brands." Despite the lackluster financial performance, there are still some reasons to be bullish. With more than 3,000 stores and brands such as Old Navy and Banana Republic, the company seems to have stores in every mall in America. Unfortunately for the company, in recent years those outlets haven't always been able to deliver same-store growth, a crucial barometer for retailers. The company's design and marketing wizards have their work cut out for them.

What will it take to restore these icons to their former luster? While these outfits proved adept at building king-size brands, they will now have to tap into another classic American business skill—the ability to reinvent themselves. Each has a strong name but it will require more to recover investors' favor.

Click here to see a slide show of well-known American brands that have fallen on harder times.

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