Earnings

J. M. Smucker Company (NYSE: SJM) reports Q2 EPS of $1.18, 14 cents better than the analyst estimate of $1.04. Revenue for the quarter was $1.28 billion, which compares to the estimate of $1.24 billion. Shares are currently up over 5%.

Highlights From SJM's Q2 Conference Call:

• Sees FY10 sales of $4.5 billion and EPS of $3.95 - $4.05 ex-items. Consensus sees $4.55 billion and $3.83, respectively.
  
• (Chairman and Co-Chief Executive Officer) We delivered the highest quarterly sales and earnings results in our history.
  
• Sales are up 52%, mainly due to the addition of Folgers. Profits were up in each business segment. Non-GAAP earnings per share were up 21%. And cash from operations exceeded 210 million.
  
• As we celebrate the one-year anniversary of completing the Folgers merger, the Coffee business performance continues to exceed our expectations. We experienced another strong quarter in Coffee in both sales and profit.
  
• Operating margin continued to expand significantly, driven by the profitability of the Coffee business. In addition, many of our core businesses also realized margin gains due to the lower commodity cost and synergy benefits.
  
• We continued to invest in our brands, as evidenced by an increase in marketing expenses of over 70% for the quarter, partly in support of the fall bake and holiday period.
  
• In the consumer segment volume was essentially flat with gains and peanut butter, pancake mixes and syrups, offsetting declines in fruit spreads.
  
• Sales in consumer were unfavorably impacted by the mix of products sold.
  
• In line with eating at home and back to baking trends, our Oils and Baking segment delivered good volume growth with both Crisco and Pillsbury brands increasing. Sales for this segment were down as expected primarily on price decreases taken in various categories.
  
• Based on category data for the 12-week period, our Pillsbury frostings are now the number one brand in volume sales.
  
• Sales in the Special market segment increased 15% due to the addition of Folgers. Volume gains were realized in Canada primarily in the baking and pickles category.
  
• (CFO)Sales for the quarter increased 436 million or 52% excluding coffee sales were down 6% for the quarter. Volume was 1% and was more than offset by a 7% decline due to price and mix with price the key driver.
  
• If you also exclude amortization in both years, earnings per were a $32 this quarter and a $3 last year and increase of 28%.
  
• Operating income increased a $146 million for the quarter excluding charges and increase as a percent of sales from 11% to 18.7%. Higher amortization expense in the current quarter negatively impacted margin by approximately a 130 basis points.
  
• Gross profit increased $249 million over the second quarter of last year and was a primary driver of the industries in operating income. Gross margin improve from 28.9% last year to 38.5% this quarter.
  
• Coffee contributed approximately 90% of the increase and continue to be impacted by favorable green coffee cost, volume-related plant efficiencies and product mix.
  
• SG&A expenses increased approximately $83 million, mainly reflecting the addition of Folgers, an increase as a percent of net sales from 17.8% to 18.2%
  
• Marketing and selling expenses totaled 10.1% of net sales compared to 9.6% last year.
  
• As scheduled earlier this month, we paid off $350 million Folgers bank debt and $200 million of senior notes assumed in a multi suites deal in 2004. This was completed using a combination of cash and borrowings against our existing $180 million credit revolver. Following the pay down outstanding borrowings on the revolver were approximately $100 million.
  
• We continue to anticipate a full-year tax rate of 34 to 34.5%.
  
• The U.S. Retail Coffee segment contributed $445 million to net sales for the second quarter of 2010 compared to the same three month period last year prior to the transaction volume was up 5%.
  
• Folgers contributed three-quarters of the growth with Dunkin' Donuts coffee accounting for the remainder. The coffee segmented $149 million to profit and achieved a 33.4% margin.
  
• We continue to believe that current margins in U.S Retail Coffee segment are in excess of longer term expectations. However, now that we've own the business for 12 months, we believe certain factors have changed since our original estimate of 28%.
  
• Sales in our U.S retail consumer segment were down 4% primarily due to mix as volume was flat for the quarter.
  
• Volume and sales gains were realized in peanut butter, pancake mixes and syrups.
  
• Volume and sales were down in fruit spreads due to mix, while potatoes, Uncrustables sandwiches and specialty foods also declined.
  
• Segment profit increased 4%, mainly due to lower distribution and operating cost. Segment margin improved by 190 basis points compared to last year's second quarter.
  
• In the U.S. Retail Oils and Baking segment, sales declined 9% compared to last year, primarily reflecting impact of price increases taken earlier this calendar year and higher promotional spending Crisco oils.
  
• Segment volume was up 3% with Pillsbury and Crisco brands up 14 and 12%, respectively. These gains were primarily offset by declines in canned milk. Segment profit increased 55%.
  
