Toys "R" Us up on earnings; El Paso convertibles add 0.25 point on restatement update

By Ronda Fears

Nashville, Aug. 23 - El Paso Corp.'s credit was stronger across-the-board on the company's update to late financial filings and restatement estimates Monday, and the rarely-seen convertibles added a quarter-point, a convertible trader said. The estimated $3.7 billion writedown is staggering, but with that behind it there is more confidence in the underlying natural gas business, the trader said.

Toys "R" Us Inc., which also is in the midst of a re-definition process with the split of the toys and baby retail groups under consideration, reported a turnaround in bottom line earnings. As a result, its mandatory issue bounced up by 1.25 points before easing back to a 1-point gain at the end of the session.

Retail issues otherwise were easier, traders said, as Wal-Mart Stores Inc., which has been a thorn in Toys "R" Us' side, lowered its sales forecast for August on slow back-to-school sales and the effects of Hurricane Charley. Gap Inc.'s convertible - a popular, liquid issue - lost a couple of points, one trader commented.

Charley was blamed for weakness in insurance issues, too. A convertible dealer said the group was off on damage estimates approaching $20 billion for the hurricane that hit Florida earlier this month, which he said compares to the $26.5 billion in damages from Hurricane Andrew in 1992. Prudential Financial Inc. was a notable decliner, he said, although Prudential reportedly withdrew from Florida entirely after Andrew. The Prudential 6.75% mandatory dropped about 0.875 point, he said, to 67.5.

It was quiet on the Delta Air Lines Inc. front insofar as news from pilot negotiations over wage concessions or the airline's restructuring efforts. Traders said the convertible bonds were quiet as well. The Delta convertibles were steady with the 8s in the 37 area and the 2.875s in the neighborhood of 40, a dealer said, while Delta shares eased back to $4.19, slipping 8 cents, or 1.87%, on the day.

Crude oil continued to ease back, as well, with the September contract dropping to $47.86 a barrel from $49.40 on Friday after a string of fresh highs. Gasoline futures also continued to decline, as they had been doing for about the past week, but several trucking issues were in the red.

Yellow-Roadway Corp. dropped sharply, a trader said, because a peer trucking firm - SCS Transportation Inc. - reduced its third quarter forecast. After the market closed Yellow-Roadway said it expects to at least meet its projections for third quarter results, but the converts had already lost 3 to 4 points.

El Paso seen with fresh slate

El Paso on Monday updated restatement estimates, bringing the projected reserves writedown to $3.7 billion including a $1 billion drop in shareholder equity, but a convertible trader said the market saw some progress in the company's business and sees the difficult period getting behind the energy firm.

"I suppose it's like a fresh slate," the trader said. "With a lot of the trouble behind it now, it's like a new company investment. Of course, we know there's an ugly history, but that can be forgotten pretty quickly if things turn around."

El Paso said the impact of its restatement for reserve revisions would reduce the value of its oil and gas properties by $2.7 billion on a pretax basis, plus result in a corresponding $1 billion after-tax reduction in shareholder equity. In addition, natural gas hedge transactions will lead to a restatement of financial results for 1999 through 2003 and about $1.6 billion in charges, the company said. El Paso's 41% reduction in its proved-reserves estimate in February led to a formal Securities and Exchange Commission investigation.

On the upside, Houston-based El Paso said asset sales are ahead of schedule, debt reduction is ahead of schedule, operating unit financial performance is above projections and, thus, liquidity is improving. El Paso said it expects to reduce debt to below $16.9 billion by year-end. Liquidity stood at about $2.7 billion at July 31, with about $1.3 billion of available cash and about $1.4 billion available under its $3 billion bank facility.

"Banc of America upgraded El Paso bonds this morning from neutral to buy and gave some support for the convertibles, too," the convertible dealer said.

El Paso's zero-coupon convertible added 0.25 point to 49.25 bid, 49.75 offered, he said. The El Paso 9% mandatory due 2005 traded as much as 0.625 point higher, he said, but eased back from there to end a quarter-point higher at 29.5 bid, 30 offered.

El Paso shares rose 24 cents, or 3%, to $8.05.

"We continue to make solid progress on our long-range plan," said Doug Foshee, president and chief executive of El Paso, in a company statement. "With $3.5 billion of asset sales closed or announced, we have effectively met the asset sales goal that we had targeted for year-end 2005. This has led to a sharp reduction in debt, and we expect that reduction to continue as we close as much as $1.8 billion in asset sales in the third quarter of 2004. Given our progress, I'm optimistic about the outlook for El Paso."

Earlier this month, El Paso said it expects to file its 2003 10-K by the end of the third quarter and its first quarter and second quarter 2004 10-Qs by Nov. 30.

Toys "R" Us convert bounces

Toys "R" Us posted net earnings of $61 million, or 28 cents a share, in fiscal second quarter ending July 31, compared with a loss of $11 million, or 5 cents a share, in the year-ago quarter. Total sales slumped 3.9% to $2.02 billion from $2.1 billion a year ago, as same-store sales dropped 7.7%.

The Toys "R" Us 6.25% mandatory due 2005 traded 1.25 points higher on the news, a sellside dealer said. The issue was heavily traded and ended the day up about 1 point, he said, at 44.625.

"There is a lot of concern about the Toys 'R' Us story, whether they will file bankruptcy like F.A.O. Schwarz [whose parent FAO Inc. is in bankruptcy], but you can't really compare the two. It's like Rolls Royce versus Volkswagen. Yeah, they're both toy stores, but F.A.O. Schwarz got in big trouble because of its ridiculous-priced toys. Their mall toy sales [KayBee Toys, or KB Toys] were in trouble, too, but the upscale toys was the big problem," the trader said.

"Toys 'R' Us is fighting a losing battle with the discounters like Wal-Mart and Target, and I think they've realized that finally, which is why the split with the Babies 'R' Us makes sense. The market has reacted pretty strongly to it, too."

The toy retail chain, which is contemplating a split between its traditional toy stores and its baby stores, said it has sold more than half of Kids "R" Us sites, for proceeds of more than $100 million, and anticipates selling the remaining sites in the next few months. Same-store sales in the Babies "R" Us division were up 1.8% during the quarter.

Toys "R" Us has $685 million revolver availability at end of second quarter and sees little or no use of that for the remainder of this year.

Toys "R" Us offered no further information on its Aug. 11 restructuring program and doesn't expect any more news on that front for "a number of months." Competition from discount retailers have strapped Toys "R" Us, and weaker sales at Wal-Mart - as the Arkansas-based chain warned Monday - put a damper on the retail sector as a whole.

Yellow-Roadway on path

Yellow-Roadway said after the market closed that it expects to at least meet its projections for third quarter results, previously estimated at $1.20 to $1.25 a share, as "overall business trends remain consistent" with its previous forecasts.

Fellow trucking company SCS Transportation cut its third-quarter earnings forecast on Monday, citing lower-than-expected revenue growth, and that pressured the entire trucking group, a sellside trader said.

The Yellow-Roadway 3.375% convertible dropped about 3.125 points, he said, to 122.5 bid, 123 offered and the 5% convertible lost 3.625 points to 140.5 bid, 141 offered. Yellow-Roadway shares fell $2.01, or 4.66%, to $41.09

But Yellow-Roadway's statement may prop up the securities Tuesday, noting that the stock was up in after-hours trading. After-hours trading activity showed the stock up 26 cents.

Yellow-Roadway had boosted its third quarter projections after beating analysts' expectations with second-quarter earnings. For all of 2004, the company is looking for earnings per share of $3.70 to $3.75.

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