Archive for the 'Retail' Category

TIF’s 4Q11 earnings misstep

Published January 16, 2012 Current Market Thoughts , earnings conference calls , Industry Analysis , Luxury goods , Retail , Stock ideas Leave a Comment
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background

When TIF reported 3Q11 earnings (Tiffany’s fiscal year, like that of most retailers, ends in January), it lowered its 4Q profit guidance (see my post).

By then, the company had seen sales for virtually the entire month of November and had detected weakness in spending by residents of the Northeast and Mid-Atlantic regions of the US.  At that time, it still expected a “low-teens percentage increase” in worldwide sales during 4Q11.  But it effectively clipped $.10 from its estimate of per share profits for the year’s final three months, saying it expected to earn $1.48 – $1.58 per share during the period.  That would be 6.3% more than the $1.44 it earned in the comparable period of fiscal 2010.

the weakening holiday selling season

Last week, TIF reported the results of its worldwide sales for November plus December.

The news wasn’t good–especially in the US and Europe.

Rather than the low-teens increase in sales the company had been anticipating, revenues were only up by 7%.

By region, they broke out as follows:

Americas    total sales = +4%,     comp store sales = +2%  (3Q11 comps = +15%)     ←

Asia-Pacific (ex Japan)     +19%, +12%, (+36%)      ←

Japan     +13%, +6%, (+4%)

Europe     +1%, -4%, (+6%).

In the US, sales to residents were down year on year.  Buying by foreign tourists pushed results into the plus column.

In its press release, TIF reduced its eps forecast for 4Q11 by another $.10-$.15.  It now expects to earn $3.60 – $3.65 for the full year.

The stock fell 10% on the news.  Unlike other stocks with negative earnings surprises, TIF hasn’t rebounded.

my thoughts

December must have been a particularly disappointing month for TIF, since management had already revised down its expectations  based on November weakness.

Recent macroeconomic reports are almost universally signalling that the US economy is improving.  In the jewelry industry in particular, Signet reported on the same day as TIF that its same store sales in its Kay business were up +9.8% and in Jared, +10.0%.  Similarly, Zale reported that its non-kiosk US jewelry business had same store sales growth of +9.0%.  Neither is showing anything like the weakness in TIF’s business.

TIF is much farther up-market than either Signet or Zale.  Presumably, that’s the source of the difference.  It looks like TIF’s high-end US customers left their credit cards at home last month.  My guess is that the problem resides in the waning fortunes of executives in financial services and the industries, like legal, which support it.

Look at the Asia-Pacific figures above, as well.  TIF didn’t highlight this area.  Same store sales are still high at +12%. But three months ago they were growing at a +36% pace, or 3x the current rate.

what to do

At last Friday’s price of $59 or so, TIF is trading at 16x fiscal 1011 eps and yielding 2%. That looks cheap to me.

On the other hand, we have only guesses as to what’s causing the current deceleration in company sales.  They’re probably good guesses, but still…

For investors, the more pertinent question is probably when earnings comparisons will begin to pick up again.  My tentative answer is–not soon.  In fact, earnings comparisons could be negative or flat until late in 2012.

So my thoughts remain unchanged from late November.  I don’t feel any need to sell the stock I own, but I don’t think I have to hurry to buy more.  If I didn’t own any I might buy a small part of a position now, but no more than that.

 

Coach’s new Hong Kong Depository Receipts

Published December 14, 2011 China , emerging markets , Hong Kong , Industry Analysis , Luxury goods , Retail , Securities regulation Leave a Comment
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Hong Kong Depository Receipts (HDRs)

I didn’t know until I was reading the Wall Street Journal this morning that Hong Kong had depository receipts (DRs).  But COH just issued one.

Sure enough, checking with the Hong Kong Stock Exchange website, HDRs have been permitted in that market since mid-2008.  Not many takers so far, however.  The HKSE lists Vale, the Brazilian iron ore company, with two HDRs; SBI, a Japanese internet-based financial, has one.  And now there’s COH (6388 is the Hong Kong ticker symbol).

what they are

The basic idea behind a DR is to provide a simple way for a domestic investor to buy a foreign stock without having to set up a brokerage account in the foreign country or to deal with foreign exchange, either in buying and selling or in receiving dividends.

The buyer doesn’t actually get a share of stock, however.  Instead, he gets an IOU (the receipt) from some financial entity, usually a bank, that holds the real shares in a depository account.  The bank handles all the necessary administrative details, like foreign exchange and the sometimes messy business of meeting the foreign country’s securities and tax regulations.