• Total sales in the Special Markets segment increased 15%, as the addition of Folgers and a 6% volume gain in Canada more than offset the impact of volume declines in the foodservice and natural foods business areas.
  
• Excluding coffee, Special Markets' net sales would have been approximately 5% less than last year's second quarter. Profit in the Special Markets segment was again strong, increasing 56% for the quarter, mainly due to the addition of Folgers and lower costs.
  
• (CEO) We are comfortable raising our outlook for the year. We continue to expect net sales of approximately 4.5 billion. We anticipate income per diluted share excluding merger and integration cost in the range of $3.95 to $4.05, an increase from the high-end of our $3.65 to $3.80 range that we have
  previously had.
  
• Amortization of approximately $0.40 per share is included in our forecast. Excluding amortization, our new forecast is $4.35 to $4.45 per share.
  
• (Q&A) My first question has to do with the comments Mark that you made about some creep up in some of the commodities of lead. And I just wanted to get a sense from you as to given your willingness to move pricing around more aggressive than some of your peers how do you think it plays out, if you have to go back to the trade and talk about price increases? (A) I think what I'll do is frankly - better is I have, first of all Paul started off on the oil because most of the impact we're talking is in his area.(A)Hey Eric, this Wagstaff. And again regarding oils we have seen about 10% increase in the cost of oil going since last time we've talked to second quarter or first quarter. As you know, we are covered through our fall bake time period and that would be with all of our key commodities. As we've looked at pricing, we are looking as pricing as they come first the calendar year and that's typical what we would do. Again, I think we've been relatively transparent in all of our key commodities and how we price it with our customers. So I think we'd be comfortable if the commodities are at a rate that you need to make an increase or decrease that we would do that.
  
• And then, I guess, maybe just as my follow-up, within coffee you had gone to a EDLP type strategy. My sense is with 5% year-over-year volume growth that you continue to take share unless the category is growing a lot more rapidly than I thought. Can you just kind of talk about the competitive landscape in coffee. Has Maxwell House followed your strategy? And was there any impact to your business during the quarter because of that approach?(A)Yeah, let me again, clarify for everyone on the phone, what we did is basically took a very significant portion of our trade spend and put it into everyday price. So if an account was actually already an EDLP account, there was most likely no effect, but if you're a high or low account, your everyday price was reduced and then your promotional price may not be as deep as it had been historically. So that's the first point. Secondly, as you know, we announced that and then started to implement that back in the first quarter, and our major competitor did not follow. Until about two weeks ago that we received confirmation that for the most part, they have followed that strategy almost penny for penny and that will be implemented as we understand some time in our third quarter or after the beginning of the new calendar year. Did that contribute to our growth? I would say that, yes, it probably did. Folgers grew over 4% during the second quarter, as it did in the first quarter. But I wouldn't contribute it all to that. I think there are a number f factors from our sales team, our marketing efforts, multi-branding promotional activities, etcetera, that probably contributed to that growth.

Intuit (NASDAQ: INTU) reports Q1 adjusted loss of $0.10, 6 cents better than the analyst estimate of ($0.16). Revenue for the quarter was $493 million, which compares to the estimate of $487.69 million.

Highlights From INTU's Q1 Conference Call:

• Sees Q209 adjusted EPS of $0.29 - $0.32, versus $0.37 consensus.
  
• Sees Q2 revenues between $800-$835 million versus $833 million consensus.
  
• (CEO) In Q1, we delivered solid growth in our core businesses. In particular, we're pleased with the strong double-digit growth in both QuickBooks units and Payments/Merchants.
  
• We're also pleased with the continuing acceleration of revenue growth in our Financial Institutions business.
  
• In addition, our progress in successfully integrating PayCycle is on track, and we completed the acquisition of Mint.com in early November.
  
• Q1 revenue of $493 million, which is at the top end of our guidance range. Our results per share and our operating loss were both much better than the range that we had originally guided.
  
• Our Q1 performance enables us to absorb the impact of the Mint acquisition without adjusting our guidance for the full year. We still expect fiscal year revenue growth of four to 8%, operating income growth of six to 10% and free cash flow growth of over 15%.
  
• And while we do believe that we've seen the bottom, we haven't seen any sustained positive trends in consumer spending or new business formations to suggest a rapid recovery. More positive indicators may come during calendar year 2010, but I don't expect them to materially affect our results this fiscal year.
  
• Now, with that said, we do expect to deliver improved operating results without the benefit of a rebound in the economy.
  
• (CFO) The operating loss is slightly larger than we had last year, but it's important to note that last year's Q1 results included an unusual $17 million benefit from compensation-related items. Adjusting for that item, the Q1 operating loss is $7 million less than it was last year.
  
• In our Small Business Group, we continue to play offense, growing customers in all of our Small Business divisions.
  
• The economic environment remains similar to the past few quarters. Payments charge volume per merchant was down 8% year-over-year.
  
