S&P Upgrades Staples to Accumulate

Staples (SPLS ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Yogeesh Wagle

Staples posted January-quarter earnings per share of 42 cents, vs. 35 cents, beating S&P's estimate by a penny. Sales rose 10% and North American retail same-store sales gained 4.0%, both better than S&P expected. In fiscal 2005 (Jan.), S&P thinks the company will see smaller gains from its store remodeling, customer service, and supply-chain initiatives, but stands to benefit from higher spending by small- to medium-sized businesses and continued international growth. S&P is raising the fiscal 2005 earnings per share estimate by 6 cents, to $1.35. Based on a blended discounted cash-flow and relative valuation model, S&P is raising the 12-month target price to $32, from $30.

Dell (DELL ): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

PC maker Dell announced that Kevin Rollins has been appointed by its board as CEO to succeed founder Michael Dell, who will remain chairman. Rollins will retain his position as president. The move has largely been anticipated and S&P sees little change in the way the company operates. S&P views Rollin's management style and vision as similar to Michael Dell's and expect his experience as a consultant to continue to prove useful in evolving the company's strategic direction. There's no change to S&P's discounted cash-flow analysis, which yields a $36 12-month target price.

Gap (GPS ): Reiterates 5 STARS (buy); Abercrombie & Fitch (ANF ) and Pacific Sunwear (PSUN ): Reiterates 4 STARS (accumulate)

Analyst: Marie Driscoll, CFA

The average specialty apparel retailer in S&P's coverage group posted an 8% gain in comp-store sales in February. While one month does not a trend make, S&P think conditions are present for a strong first quarter as inventories are slim, merchandise appears to be trend-right, and the consumer is spending. S&P is particularly enthused by a 12% comp-store rise at Gap, improving domestic traffic at all chains, and expanding merchandise margins. S&P says investors should accumulate Pacific Sun because the surf trend still has strong momentum.

Merck & Co. (MRK ): Reiterates 4 STARS (accumulate)

Analyst: Herman Saftlas

Merck announced first-quarter earnings per share guidance of 71 cents to 73 cents. S&P's estimate is 73 cents. The drugmaker's guidance excludes costs related to the acquisition of Aton Pharma, and a gain from the sale of its stake in a European joint venture, both of which should be neutral to earnings in the first quarter and full-year 2004. Merck reiterated the 2004 earnings per share guidance of $3.11 to $3.17, which S&P finds reassuring given the likely residual impact from a new inventory management system. S&P is maintaining the 12-month target price of $53, based on a blend of S&P's forward price-earnings and discounted cash-flow analyses. The current $1.48 dividend presently provides a yield of 3.1%.

Disney (DIS ): Reiterates 3 STARS (hold)

Analysts: Tuna Amobi CFA, CPA, and Thomas Graves, CFA

News of the Disney Board of Directors selecting George Mitchell as non-executive chairman follows a large shareholder protest vote against Michael Eisner, who was previously chairman but retains his CEO post. S&P believes that Disney's improved operating fundamentals and prospects for a possible acquisition by Comcast or another company are adequately reflected in the share price. S&P thinks Comcast will be disciplined in its approach, but believes it could up the ante to acquire Disney. However, S&P doesn't expect enough upside to advise buying Disney shares.

Best Buy (BBY ): Maintains 5 STARS (buy)

Analyst: Amrit Tewary

Best Buy's February-quarter comp-sales gain of 9.7% suggests an acceleration in January and February from its already strong December comp-sales gain of 9.3%. The consumer-electronics retailer stated that the strong February-quarter sales performance was driven by increased store traffic, especially for computers. S&P thinks January and February results benefited from incremental sales generated by customers coming in to redeem gift certificates and to use Reward Zone coupons they earned during the holidays. Looking ahead, S&P sees Best Buy as the best positioned retailer among its peers to take advantage of a strong digital product cycle.

Pep Boys (PBY ): Maintains 3 STARS (hold)

Analyst: Yogeesh Wagle

Pep Boys' January-quarter earnings per share of 12 cents, vs. 3 cents, excluding one-time charges in both periods, is 8 cents above S&P's estimate. Sales grew 14% on a better-than-expected same-store sales gains of 16% for merchandise and 5.1% for service revenue. The car parts and services retailer said sales performance was driven by new product introductions during the Christmas selling season. S&P's fiscal 2005 (Jan.) earnings per share estimate remains $1.06. Although the recent quarters' results are a positive surprise, S&P believes Pep Boys' current premium valuation vis-a-vis peers fairly reflects the ongoing turnaround in its retail operations.

Neiman Marcus (NMG.A ): Reiterates 5 STARS (buy)

Analyst: Jason Asaeda

Neiman's posted January-quarter operating earnings per share of $1.06, vs. 68 cents, beating S&P's estimate by 5 cents. Gross margin improved by 170 basis points on lower markdowns and the elimination of two promotional events. Expense leverage also improved on a strong 10.5% comp-store sales gain. With customers responding favorably to new spring fashions and the company focused on full-price selling, S&P is raising the fiscal 2004 (Jul.) operating earnings per share estimate to $3.50, from $3.35, and sees fiscal 2005 at $3.78. S&P is also raising the 12-month target price by $2, to $70, based on a discounted cash-flow analysis.

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