Finally, A Good Kodak Moment

The second quarter shows the payoff from massive cost cuts

For months, investors have been fretting that Eastman Kodak Co. CEO George M.C. Fisher might be too much of a "Mr. Nice Guy" to revitalize the fading film giant. But Kodak's July 15 announcement that its second-quarter earnings soared 35%, to $495 million, or $1.51 a share, may have allayed those fears.

The profit results--which far exceeded Wall Street's expectations--stemmed almost entirely from Fisher's brutal attack on the company's bloated cost structure. So far this year, Fisher has slashed 7,600 jobs and reduced costs by $350 million, boosting Kodak's operating profit margin to 18.5% of sales, from 14.3%. Those numbers "pretty well blew the entire bear camp out of the water," says Alex Henderson, an analyst at Prudential Securities Inc. Indeed, as a result of the news, Kodak's stock surged nearly 12%, to a 52-week-high of 82 1/2.

Still, it's too soon to conclude that Fisher will bring about the turnaround he promised when he arrived in Rochester in 1993, fresh from his widely heralded reign at now-reeling Motorola Inc. Fisher's goal is to make Kodak a growth company once again. But for all the good news on earnings, Kodak's sales dropped 8%. Even factoring out the effect of the strong dollar on foreign sales, overall sales were off 1%.

Perhaps most troubling for Fisher's strategy, sales were also disappointing in markets he's counting on for growth: emerging economies and digital imaging. Thanks to the continuing Asian financial crisis, sales in emerging markets plunged 14%. And the red ink just keeps flowing in the digital business, where sales declined 5%, and Kodak lost another $64 million. "Nobody has declared victory," concedes chief financial officer Harry L. Kavetas. "We still have a long ways to go."

Near term, Kodak's earnings should continue to improve: Fisher promises to cut 12,300 more jobs by 2000 and boost annual savings to $1 billion. That will help Kodak "withstand aggressive pricing challenges" from Fuji Photo Film Co., predicts Peter Enderlin, an analyst at FAC/Equities. Indeed, Kodak appeared to check its market-share loss to Fuji in the second quarter. But until Fisher produces sales growth, his turnaround won't be in the can.