• Total Small Business Group revenue in the first quarter was flat with a year ago.
  
• In our Financial Management Solutions segment, QuickBooks units grew a strong 15%. Revenue declined 7%, about three points of which was driven by increased use of consignment in our retail channel and four points of which was driven by heavier promotion of QuickBooks 2009 than we had last year.
  
• Our Employee Management Solutions revenue was up 9%. The PayCycle integration continues to go smoothly, contributing to strong revenue growth.
  
• And we continue to see strong retention of our existing Payroll customers. Payment Solutions revenue was up 4% driven by strong growth in our customer base, which was up 12% in Q1. Charge volume per merchant was down 8% in the quarter.
  
• Our Consumer Tax group had revenue of $22 million in Q1, up 8 million from last year.
  
• TurboTax for 2009 will go on sale in retail stores on November 27, and the season begins in earnest in January.
  
• The Financial Institutions division continues to gain momentum with 7% revenue growth and strong user growth. Internet Banking users were up 4% in Q1, and Bill Pay users were up 18%.
  
• This quarter we signed a large regional bank that will become one of our largest customers when we convert them to our platform in 2010.
  
• Our Other Businesses segment posted a 5% revenue decline in Q1, driven by a later Quicken launch than we had last year.
  
• In Q1, we repurchased $300 million of Intuit stock, which used the remaining funds from our prior repurchase program. The board has approved a new repurchase program of $600 million.
  
• We are reiterating our full-year guidance inclusive of the Mint acquisition. For fiscal year 2010 we expect revenue of 3.3 billion to 3.43 billion, or growth of four to 8%; non-GAAP operating income of 985 million to 1.025 billion, or growth of six to 10%; non-GAAP diluted EPS of $1.89 to $1.96, or growth of four to 8%. (FY revenue consensus is $3.38 billion and EPS consensus is $1.94)
  
• As you may recall, in FY '09 both our GAAP and our non-GAAP EPS benefited from certain tax items. Adjusting for those items, FY '10 non-GAAP EPS growth would be eight to 12%. GAAP operating income of 785 million to 825 million, or growth of 15 to 21%, and GAAP diluted EPS of $1.49 to $1.56, or growth of 10 to 16%.
  
• For Q2 we expect revenue of 800 to 835 million, or growth of one to 6%.(Consensus is $832.99 million) This year we are expecting a $9 million shift in accounting professionals revenue from Q2 to later in the year; non-GAAP operating income of 160 million to 175 million, compared with 172 million in the year-ago quarter; non-GAAP diluted EPS of 29 to $0.32 (Consensus is $0.37), compared with $0.34 in the year-ago quarter; GAAP operating income of 94 to 109 million, compared with 109 million in the year-ago quarter; and GAAP diluted EPS of 15 to $0.18, compared with $0.26 in the year-ago quarter.
  
• (Q&A) My first question is around QuickBooks. I understand that there was some pricing discounting that impacted the difference between units and total revenue this quarter. But as we look into the next couple of quarters, can you talk to us about how you're thinking about what will drive that business between units and average selling prices? What will -- what should we think about as the mix being there?(A)We clearly saw a spike in our unit growth. It isn't what we have anticipated for the full year. It was driven by the fact that we were depleting the QuickBooks 2009 inventory and making room for QuickBooks 2010. As Neil mentioned, we learned a lot about the balance between how deep we needed to go with promotional offers and what kind of unit growth we could generate. So I think what you're going to see us continue to do is go for driving more units and category growth, but doing that with a better understanding of how we can capture more price per unit. So you're going to see the gap between units and revenue hopefully over the balance of this fiscal year start to narrow. But our ultimate goal is to continue to bring customers into the franchise, because we know we can increase the revenue per user 3x over a five-year period by selling things like Payroll and Payments and other services. But we'll be doing that with much -- hopefully much less reliance on promotions for the balance of the fiscal year.
  
• And if I could just ask one follow-up on the FI group, it sounds like you saw a nice big customer win there. How were total signings in the quarter for FIs? And do you feel like that market has stabilized a little bit in terms of being able to sign new institutions? (A)Yeah. Adam, we have seen a continued healthy pipeline of sales in our sales pipeline for Financial Institutions. We've also seen, as we've talked in the past, that pipeline that was already sold, but we're waiting for implementations to happen. Those are starting to break free. It's not anything that I would scream as a tremendous rapid recovery, but it's starting to move forward in the right direction.
  
