Category Archives: Japanese development

Tiffany(TIF): strong 3Q11 + weak guidance = 8.7% stock drop

November 30, 2011 By in Asian economic development, China, Current Market Thoughts, earnings conference calls, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Recent Market Action, Retail, Stock ideas Tags: , , , , , , , , , , Leave a comment

the results

TIF reported its 3Q11 (ended October 31st) earnings results before the start of New York trading yesterday morning.  For the three months, the company took in revenue of $821.8 million.  It earned $89.7 million, or $.70 per share.  This represents a 52% increase over the $.46 a share the company earned in 3Q10.  The 3Q11 figure handily beat the Wall Street consensus of $.60 a share, even exceeding the most optimistic estimate, which was $.67.

TIF also continues to buy back stock at around the $65-$66 level.

the guidance

TIF says it expects 4Q11 earnings to come in between $1.48-$1.58 per share.  This represents a (mere) 6.3% increase over the $1.44 per share the company posted for 4Q10.  This guidance falls near the bottom of the 4Q Wall Street analysts’ estimate range of $1.51 – $1.69.  The median estimate, which  may be revised down, has been $1.64.

Just for reference, a year ago TIF guided to eps of $1.29 and reported $1.44.  If we adjust management guidance for possible lowballing of the same magnitude, we arrive at a figure around $1.65.  That would be a year on year gain of 15% or so.

the details

3Q11 business was stellar.  By areas:

–the Americas, 47.9% of TIF’s sales (49.7% a year ago), rose by 17% yoy.

–Asia Pacific, 22.6% (19.6%), was up by 44%

–Japan, 18.1% (19.1), rose by 12%

–Europe, 11.4% (11.6%), was up by 19%.

Strength was in high-end merchandise.

Where’s the problem?

In its guidance, TIF alluded to “recent sales weaknesses” it has noticed in Europe (no surprise there–and it’s still a tiny part of TIF’s overall business) and in the eastern US.  In its conference call, the company said the western US remains strong and buying by foreign tourists continues to be a significant positive.  But it has noticed a slowdown in purchases by domestic customers in the Northeast and Mid-Atlantic states.  That’s the reason for its relative caution.

my thoughts

On the surface, the Boston-Washington corridor slowdown seems odd.  The just-released National Retail Federation survey (see my post) highlights the Northeast as an area where holiday spending is surging.  However, I’d already heard the same story as TIF’s from another (privately held) luxury retailer doing business along the East Coast.  I’d attributed that to company-specific problems, but it’s sounding like I’m wrong.

What could be the cause?  …pent-up demand from the recession being satisfied over the past year?  …lower bonuses on Wall Street?  …Newt Gingrich taking a lower spending profile (a joke)?

TIF is still projecting sales in the Americas to be up by 15%-20% yoy in 4Q11, but is now expecting the lion’s share of the sales growth to come from buying by foreign tourists.  This contrasts with the 50-50 split the company has seen in sales growth  between locals and foreigners during recent quarters.

TIF is currently earning at a $4 per share annual rate.  This means it’s now trading at a bit over 15x earnings.  That’s an unusually low multiple by historic standards.  It’s also where the TIF management sees considerable value, as evidenced by its stock buybacks.  In addition, Asia Pacific sales probably amount to about a third of revenues, if we factor in sales to tourists in the US and Europe.  Those sales alone seem to me to be enough to grow the entire company’s profits by at least 10% per year.

On the other hand, if US sales of luxury goods to domestic buyers are beginning to flatten out after an extraordinary burst of buying over the past year–and continue flat for a while–then earnings comparisons for TIF over the next few quarters will likely be lackluster.  Any potential bids from European luxury goods firms (I’ve regarded this possibility as very small, in any event) will likely stay on the shelf until the EU’s economic future is less cloudy.

All in all, I’m content myself to wait before adding to my holding.  If I owned no TIF at all, however, I’d be tempted to buy a small amount now and await further developments.

