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Tuesday, August 01, 2006

Eastman Kodak: A Long and Brutal Death

Back in 1997, 1998, 1999, and so on there has been a trend away from normal cameras to digital cameras. Therefore old world film with silver in it has faced an eroding market year after year. You would think that management at Eastman Kodak (EK) could have seen this. If you look at their chart here you'll see they haven't bothered looking.

(chart courtesy of

Let's forget about the fact that the company lost $282 million, which translates to about -$0.98 on an EPS basis. While its costs are going up (silver prices) its net sales were down 9% from $3.69 Billion to $3.36 Billion.

The company just today fessed up that the 25,000 layoffs it announced in 2004 may not be enough as it now sees 25,000 to 27,000 as the total number. They now project up to $3.4 Billion as the total charges instead of the original $3.0 Billion. A crack-head could have told you that were going to have more layoffs. This is also going to be through the end of 2007.

If CEO Antonio Perez had ever read Machiavelli he would have been convinced that the best and most efficient way to impose new will is to impose it swiftly and instill all changes at once. He has been President and COO since 2003 and was just elected CEO in January 2006, so maybe he doesn't deserve ALL of the blame. Despite that, he needs to impose this much faster and just get it over with.

The company JUST TODAY announced it has decided to outsource manufacturing its digital cameras. That almost seemed like a typo when reading it as though it was maybe a press release from 1998. It wasn't, they are just that slow to act. The CEO is supposed to be a digital imaging and electronic publishing guru. If that is true then why did outsourcing the digital camera manufacturing take this long?

"This agreement will bring our camera products to market more quickly, with greater predictability, flexibility, and cost efficiency," the company said. Kodak will develop system design, product look and feel of the cameras and retain intellectual property rights. The company is transferring about 550 workers to Flextronics facilities in this deal.

Here is what we said: "Why the hell did it take you THIS long to do this?" This company MUST get a "F" if management was being assigned a grade. If activist investor groups like ValueAct are not involved in chasing management at this company, they sure need to be. Companies like Altria (MO) have learned to live and thrive while their US consumer base drops year after year. Even dial-up ISP's are still around. You would think these guys could figure it out. Have these guys ever hired an efficiency consultant? Better yet, have their auditors cited them as a GOING CONCERN yet in the annual report?

Anyone surprised that Digital Cameras were taking over is a disgrace. Does anyone use real cameras with real film anymore? Obviously there are some, but outside of wedding photographers and their medical imaging unit it is a smaller and smaller lot each year. Eastman Kodak had the shot to dominate digital film as well, but they wanted to try to prove they could continue winning in old world film.

We aren't so naive as to think that they haven't gone after the digital camera market, but they have proved time after time to be an utter failure. They even get trumped by cheaper alternative digital film and regular development at drug stores and grocery stores now. The cost of printing digital photos has come way in and now so many people use outside online storage as their virtual scrapbooks to hold endless pictures. They didn’t even go out and acquire a lot of the digital photo sites, or even try to squeeze them into a lesser existence. The long-term chart says the rest.

About the ONLY good news you can read into EK today is that the company said it has seen a lot of interest for its health imaging unit from outside buyers. Antonio Perez says plans for the unit including a potential sale will be announced by the end of year.

Kodak plans to provide a more detailed update on its transformation during its Annual Strategy Review meeting scheduled for November 15, 2006 in New York City. Our take for that meeting: Tell the CEO and everyone else in charge to step up their efforts or to at least get out of the way. Maybe they need to bring in Jack Welch for a year or two, now that's an idea.

Jon C. Ogg
August 1, 2006

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