• Good afternoon, guys. On TurboTax, could you talk a little bit about your strategy this year? It looks like once again you're pushing for units at the low end especially?(A)Yeah, Jim, our strategy this year is consistent with our prior years, and that is the biggest opportunity we have to grow TurboTax is to expand the share of our -- expand our category by capturing more people who are going to tax stores, continuing to convert people who are doing it with paper and pencil and converting more people who come into the category for the first time. So it's always about expanding the category and capturing our share of those users. So what you see us doing is we have a pricing strategy that begins on the low end with free, and we also continue to capture value on the high end when our value proposition is one-third cheaper than a tax store. And ultimately the goal is to grow that category, grow our share and then ultimately drive revenue as a result.
  
• And just as a follow-up, could you give us an update on your view of the -- what's happening with the Free File Alliance and with any possible legislation on refund anticipation loans?(A)Yeah, Jim. On the Free File Alliance, the Free File Association and the IRS continue to have very productive conversations. Nothing has been announced yet, but I like the momentum. I think the whole industry and the IRS are moving in the right direction and when something has been completed, that'll be announced. In terms of the refund anticipation loans, the good news for us is, as you know, we moved out of that business somewhere four, five years ago because we didn't feel that that was aligned with how we operated the company and the way we wanted to be working with our customers. So while I hear the intense negotiations and debate going on in the industry, regardless of how that plays out, that won't have an impact on Intuit.
  
• Hey, I was wondering if you could -- I know it's early with QuickBooks 2010, but I was wondering what you're seeing so far with this release versus last year? And also was wondering if you could share with us any signs that things are starting to get better? Salesforce.com made some comments on their earnings call that they've seen their SMB business start to up tick a little bit, and I was just wondering if you could share any thoughts on that?(A)I think first of all on QuickBooks 2010, it's still pretty early. We've been out in market for four or five weeks. We've got some positive indicators, positive reviews from PC Magazine and others. If you go to Amazon.com and you read user reviews, they're positive. If we check the sentiments in the accounting community, who recommends these solutions to small businesses, it's very positive.But quite frankly, those are all words until we actually see the customers buying the product and using the product. And so far we like the early results, but there's still a lot of game left in the year. So, I would tell you that we've put our best effort into this product this year. The team is proud of it, and they have a reason to be. The early results suggest that the customers like it, but we'll have to see if we can translate that sentiment into revenue and customer growth. In terms of what we're seeing in small businesses, we continue to hear the optimism and the voice of those small businesses. But as I've said before, they tended to be the last ones to see the downturn and the first ones to believe we were coming out because they're resilient by nature, and that's what I love about small business owners. But what we look for is whether or not the businesses are getting healthy, and the best indicator we have is charge volume. Are consumers shopping in their stores, are they using their credit cards, and are they able to continue to buy? And while we saw a slight up tick this quarter, charge volume is still down 8% year-over-year. It was down 9% for three consecutive quarters, but I don't think that's anything at this point that I would point to, to say we see a sustained recovery. So net net, I think we've seen the bottom in our rearview mirror. I don't see a real fast upswing. But we do see small business continuing to stay in there and fight it out, and we're continuing to do our best to execute and help them.

Gap Inc. (NYSE: GPS) reports Q3 EPS of $0.44, even with the analyst estimate of $0.44. Revenue for the quarter was $3.59 million, which compares to the estimate of $3.57 billion. Shares are currently trading flat on the session.

Highlights From GPS's Q3 Conference Call:

• Introduces new $500 million buyback program.
  
• (CFO) We met our goal of improving our comp store sales trend and we did it while delivering the highest third quarter gross margin rate in the past 10 years. These two factors drove a 25% increase in net earnings.
  
• Diluted earnings per share were $0.44, versus $0.35 last year. Gross margin improved by 380 basis points to 42.5%. Operating margin was 13.9%, versus 11.1% last year, and year-to-date free cash flow was 931 million.
  
• Q3 net earnings were 307 million, compared to 246 million last year. Third quarter effective tax rate was 38.6%.
  
• Q3 net sales were $3.59 billion, up 1% to last year. Total company comp-store sales were flat in the quarter, versus down 12% last year.
  
• Gross profit was up 146 million, or 11%, to $1.52 billion. Gross margin was 42.5%, up 380 basis points, with 360 basis points from higher merchandise margins and 20 basis points from occupancy leverage.
  
• Merchandise margin improvements were driven by more goods sold at reg and promo, and higher regular price margins.
  
• Operating expenses were $1 billion, up 40 million from last year, driven by increased marketing.
  
• Marketing was up 20 million to 141 million, with the increase being driven by Old Navy and Gap. Foreign exchange also drove about 10 million of unfavorability.
  
• We ended Q3 with 2 billion in inventory, down 10% over the third quarter of 2008. Inventory dollars per square foot were down 9% versus the prior year.
  
• Year-to-date, capital expenditures were 221 million. We opened 36 stores, weighted toward international and outlet, and closed 42, weighted toward Gap brand.
  
• Year-to-date, free cash flow, defined as cash from operations less capital expenditures, was an inflow of 931 million, compared with an inflow of 519 million last year.
  