 


lessons from Olympus Corp (7733:JP)

November 10, 2011 By in Asian economic development, economics, Japanese development, Portfolio management, Stock ideas Tags: , , , , , , , , Leave a comment

the latest chapter in the Olympus story

In an earlier post, I’ve written about the events that led up to the firing of Olympus’s newly-appointed CEO Michael Woodford.

On Halloween, according to the Wall Street Journal, long-time Olympus executive Hisashi Mori revealed to replacement CEO Shuichi Takayama–who had been defending Olympus vigorously against Woodford’s accusations–the truth about the situation.

That is, the apparently bizarre investment banking activity Olympus had engaged in was a sham.  The excessive payments, the shell companies, the subsequent writedowns, were all designed to funnel hundreds of millions of dollars out of operations.  The cash was used to cover massive losses run up in speculative portfolio trading.   A small coterie of company insiders had kept them from public view for as much as twenty years through fraudulent accounting.

My immediate reactions?

Two of them:

Wow!   …like a bad novel.

–and–

Wow!  …welcome to Japan.

on further consideration

As to Olympus itself, I think there’s lots more to come.  You don’t need a half-billion dollars to fix inflated balance sheet entries.  Writedowns do that.  This isn’t about paper losses that haven’t been recognized.  It’s about active investment accounts that can’t be closed until debts are paid off.   Who are the lenders?  Was the debt collateralized by, say, Olympus plant and equipment?  How was this all hidden for years?

In general, Olympus illustrates how traditional Japanese companies have one foot–and perhaps both–firmly planted in a samurai-like world that’s governed by a rigid system of rights and obligations among insiders.  In this world, shareholder value has no place.

Companies like this can trade at far below the value of their assets.  But that doesn’t mean they’re cheap.  Nor is it, in my opinion, because investors think the books of such companies are as cooked is Olympus’s seem to be.

I think they trade at prices that make a Western value investor salivate because experienced market participants understand that the company won’t use its assets for the benefit of shareholders.  Managements are happy to destroy the assets, if need be, so they can preserve the jobs and relative status of management and employees.  Outsiders, including holders of the company’s equity, don’t count.

investment implications

One is to avoid these apparently asset-rich companies.

More important, it seems to me there has been a wholesale rejection of this modus operandi by younger Japanese citizens.  The “counter-culture” companies the latter run operate along profit-maximization, shareholder-friendly principles.  They also find their samurai-generation rivals easy pickings.  That’s where I think any investor interested in Japan should look.  Many are worth considering even for those with no need to be in Japan, because they then to be really good companies.

the 10th Bain luxury goods study, October 2011(II): trends

November 1, 2011 By in Asian economic development, Bain luxury goods study, China, Current Market Thoughts, emerging markets, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas, Strategy Tags: , , , , , , , , , , Leave a comment

Yesterday, I wrote about prospects for the luxury goods industry this year.  Today’s post is about trends in the business.

areas of current strength

Bain’s estimates current growth prospects by category as follows:

hard luxury (jewelry, watches)     +18%

accessories          +13%

luxury goods in general     +10%

apparel          +8%

perfume/cosmetics          +3%

art de la table          +3%

cyclical forces…

As you’d expect, more expensive items, those sold through wholesalers (who stop buying, period, in recession and turn all their efforts into converting their existing inventory into cash) and those with a large percentage of aspirational buyers all fare the worst in an economic downturn.  Luxury watches are the prime example.  Anything sold through department stores might also qualify.

Men’s apparel is also highly cyclical.  For whatever reason, women continue to buy luxury goods during a downturn.  True, they may trade down a bit and space their purchase farther apart.  But men tend to stop dead in their tracks.  One reason is that big traditional men’s categories like business suits and formal wear are expensive and easily postponable purchases.  Another is that women control the purse strings in most households around the world.

So it’s no surprise that this year watches, expensive jewelry and men’s apparel are all doing extremely well.

