2014

The Zacks Analyst Blog Highlights:Sprint, Costco Wholesale, Verizon Communications, CenturyLink and Vera Bradley

CHICAGO, Sept. 23, 2013 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Sprint Corporation (NYSE: S-Free Report), Costco Wholesale Corporation (Nasdaq: COST-Free Report), Verizon Communications Inc. (NYSE: VZ-Free Report), CenturyLink, Inc. (NYSE: CTL-Free Report) and Vera Bradley Inc (Nasdaq: VRA-Free Report).

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Here are highlights from Friday's Analyst Blog:

Sprint Expands via Costco

Sprint Corporation (NYSE: S-Free Report) recently announced that it will distribute its products through another 100 stores of Costco Wholesale Corporation (Nasdaq: COST-Free Report). The move will enable the company – which already offers products through 106 membership warehouses – to reach out to a wider customer base across the U.S.  

Costco membership warehouses allow customers to purchase branded merchandise at discounted prices compared to retail stores. To date, Sprint has leveraged the opportunity to generate higher product sales through Costco membership warehouses and now expects the addition of stores to add to its popularity and drive business growth.

We believe the company's need to increase distribution centers emerges from the increased penetration of smartphones including Android, tablets, USB modems, hotspots and routers, all of which are performing well in the market. Currently, Sprint enjoys a smartphone penetration of 86% of its post-paid sales. In Jun 2013, the company launched 4G LTE based Windows Phone 8 smartphones – HTC 8XT and Samsung ATIV S Neo under two-year contract plans.

Recently, the company also announced to offer Samsung Galaxy Mega on its network attracting customers for its 4G services. Besides, Sprint also activated over 1.4 million iPhones in the second quarter, 41% of which belong to new customers. Over the long term, the company expects iPhone to generate $7–$8 billion in profits with the addition of 1–1.2 billion gross subscribers adding $6–$6.8 billion in profitability.

Overall, the company sold around 5 million smartphones in the second quarter. In addition, the company also introduced its tri-band LTE data device that uses LTE on 800 megahertz, 1,900 megahertz and 2.5 gigahertz. The device will be available for sale in late 2013.

We believe that after Sprint's merger with Japan's telecom company, Softbank Corp., the company is diverting its focus on expanding business in the U.S. market so as to turn its loss making business into a profitable organization. As a result, strategic investment and collaboration remain crucial to the company's future. While on the one hand the company is planning product sales, which we believe includes contract services bundled with sale of equipment like smartphones and tablets, on the other hand, it is reportedly scrapping the idea of participating in Canadian spectrum auction, in which Verizon Communications Inc. (NYSE: VZ - Free Report) is also bidding. This shows that Sprint's primary focus is on scaling up its operations in the home ground rather than entering into a highly competitive market like Canada, which may turn out all the more aggressive with Verizon's entry.

Beyond this, the company is banking its Network Vision strategy. Through this plan, the company is concentrating on the core Sprint platform, which includes CDMA, WiMAX and LTE technologies that led to the eventual termination of the Nextel platform (iDEN business) in Jun 2013. The company began the deployment of CDMA voice on 800 MHz in early 2013 and is expected to deploy LTE on 800 megahertz by this fourth quarter.

As part of the Network Vision strategy, the company's LTE services currently cover over 151 markets with 20,000 sites on air. In 2013, the company expects to have LTE coverage for approximately 200 million customers. We believe the efficient use of capital, reduction of cell sites, elimination of dual networks, backhaul efficiencies, reduced churn, lower roaming charges and energy cost savings bode well for Sprint's long-term growth. The company expects the Network Vision deployment to be over by the end of 2013, two years ahead of the original schedule.

Sprint Corp., which operates with CenturyLink, Inc. (NYSE: CTL-Free Report), currently has a Zacks Rank #3 (Hold).

Vera Bradley Downgraded to Strong Sell

Zacks Investment Research downgraded Vera Bradley Inc (Nasdaq: VRA-Free Report) to a Zacks Rank #5 (Strong Sell) on Sep 19. Tempered expectations for fiscal 2014 despite decent second quarter fiscal 2014 results led to the downgrade.

Why the Downgrade?

On Sep 11, Vera Bradley, known for its colorful luxury handbags, reported its second quarter of fiscal 2014 (ending Aug 3, 2013) results. The company struggled amid a challenging macro-economic environment and somehow managed to deliver better-than-expected positive earnings and in-line revenue growth. Earnings and revenues also increased on a year-over-year basis. However, Vera Bradley slashed its outlook for fiscal 2014. In fact, the company cut its guidance for the second time this fiscal year.

Comparable store sales decreased 3.7% in the quarter due to underperformance of the products and less traffic at the stores. Traffic reduced owing to the difficult macroeconomic retail environment. This also led to cautious ordering from specialty retailers, which lowered the company's indirect revenues by 12.2%.

Management believes that the decline in traffic trends will take a toll on the third quarter results and will eventually impact fiscal 2014 results. Though the company has taken initiatives to drive performance, these are expected to reap benefits over the long term.

The uncertain consumer environment forced the company to lower its outlook for fiscal 2014. Vera Bradley now expects net sales in the range of $535 million to $540 million for fiscal 2014 lower than prior expectations of $570 million to $575 million. The company also slashed its earnings outlook and now expects earnings per share in the range of $1.47 to $1.52 per share compared with the prior range of $1.74 to $1.78 per share. Vera Bradley also expects gross margin to decline 100 to 125 basis points from fiscal 2013 levels.

This retailer witnessed sharp downward estimate revisions after announcing its second quarter fiscal 2014 results. Estimate revisions witnessed a downward trend for the third quarter and fiscal 2014. The Zacks Consensus Estimate for the third quarter decreased 30.6% and that for fiscal 2014 went down 14.9% over the last 30 days.

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