• At Gap, we added a fully integrated marketing campaign which includes holiday TV for the first time since 2006. The TV commercial started on November 12 and runs for about five weeks.
  
• At Old Navy, we're continuing with our successful SuperModelquins campaign and added about a week of TV compared to last year. Given these investments, we expect Q4 marketing expenses to be up about 45 million compared to last year.
  
• In total, we expect Q4 operating expenses to be up about 100 to 120 million versus last year.
  
• For context, operating expenses year to-date through Q3 are down 85 million, and due to the fact that Q4 operating expenses last year were down 217 million, on a two-year basis, operating expenses are still expected to be down about 100 million in Q4.
  
• We expect the percentage change in inventory dollars per square foot at the end of Q4 to be flat compared to the end of Q4 last year.
  
• We now expect depreciation and amortization to be about 575 million. The increase from our previous guidance of 550 million is driven in part by accelerated depreciation associated with our Old Navy remodels.
  
• Our guidance remains unchanged for the following metrics. Effective tax rate, about 39; capital expenditures, about 350 million; new store openings, about 50; store closures, about 100, net square footage decline, about 2%.
  
• In closing, we're pleased that this quarter, we achieved our best Q3 operating margin in 10 years, driven by continued gross margin expansion. We'll closely monitor the returns from the investments we've made to drive traffic and sales during this holiday season, and of course, we'll maintain our operational discipline as we focus on our top line.
  
• (CEO) We are very focused on top line, but it's good to see, with the work we've done most recently, we improved the trend on the two-year comp in Q3.
  
• Feedback from our customers has been very strong and very positive. So the challenge for us is, how do we take that relaunch of denim and get that incremental sale? That incremental sale through the right marketing inside the store.
  
• And lastly, we've been very pleased with the introduction of the Stella McCartney line in conjunction with GapKids, and we look forward to working with Stella and her team for spring season launch on collaboration with GapKids.
  
• Other development in the third quarter for them has been a launch of their new prototype store. We opened first in Las Vegas, and then Scottsdale, and just last Saturday, we opened up in SoHo. I think that's all positive. It's a new prototype of Banana Republic.
  
• (Q&A) My question would be regarding the operating expense guidance going forward. We're seeing no change on the marketing spend, in terms of your plan, but can you give us a little bit more color on the higher variable store costs that you're referring to for Q4, and what does that entail?(A)Yes, John, those are just simply associated with our goal of continuing on this path of improving our comp-store sales trend. So we are - if we're fortunate enough to sell more units, you would expect nominal dollars of SG&A to increase with the store-related part of our structure. That said, it's always our objective to keep those in line with sales. So we wouldn't want to deleverage that piece, but from a nominal dollar perspective, they would go up.
  
• Okay, pretty clear. And then on the gross margin, the IMU benefit? You did give us a little bit of description about the components to gross margin. Can you give us a feel for how much of a magnitude better IMU contributed? And could we expect to see the same kind of magnitude continue in Q4 and even in Q1?(A)Yeah, I think the structure of our gross margin, as a reminder, is, this year, we've been benefiting strongly from average unit cost reduction, and those are really meaningful reductions. And the good news is, during this recessionary time where our customers are really looking for value, that has afforded us the opportunity to be out there proactively with planned promotions and giving our customers planned value, which we did all throughout Q3. That means our AUR was actually down, but despite that, we actually delivered this great margin expansion, and that's our very plan as we move into Q4.
  
• Glenn, I just wondered if you could comment a little bit more about the Gap domestic business? And more specifically, adult. The launch of denim was a big accomplishment for you this year. I know there's a lot of enthusiasm about the initial sell-throughs of that product. Could you talk about your own expectations for the - how that evolves, and eventually brings back more of the core business to Gap? I
  don't think the intent was that it - was an immediate overnight success, but that it's a gradual build and you're going to drive trial in it. Could you just describe that process a little more and what metrics you're looking for over a period of time? (A)No, there's a lot of metrics we're looking at in denim, first and foremost. I think the reason it was chosen was that it's a dominant part of our business. We have heritage and credibility in it. Don't feel necessarily good about how maybe we've come across to our customers in the last five years. So the reinvention of it by the Gap team was the right decision. And I think all retailers do this. They look at, what are the categories that will draw people into their stores, so we're always trying to find needs versus wants, and if we can be a dominant player again at a higher level we are today in terms of market share when it comes to we think denim, is pretty close to a need component when it comes to apparel and fashion. And I think the upside for us is getting people in at a regular rotational basis, probably helping us with our frequency, so it has a real category management strategic value. Now ongoing, the real focus, and I'd say the commitment we have on denim, was not to relaunch it in August, ride the wave in September, and then basically move on to the next big idea. The commitment we made to each other, and you'll see a little bit of that coming up in our holiday marketing as we turn November into December, is how do we continue with a constant reinforcement.
  Innovation, good product, and differentiated ideas when it comes to denim on a month-by-month basis as we turn the page and look at 2010. And again, on our holiday, you would expect - I think the natural feeling in apparel is, we can't sell denim in December. And I think maybe it's not the best month for denim, but if you're the dominant player and you want to be known for that, we should be finding ways, through product development, through messaging and marketing, to make sure everybody knows every single month is denim month inside of Gap. So I think the team has done a nice job. As you said, the reception has been positive. We felt good about customer feedback. We have been chasing into inventory in September, October. Probably not, Jeff, till this week, and maybe the latter part, definitely coming into Thanksgiving weekend, do we actually feel we have the inventory by size, by fit, by wash, that we started out in the first week of August, because we thought we did a very good job of building inventory, but we learned a lot, and we'll be in a much better place in November. Now we got to continue to be innovative and keep pushing it and keep marketing it and keep speaking to customers, because that was not a one season wonder, it is a permanent part of our marketing messaging going forward.
  
