San Diego Plop! It's not a baseball dropping into a mitt. It's a company falling into Wall Street's doghouse. Still another corporation that shelled out bucks to have its name on a pro-sports stadium has taken a pratfall. This company is San Diego-based Petco Animal Supplies, the second biggest pet supply retailer, whose name adorns Petco Park. Last week, Petco joined some other fallen corporate superstars who once had their name on stadiums: Enron, Adelphia, and Trans World Airlines, and some other stinkers whose names are still on sports palaces: United Airlines, Conseco, and Reliant Energy, for only a few examples.
Petco's fall from grace took several weeks. On April 15, the company announced it would delay the filing of its annual report to the Securities and Exchange Commission because it had accounting problems: it had been under-accruing expenses. The stock plummeted 13.6 percent that day but then crawled most of the way back as two weeks later, the company said that an internal review indicated it wouldn't have to restate its results from earlier periods. But the company said that since it hadn't filed its report, its stock might be delisted by NASDAQ.
On May 18, Petco said it would announce its first quarter results on May 25. On May 23, it said that it had received an official notice that NASDAQ might delist the stock. Petco also said it might file its financial results -- delayed because of the internal probe of its accounting -- "within the next couple of weeks." The stock was shaky; investors don't like uncertainty.
That was particularly true as civil lawsuits against the company piled up. "Petco's fourth-quarter earnings were materially artificially inflated through accounting manipulation," notes law firm Milberg Weiss Bershad & Schulman, one of several firms to file suits. Petco's rosy projections for 2005 "were premised on the continuation of improper accounting practices," and thus investors were skinned, charges the suit.
On May 25, after the close of trading, Petco announced unexpected bad news. Its sales growth, while strong, had slowed markedly. First-quarter earnings were below Wall Street's expectations. The company shaved its earnings forecast for the year. Earlier, it had expected to earn $1.80 or $1.81 a share. Now it anticipates earning $1.66 to $1.72. Wall Street had expected $1.74. Petco's stock has been dropping during the year and had been losing altitude before May 25. That day, it plunged from a high during trading hours of $33.15 to below $30 in after-hours trading. The following day, the stock got below $29 before inching above $30 on Friday. It receded a hair Tuesday.
Even if the company comes up with its earnings statement earlier than expected, and the accounting manipulations appear relatively benign, Petco has lost credibility with investors.
The company's May 25 conference call was unsatisfactory to anyone seeking meaty information. The company repeated that it would file its annual earnings report "within the next couple of weeks." Officials said outside auditors were probing the accounting problems in the company's distribution line. "Traffic weakened after Easter," said one official, blaming rising fuel prices and "lagging consumer confidence." It expects this traffic weakness to continue this year. Then the company said it had launched a "re-merchandising" program in stores -- rearranging the goods on the shelves. It wouldn't clarify why this initiative came at a time that earnings were softening for other reasons, although chief executive James M. Myers said the program involved "some easy fixes" and did not represent "a heavy redoing of the stores. We're not taking on something that would put us at risk."
During the conference call, Petco stock was plummeting in after-hours trading. Securities analysts knew their necks were in nooses. They asked some tough questions, but nobody asked the key one: why are Petco's product prices so high? Petco has been lagging the top company in the industry, Phoenix-based PetsMart, in many areas, particularly price. To please its shareholders, Petco loads its shelves with goods that give it a high profit margin. But that's not what customers may want -- one reason that traffic could use a boost. Says Michael Souers, an analyst with Standard & Poor's, "From our research, we have concluded that PetsMart prices its products at a significant discount to Petco, and its prices are only slightly higher than discount stores like Wal-Mart. As store growth continues to ramp up sharply, PetsMart could possibly capture additional market share as price becomes more of a differentiating factor."
Petco also has a heavy debt load, although it has been trimming it, notes Souers, "providing the company with greater financial flexibility as it continues to aggressively expand its store base." But that sounds like damning with faint praise. With Petco's stock lower, Souers says it is a good buy.
If earnings and accounting news worsens, Petco will join Wall Street's long list of naming rights dogs. Barron's in 2001 cooked up a Stadium Jinx Index. It tracked how poorly the stocks of companies buying naming rights performed. Chris Isidore of CNN/Money had his own index. Both indices did horribly in the early 2000s but have improved somewhat.
According to Naming Rights Online, two-thirds of teams in the five major sports leagues play in named facilities. The National Hockey League has the most named facilities -- 87 percent. Big pucking deal: the league sat out the 2004-2005 season as a result of a labor dispute.
Just take a gander at some of the defunct naming rights deals, as reported by Naming Rights Online. Companies going down in scandal: Adelphia Coliseum (Tennessee Titans); Enron Field (Houston Astros). Companies going into bankruptcy: Houlihan's Stadium (Tampa Bay Buccaneers); National Car Rental Center (Florida Panthers); Pro Player Stadium (Florida Marlins and Miami Dolphins); PSINet Stadium (Baltimore Ravens); Trans World Dome (St. Louis Rams). Companies with severe business woes: 3Com Park (San Francisco 49ers and Giants); Canadian Airlines Saddledome (Calgary Flames); CMGI Field (New England Patriots); Edison International Field (Anaheim Angels).
Actually, a plethora of troubled companies still have their names on sports facilities. Consider ailing airlines: Air Canada Centre (Toronto Maple Leafs and Raptors); America West Arena (Phoenix Suns); American Airlines Arena (Miami Heat) and American Airlines Center (Dallas Mavericks and Stars); Continental Airlines Arena (New Jersey Devils and Nets); Delta Center (Utah Jazz), and United Center (Chicago Bulls and Blackhawks). I would think employees of bankrupt United, seeing their pay and pensions slashed, would resent this naming-rights contract.