ADRs

The company whose stock underlies the DR may use the DR issuance to raise capital in a new market, where investors may well pay a higher multiple for shares than would be possible in the home market.  In the biggest DR market, the US, I’ve found this often the case–and regard it as a bad sign.  In my experience, seeing a mature company launch an ADR means it has lost its allure for more knowledgeable home market investors.  (Another important factor in ADR issuance in particular is that it circumvents the more stringent disclosure and reporting requirements that the SEC has for US-based companies.)

In the COH case, however, the firm has not created 6388 to raise new funds–after all, operations are generating $1 billion in annual net cash.  It has created a DR to raise its public profile in Greater China.

their Achilles heel

The bane of DRs, in my opinion, is low trading volume and potentially Grand Canyon-wide bid-asked spreads.  I’ve found the problem especially acute in cases, like this one, where the operating hours of the home and DR exchanges don’t overlap.  According to the HKSE website, trading in 6388 over the past five days has only totaled about US$11,000.  The bid-asked spread shown is about 2% (my experience in the US is that the spread for a stock like this could be more like 10%).  December is usually a dreary month for investors, so January will probably give a better read on volume.

worth watching

Nevertheless, COH has probably gotten more publicity in China through the HDR listing than it would have been able to buy with the money it spent to create its HDR.  The phenomenon itself it worth watching, as well.   Two reasons:

–we may ultimately reach a tipping point where having a HDR acquires a cachet that exerts a positive influence on the home market security price, and

–pioneers like COH may have a leg up on obtaining an eventual listing on a mainland exchange.

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

Published November 30, 2011 Asian economic development , China , Current Market Thoughts , earnings conference calls , Hong Kong , Industry Analysis , Japanese development , Luxury goods , Recent Market Action , Retail , Stock ideas Leave a Comment
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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.

 


Thanksgiving retail sales–more evidence of a healing economy

Published November 28, 2011 Current Market Thoughts , Industry Analysis , Recent Market Action , Retail , Strategy Leave a Comment
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the National Retail Federation survey

Yesterday, the National Retail Federation, a large retail trade association, released its annual survey of shopping over the Thanksgiving/Black Friday weekend.  The survey, conducted by BIGresearch, polled 3,826 US consumers on November 24-26 about their actual spending and their intentions for the remainder of the weekend. It has a margin of error of +/- 1.6%.

the results

overall

The typical shopper reported spending $398.62 over the weekend.  That’s up up 9.1% year on year, and contrasts sharply with spending behavior in 2010, which was virtually flat (up .3%) vs. 2009.  This is a record high, and the largest yearly increase since 2006.

A lot of people who stayed home last year joined the fray.  Total spending was $52.4 billion, up 16.4% vs. 2010.

Buying was led by consumers in the Northeast, who reported that their outlays are up 24% year on year.  (During the Great Recession, buying remained steady in the South and rose steadily in the West, but fell off a cliff in the Northeast and Midwest.  The latter rebounded last year; this year’s Northeast figures are only slightly above the 2007 level.)  This makes some intuitive sense, since the Northeast was the epicenter of the financial crisis and hurt very badly by it.

The average shopper polled has done 38% of his shopping this weekend, about the same as last year.  Despite having spent the most money so far, shoppers in the Northeast say they’ve only spent 36% of what they intend to.  That’s the lowest regional total.

the rise of the Thanksgiving Day shopper

Although Friday and Saturday are the heart of the retailers’ Thanksgiving weekend, the increase in store openings and special sales on Thanksgiving evening led to 21.9% of survey respondents showing up at the stores during the Thursday holiday.  That’s up from 18.1% who turned out last year.

online shopping increases

This year, shoppers reported that they spent 37.8% of their total online.  That seems like a huge amount, but last year the percentage was 33.3%.

The bigger behavioral change, shown in a companion survey about Cyber Monday behavior, is in the use of mobile devices.  That’s tripled to 14.5% of shoppers over the past three years, and doubled since last year.  This doesn’t necessarily mean that many consumers will order merchandise over their phones or tablets.  Some will, but most use these devices to comparison shop or to check in-store prices.

By the way, the vast majority of today’s Cyber Monday shoppers now buy early in the morning and from their home computers, rather than during breaks at work.

investment conclusions

The survey outcome appears to have the NRF considering whether its forecast of a 2.8% increase in retail sales for the 2011 holiday season isn’t too low.  In my view, it probably is.

To me, aside from the magnitude of the spending increase this year, the most interesting result of the NRF surveys is that they highlight the rebound of the financial services-dependent Northeast after two years of caution.

The overall survey reinforces the view I’ve held for a long time that high unemployment is an urgent social and political problem, but one that will have little negative impact on GDP growth in the US or on the results of publicly listed US corporations.

 

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

Published November 1, 2011 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 Leave a Comment
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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.

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