• Hey Glenn, can you - it seems like you've expanded the focus I mean clearly to gaining market share, and I think we understand the marketing elements behind that. But what about the merchandise margin side of the equation? I mean, can we expect a more value-focused element at the store level? And just how much merchandise margin are we willing to give up in order to gain share? And is that in fact what we should expect in 4Q versus 3Q? Or are there mix shifts that you talked about that can benefit the margin and costing that might benefit the margin? Thanks.(A)Jeff, just to turn it as a parallel comparison to SG&A, we worked really hard for two years to take out of our business approximately $700 million of SG&A, and the benefit of that is it's given the company flexibility to make good decisions,
  whether it's marketing investments or other investments we want to make in our business. The comparison to average unit cost is identical. We - back in '07 and '08, and as Sabrina just said, a good chunk of 2009, have really put a big focus on that through changing the processes internally about who
  negotiates what, be much more tough minded, introducing reverse options, all of the things we've done is to make sure that we are getting the best cost, while protecting our quality in the business. What that's given us is the flexibility, as you suggest, to make sure the business now with the margin rate we have in the business and how we've built that over the last couple years, now it allows us, as we talk about market share, to make sure that we're not irresponsible, but we get the business talking about market - talking about gross margin dollars per foot. So now we can make the right decisions, and I think we've proven that at Old Navy, as the first brand. I think they have gotten a lot of cost benefit with the work they've done. But now, as you saw their performance in the months of September and October, with those sort of low teen comps, I think Tom and his business are able to make those trade-offs between where do you want to be a little more aggressive to get to market share, all part of a larger value proposition that that brand stands for. Now he's in a unique circumstance, but the theory also applies to Gap, Banana Republic, our online channel, and of course our outlet business, which is a dominant player in value. It is with the added benefit of the gross margin rate, driven mostly from AUC and strong inventory management, how do we make better decisions now to get market share by focusing the company on gross margin dollars per foot. One last thing I'll also say to you, and I kind of said this in my opening comments, we've expanded our thinking quite a bit now when it comes to gross margin. What are the other levers the business needs to pull and be thoughtful about? So I think I might have referred to, in the opening comments, on mix, the mix inside our business, and again I think the best retailers are always thinking with a merchant lens on what they present to their customers. But behind the scene, there are good people - more category management type people, who are spending time going, what's the category trade-off that can satisfy the customer, get the incremental sale and conversion, maintain loyalty, stand for what the brand proposition is, but get an added economic benefit by doing the right mix inside the four walls of your business. So we're spending a lot of time on that, which I hope, as we get skilled at it, and we're not there today, will give us even more gross margin rate benefit, which will allow the company even greater flexibility to make these further decisions we have to make to gain market share.

Dell (NASDAQ: DELL) reports Q3 EPS of $0.23, 5 cents below the analyst estimate of $0.28. Revenue for the quarter was $12.9 Billion, which compares to the estimate of $13.2 million. Shares are down over 9% today.

Highlights From DELL's Q3 Conference Call:

• (CFO) We're encouraged by our Q3 results, especially in our large enterprise and SMB businesses, where we saw sequential growth for the first time in seven quarters.
  
• We also made solid progress on our key strategic initiatives this quarter. This includes improving the cost structure of the company through our COGS efforts and continued OpEx control, executing a differentiated enterprise strategy, and delivering strong cash flow from operations.
  
• Overall, we grew sequentially for the second quarter in a row, and we expect Q4 to again be sequentially bigger than Q3.
  
• We saw improving demand momentum in our large enterprise and small and medium businesses later in the quarter, and this appears to be carrying over into our Q4.
  
• Revenue was up 1% sequentially while down 15% year over year to $12.9 billion. This year-over-year comparison is improved versus our first half year-over-year performance, which was a 23% decline.
  