Maybe the unusual strength of luxury goods indicates there’s some pent-up demand being met.  In any event, luxury buyers are clearly signalling with their wallets that, for them,  the economic downturn is a thing of the past.

…and secular

who

The traditional picture of a luxury goods buyer is: female, older, from either Europe or Japan.

That’s changing.  Increasingly, customers are younger, more casual,  and male.  These may be trends in many geographies.  However, the main reason theses attributes are appearing on the radar screen is that they describe the Chinese luxury goods consumer.  At 20% of the market, Chinese buying is already very big, and it’s growing very quickly as well.

where

For at least the past decade, makers of luxury goods have been upping their own retail presence.  They are doing this so they can capture the wholesale-to-retail markup.  It also gives them greater control over their brand image and their inventories.

Nevertheless, the luxury goods industry is still predominantly wholesale.  But Bain thinks that the percentage of industry sales through wholesale channels will have shrunk in 2011 to 72% of the total from 75% just two years ago.  This comes despite the business cycle strength of department stores.

online

Internet sales comprise only 3% of total luxury sales at present.  But the category is expanding very rapidly.  Bain thinks online sales will be up by 25% this year, to €5.6 billion.

Online has two segments:  full price and off-price.

Full price is is growing faster than overall luxury sales and comprises about two-thirds of all internet business.  But it’s being left in the dust by off-price, which is one-third today but which amounted to only 20% of online sales four years ago.  Private “flash” sales are the fastest growing part of off-price.

outlets

Off-price non-internet sales amount to about €10 billion, or 5% of the overall luxury market.

Outlet sales grew by 22% last year.  Bain projects them to expand by another 13% in 2011.  That’s faster than the overall luxury goods market, despite the return to health of the full-price market and the consequently smaller amount of unsold merchandise sloshing around in the system.  (Although Bain doesn’t talk about it, part of the answer to this apparent contradiction is that luxury goods companies also produce low-end “outlet only” merchandise.)

This isn’t news.  Outlets are a long-standing, mature channel in the US and Europe.

What is noteworthy is the rapid growth–around a +30% clip–that’s just starting in off-price sales in Asia and Latin America.

brand proliferation, company consolidation

Over the past ten years, the market share of the top five luxury brands has shrunk from 26% of the market to 21%.  In contrast, the share of the top five luxury goods companies has risen from 30% to 35%.

To me, this means market power is shifting from the owners of iconic individual brands to companies that are sophisticated enough provide a common platform–supply chain, support for in-house retail, dealing with consumer preferences in many different geographies–on which a group of disparate brands can operate in an increasingly complex global environment.

More and more, these technology and management factors will be the keys to success.  This also implies that these factors will increasingly be the selling points used to convince acquisition targets to join a luxury conglomerate.  The recent sale of Bulgari to LVMH is a case in point.

the curious case of Olympus Corporation (JP:7733)

October 18, 2011 By in Japanese development, Recent Market Action, Stock ideas Tags: , , , , , , , , 1 Comment

the Olympus story

I have had a nodding acquaintance with Olympus Corp. for a long time.  At one point, I even owned it in one of the portfolios I managed.

I was attracted to the company by its strong market position in endoscopes and its leadership in digital cameras.  But I soon came to the conclusion that Olympus was, at least at that time, pretty set in its ways–resistant to change and not particularly keen to make profits for shareholders from its operations.  So I sold the stock.

The excitement surrounding the recent appointment of Michael Woodford, a foreigner, but a 30-year Olympus employee, as the company’s CEO six months ago suggests that I wasn’t alone in that view.  So too does the 44% plunge in the stock’s price since last Friday, when Mr. Woodford was summarily fired.

According to the Wall Street Journal, soon after Mr. Woodford became a member of the board of Olympus he read a series of  exposés in Japanese magazines about acquisitions Olympus had made in 2006-08.  He was concerned enough to bring in auditor Price Waterhouse to conduct an investigation.   The Financial Times has examined documents provided by Mr. Woodford that he says are copies of the auditors report and his correspondence with other members of the board.