• The commercial business excluding a seasonally down public business grew 4% sequentially on improving demand as we said in SMB and large enterprise.
  
• Our Q3 reported revenue was adversely affected by the timing of the Windows 7 launch in our SMB and consumer businesses where we did build more backlog than normal due to the late quarter order dynamics.
  
• The gross margin for the quarter was 17.3%; OpEx was 12.8. Operating income was 4.5% of revenue, and our EPS was $0.17 on a GAAP basis.
  
• Organizational effectiveness expense was $123 million or $0.05 after tax in the quarter, with the majority of this expense related to COGS.
  
• OpEx was 12.5% of revenue, and our adjusted operating income was $740 million with a relatively strong rate of 5.8%.
  
• Financing and Other expenses were $63 million, driven by the higher interest expense related to the $3.8 billion in debt we're now carrying, lower investment yields on our invested cash, and the heightened foreign exchange rate volatility, which is reflected in mark to market on our currency hedges in F&O.
  
• As we look forward, we expect to incur approximately $50 million per quarter in interest expense going forward. And our investments are currently returning about 30 basis points per year in return.
  
• Our tax rate for the third quarter was 34.5%, which was driven by an increased mix of profits in higher tax jurisdictions and our mix shift to enterprise products and services. Our current view for the full-year tax rate is 28 to 30%, which is the same as our year-to-date rate.
  
• We generated $801 million in cash flow from operations, which is significantly in excess of our net income from the quarter. Year to date, we generated $2.6 billion in cash flow from ops. And over the past four quarters, we've generated $3.4 billion in operating cash flow, which is up 42% versus the prior four quarters.
  
• Our cash conversion cycle improved again by one day sequentially to negative 36 days. For the quarter, receivables decreased two days and inventory increased one day, consistent with the seasonal consumer ramp, especially given the Windows 7 timing.
  
• Payables remained flat at 84 days as a result of structural supply chain improvements and our ongoing transition to contract manufacturing. We continue to target cash flow from operations in excess of net income and a cash conversion cycle that's negative 30 days or better before the impact of the Perot acquisition.
  
• We ended the quarter with $14 billion in cash and investments. And as a reminder, this balance has already been decreased by $4 billion as of November 3 when we closed the Perot transaction.
  
• On the COGS line, we continue to make great progress in our overall $4 billion cost savings efforts, and we've accomplished a significant amount of work. We still have more to do. Our product redesign driven cost reductions have progressed to the point where 65% of our business client and 75% of our consumer platforms have been cost optimized and redesigned
  
• Approximately 43% of our manufacturing volume that was shipped in the quarter has now gone through contract manufacturing partners.
  
• Turning to the business units, we had mixed results in the business units, but we did see positive momentum in many places.
  
• Large enterprise had revenue growth of 4% sequentially and was down 23% year over year to $3.4 billion of revenue. This business is down from a quarterly peak of $4.9 billion in Q1 of fiscal year '09, and as a result has suffered from deleveraging on the cost side.
  
• Operating income as a percentage of revenue was down 10 basis points sequentially to 5.1%, driven by this lack of scale.
  
• We saw sequential growth in server revenue, which was up double digits, along with increases in mobility and services.
  
• Public had another great quarter, with revenue down 3% sequentially and 7% year over year to $3.7 billion.
  
• Our Small and Medium Business revenue increased 5% sequentially and was down 19% year over year to $3 billion.
  
• Positive trends in the Americas and Asia continued through the quarter, while EMEA is challenged, but picked up in the very end of the quarter.
  
• Our Consumer business posted a 17% year-over-year increase in unit volume and revenue of $2.8 billion, down 1% sequentially and 10% from a year ago.
  
• While profitability in the quarter was sequentially down, operating income for the year is at 1.2% of revenue, which is consistent with our full-year target of between 1 and 2%.
  
• On a regional basis, sequential revenue declined in the Americas by 2% while EMEA and APJ were up 6% and 7% respectively.
  
• Americas and Asia while EMEA continues to encounter more challenging macroeconomic conditions. Our total revenue from BRIC countries was up 18% sequentially and made up nearly 12% of our total global revenue.
  
• In the client space, mobility units were up 11% sequentially and revenue was up 8% due to increased demand in all segments, while year-over-year revenue declined 14%.
  
• Average selling prices in mobility declined by 2%. Desktop units were down 10% sequentially with a revenue decline of 9%.
  
• On enterprise products and services, server revenue was up 10% sequentially on a unit increase of 1%, while revenue and units were down 6 and 7% respectively on a year-over-year basis.
  
• Storage revenue was down 8% sequentially and 19% year over year.
  
• EqualLogic revenue was up 31% with continued strength from a margin standpoint. Our overall storage margin rates are up over 30% versus where they were last year.
  
• Enhanced services revenue rose 2% sequentially to $1.2 billion, while our deferred revenue balance increased 2% from Q2 to $5.9 billion.
  
• For our Q4, we expect to see typical holiday demand improvements in our consumer business while businesses such as public are seasonally lower during the quarter.
  
• (CEO) Overall, adjusted operating income without organizational effectiveness and amortization of intangibles was 5.8%. Our public and small/medium businesses operated with 9.5% operating income.
  
• Free cash flow year to date was $2.9 billion and was 3.9 billion over the last four quarters.
  
• We're also excited to welcome the Perot team and the platform this provides with now a combined Dell Services business of $8 billion in annual revenue with $13 billion in combined backlog and deferred services revenue. Together, the expanded Dell Services supports approximately 30 million computer systems and manages over 2 million seats.
  
• In healthcare, we have over 2,500 accounts, but just 130 overlap.
  
• (Q&A) I have one question for Brian and a follow-up for Michael. Brian, you had mentioned that because of Windows 7 that you had experienced a larger than usual backlog in this quarter exiting the quarter. Can you help quantify how material that was and how we should be thinking about potentially making an adjustment for revenue that maybe would have recognized this quarter had it been more normal and not had that Windows 7 bump, and ostensibly how much benefit you might have starting next quarter because of that? (A)I think as you know, we run the business generally with a pretty minimal backlog. I think what we saw was the order pattern, especially in SMB and consumer where order rates were somewhat depressed probably in the two weeks prior to the launch of Windows 7, so the middle two weeks of October. Once we saw the launch happen, order rates picked up significantly. That contributed to some orders that came in, in the last couple weeks that obviously we just couldn't get out given the timing. I wouldn't call it material enough to impact how you're thinking about the fourth quarter. And again, we do think it's going to be a sequentially improved fourth quarter just based on the order rates we see.
  
• Michael, you had commented two quarters ago that you expected a powerful PC replacement cycle. Do you still hold that view and should we be thinking about materially above a normal trend PC unit market growth of 10% for 2010?(A)I would not be surprised to see it well into the teens. I think there is an aging install base for sure, and you just have an accumulation of new technologies at the hardware, software, virtualized client. And these IT managers really know that they cannot extend the life of these client assets forever. And while I don't think it's all going to occur at once, I think it will be a rolling refresh that occurs over perhaps 18 months. I think that a lot of these - I can't remember a time when a very high percentage of them skipped an entire operating system. And so what we remind them is that - and they know this, Windows XP is eight years old. And so yes, I think it's going to be a pretty powerful cycle.
  
• My question is on the potential corporate upgrade cycle as well. Once this cycle begins potentially sometime next year, I suspect other large OEMs will be jockeying for a share of the pie as well. In that instance, will you still focus on gross margin preservation over market share stability? Or does the strategy change somewhat to a more growth oriented focus? (A)We think we're holding or gaining share in the right kind of price points. Our efforts on the cost side should expand our ability to profitability compete in a larger portion of the price points. What I would also tell you is that the pipeline of client opportunities - we're already seeing more client activity in the last 30 to 60 days than we have in a long time, and the pipeline for client activity going forward into next year is the strongest it has been in a long time as well. So if I look at our commercial businesses, the second quarter was the bottom. The third quarter was certainly better. October was the best, and November looks even better than October. So the momentum and trend is good. (A)I would also say when you think about the share dynamics we faced as we've seen consumer growing much faster than commercial, remember our business is 80% commercial. So by virtue of that mix, we've seen share losses that frankly should reverse themselves when commercial comes back in a refresh cycle. So I think by nature of our mix, you'll see our overall share position improve.(A)But we will actually stay biased toward profit.

The No. 2 U.S. homebuilder, D. R. Horton Inc. (NYSE: DHI), reported an improved loss for the fourth quarter over last year, but still missed the analyst estimate causing shares to drop in the pre-market hours.

The company reported a loss of 73 cents per share, 49 cents worse than market consensus of a loss of 24 cents per share. Revenue for D.R. Horton also missed expectations with $1.01 billion in the fourth quarter, below the analyst estimate of $1.11 billion.

The numbers for the company are much improved over the year-ago quarter; however the homebuilder is still struggling in a battered housing market.

D.R. Horton posted a loss in the fourth quarter of $231.9, compared to the same quarter last year when the company lost $799.9 million, or $2.53 per share.

Donald R. Horton, Chairman of the Board, said, "Our net sales orders in the September quarter reflected a 26% increase compared to the prior year quarter," Donald R. Horton, Chairman of the Board, said. "However, market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence."

The company said that the year-ago loss was attributed to $1.1 billion in pre-tax charges.

The shares are down 6.9 percent before the market opens to $11.40.

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