Mr. Woodford has reportedly also related his tale to the anti-fraud authorities in the UK (at least one of the acquisitions was British).  Based on the press reports, the facts seem to come down to this:

–during 2oo6-2008 Olympus made several acquisitions in businesses not directly related either to endoscopes or cameras, spending a total of over $2 billion

–the seller of all the companies bought was a single special purpose vehicle whose owners have not been identified

–Olympus paid inexplicably high investment banking fees–amounting to 50% of the cost of the underlying assets being bought–to a Cayman Islands company that has since disappeared

– in 2009, Olympus wrote down about $1.6 billion of the balance sheet value of the acquisitions.

In a meeting closed to the press, Olympus has apparently denied Mr. Woodford’s allegations and threatened to sue him for disclosing confidential company information.  It says it dismissed him because of his management style.

what to make of this?

Assuming Mr. Woodford’s story is true–and it’s hard to believe he just made this all up–the most benign explanation I can see is that Olympus was the victim of a massive fraud in these acquisitions and covered the whole affair up.   That would square with what I’ve observed over the years as the psychological inability of traditional Japanese managers to confront operating problems or to report anything other than good news to their superiors.

The bigger issue for investors, however, isn’t just Olympus.  It’s how many other asset-rich, performance-poor Japanese firms of the type Western value investors have been attracted to over the years have similar hidden problems.  My guess is that Olympus isn’t alone here.  And no matter how the Olympus case finally plays out, it will certainly not be something that will motivate competent Western corporate turnaround specialists to accept Japanese jobs.

how much is Yahoo worth?

September 9, 2011 By in China, emerging markets, Industry Analysis, internet, Japanese development, Stock ideas Tags: , , , , , , , , , , Leave a comment

YHOO’s financials

This is a first pass through the YHOO financials.  Although the company’s statements have the same strong appeal for a puzzle-solver as sudoku or the NY Times crossword puzzle, I don’t think I’m going to do any more.  Why?  This is a situation where a value investor’s experience and instincts are important, not those of a growth investor like me.

But I do know something about China and about Japan–which, along with the erratic behavior of YHOO’s management, seem to me to be the big wild cards here–so I think my comments have some value.

Here goes:

the parts

YHOO consists of four parts:

1.  Working capital on the balance sheet of $2.6 billion.

2.  A 35% equity interest in Yahoo Japan (4689:JP).  That stock closed at ¥24,500 per share overnight, giving YHOO’s holding of about 20 million shares a value of $6.4 billion.  Despite its large interest, YHOO is more or less a passive investor in 4689, which is controlled by the Japanese internet firm Softbank (42% interest).   [I went to Yahoo Finance first to get the stock price information, but the site didn't have it.  Google Finance did.]

YHOO recorded about $350 million on its income statement as its share of Yahoo Japan’s earnings last year, but actually only received cash of $61 million in dividends.

3.  A 43%  primary (meaning, as things stand now) equity interest in the Alibaba Group, or 40% fully diluted (meaning after any warrants, stock options, convertibles… are exercised).

YHOO acquired its holding in Alibaba, a private mainland Chinese company, in 2005 in return for $1 billion in cash plus YHOO’s China search business.  Alibaba, which also has Softbank as a minority shareholder, runs the Chinese equivalent of eBay and Paypal.

According to YHOO (p. 76 of the 2010 10-K), Alibaba had revenue of $1.3 billion, up 77% year on year, in 2010 and made a slight accounting loss.

YHOO’s balance sheet carrying value–based on its purchase price–is $2.3 billion.  But Alibaba is growing very fast.  Its revenues today are triple what they were two years ago–no mention of revenues in either the 2005 or 2006 YHOO 10-Ks.

Let’s just make up a number for asset value.  If Yahoo Japan is worth 3x carrying value, Alibaba should easily be worth 4x, probably more.  But 4x carrying value = $9.2 billion.

4.  The rest of YHOO.  This is a shrinking business that generated about $1 billion in cash last year.  If you ran this part of YHOO for maximum cash generation until the flow turned negative and then closed it down, it might be worth $5 billion.  Maybe you could sell it for $3 billion today.

the sum

$2.6 billion + $6.4 billion +$9.2 billion + $5 billion   =   $23.2 billion, or about $18.50 per share.  Even though Yahoo Finance didn’t have a quote for Yahoo Japan, it did list a price target for YHOO shares a year from now.  It’s $17.62.

the issues

I think all the numbers are pretty solid except for Alibaba, which is 40% of the total. That’s an issue.

potential plusses

1.  Top management of YHOO hasn’t covered itself in glory over at least the past half-decade.  Still, the Yahoo brand name is a powerful asset.  Maybe the core company would be worth a lot more if put in more competent hands.  Let’s dream.  Add $5 billion to asset value?

2.  Alibaba is in its early growth days.  I may be undervaluing it significantly.  Add another $5 billion to asset value?

So YHOO’s value might be $26.50 a share?

potential minuses

1.  Masayoshi Son of Softbank controls Yahoo Japan, not YHOO.  Mr.Son was a corporate outsider with a somewhat suspect pedigree when he struck his deal with YHOO.  He’s now firmly inside an establishment that protects its own fiercely against the possibility of foreign interference.  Basically, YHOO has no power in this relationship.

Cellphone-based social networking companies have displaced Yahoo Japan much in the same way that Google and Facebook have supplanted YHOO.  Arguably, even at 15x earnings Yahoo Japan’s stock price is inflated by local stock market investors who see it as a defensive holding during a time of economic turmoil.

Who would buy 4689 from YHOO?  Softbank gains nothing by doing so.  A 1% dividend yield isn’t particularly attractive.  Any private buyer would put himself into the same powerless situation YHOO is in now.  A secondary offering would have to come at a significant discount, I think.  Selling a third of the company this way might take years.

2.  Jack Ma controls Alibaba, including a portion of its Alibaba voting rights that YHOO has ceded to him.  After his unsuccessful attempt to buy back YHOO’s holding earlier this year, Mr. Ma has begun to take important profit contributors out of Alibaba, starting with Alipay, the group’s Paypal equivalent–whether other shareholders like it or not.

In this case as well, I don’t see that YHOO has any real power.  Beijing may well be happy to block any potential sale, especially to another foreigner.  Mr. Ma may also have a contractual right to do so (who knows?).  How big a discount to intrinsic value would you require to put yourself into the poor bargaining position YHOO is in?    …probably a very big one.

3.  taxes.  Suppose both the Alibaba and Yahoo Japan stakes could be sold.  Under normal circumstances at least 20% of the sale price would go to some government tax collector–maybe more.  YHOO says it can’t find a tax-efficient way to get sales done.  Taxes could shave $4 a share off a sum-of-the-parts value.

4.  details of the joint venture contracts.  YHOO says it’s taxes.  I think there are no buyers–although not many sellers have gone broke by underestimating the intelligence of private equity/hedge fund purchasers.  But there may also be “change of control” provisions in the agreements with Yahoo Japan and Alibaba that either prohibit sale to a third party or significantly disadvantage any new owner.  It’s possible that YHOO doesn’t want to own up to any foolish terms it may have agreed to.

my conclusion

YHOO is a $14.50 stock as I’m writing this at about 11am Friday.  An $18.50 target gives me a 28% gain.  It’s possible that the stock could go significantly higher, if either of my plusses pan out.

But I’m unwilling to bet that YHOO’s board will turn competent overnight.  I think that YHOO will need to make significant concessions to Mr. Ma in order to be able to realize any value that’s in Alibaba.  And Alibaba’s most of the growth story. I think potential minuses outweigh potential plusses.

So I’m going to pass on this one.  It will be interesting to see how the bombastic Mr. Loeb fares in his crusade for change–although greenmail rather than change may be his real goal.

 

 


 

 

Follow

Get every new post delivered to your Inbox.

Join 97 other followers