Category Archives: Retail

Graff Diamonds yanks its proposed Hong Kong IPO

May 30, 2012 By in China, Gold, Hong Kong, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

fuses blown

Bad day in New Jersey.  Yesterday was the first super-hot day of the late spring, with temperatures approaching 100 degrees Fahrenheit.  Creaking power infrastructure reacted in the way we’re unfortunately becoming accustomed to.  It collapsed.  No power for most of our neighbors, no internet or cable TV for us.  Hence the late post.

Graff

According to Bloomberg, the plug was pulled on the Graff Diamonds offering less than two days before the stock was supposed to debut.

I can’t say I was shocked, for several reasons:

–Hong Kong has been pummelled especially badly by selling emanating out of the EU, where another flight to safety by equity investors is in full flower.  It looks almost like last summer.  (Where did they get all the stock?)

–Chow Tai Fook Jewellery (HK: 1929) came public late last year and is now trading at about 2/3rds of the IPO price.  True, 1929 sells mainly chuk kam pure gold jewelry and knickknacks, not diamonds.  But the market is the same–China.

–TIF, whose main problems appear to me to be in the US, nevertheless also reported a deceleration in its China business last quarter.

–I suspect that retail investors in Hong Kong–always important in that market–were especially badly burned by the Facebook IPO.  IF US retail investors got 5x-10x what they expected, Hong Kongers could have gotten double that size.  Hong Kong is a market of veteran stock market participants, so they’ll shrug off their bad treatment by underwriters quickly.  But if I’m correct, they’re still licking their wounds.

–I haven’t tried to locate a copy of the Graff Diamonds prospectus.  My experience is that in Hong Kong these documents weigh a ton, but don’t contain anything like that amount of information.  Besides, they’re not supposed to be available in the US until after the offering.  Media reports do bring up two potentially worrying issues, however.

Apparently, a mere 20 customers make up 50% of revenues.

A large chunk of the IPO proceeds were said to be earmarked for buying diamond inventory from the company’s founding family.  I’d want to know how this inventory is being valued–and how many months’ (years?) sales this represents.  I’d also want to know how the acquisition of the gigantic gems Graff is famous for will proceed from now on.  Does the Graff family act as exclusive agent for the company?  …is the family paid a commission for acquisition?

a paucity of demand

When the IPO was pulled, the underwriters had orders for only half the shares intended to be offered by the company.  In a healthy offering the books would be, say, 5x covered.  A “hot” offering might have books 10x covered.  In Hong Kong, which operates under different rules than the US, 100x isn’t unknown.

my thoughts

In the current economic environment, Graff Diamonds was always going to be a tough sell, especially with the family wanting 25x earnings for its shares.  I think FB did much more to suck the life out of this offering than most brokers would be willing to admit, however.

TIF’s 1Q12: surprising slowdown by US customers

May 25, 2012 By in earnings conference calls, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

the report

TIF reported 1Q12 (ended April 30th) results prior to the opening of equity trading in New York yesterday morning.

Revenues were up 8% year on year, at $819.2 million.  The company earned $.64 a share for the three months, down a bit less than 5% from  results–but substantially below the Wall Street consensus of $.69.

Tif also lowered its full-year guidance by $.25 a share, to a range of $3.70-$3.80.  Worldwide sales are now expected to grow at a 7%-8% rate, down from the prior expectation of +10%.  Eps comparisons will likely be negative in 2Q12 and 3Q12.

The stock dropped sharply on the news.

As I’m writing this on Friday morning, TIF shares are somewhat lower again, in a choppy but flattish market.

the details

sales

Americas           up 3% at $386 million

Asia Pacific         up 17% at $195 million

Japan          up 15% at $142 million

Europe     up 3% at $88 million.

Business was much better than I had expected in Japan.  Analysis is complicated by the fact of the Fukushima nuclear disaster in mid-March 2011.  Still, same store sales growth is up more than 10% from two years ago, in a land that had been turning decidedly cool toward luxury goods.

I think any gain in Europe, now the epicenter of world economic woes, is just short of miraculous.

Asia Pacific performed as expected–no better, no worse.  The company says Chinese business has cooled a bit from the torrid pace of last year.  I don’t consider this a worry.  But it does suggest that Asia won’t be a source of significant upside surprise for a while.

It’s the Americas, and specifically the US, where the falloff versus expectations lies.  Sales to foreign tourists are up, with weakness in European buying more than offset by a step-up in purchases by Asian visitors.  So it looks like the problem is with sales in the US to Americans.

TIF pointed out in its conference call that the softness:

–occurred in April

–is not focussed in any one region of the country (so it isn’t just laid-off NY bankers), and

–is consistent with MasterCard data for high-end jewelry in general (so it isn’t a Tiffany-specific issue).

my thoughts

Some portion of the poor US performance may be attributed to a later date for Mother’s Day this year.  But everyone who has access to a calendar already knew that.  Certainly management had factored this into its earlier guidance.

The downward revision comes after TIF has seen Mother’s Day sales.  I think this means that–unlike the case with more mass-market jewelers like Signet–Mother’s Day didn’t counteract April weakness for TIF.  It confirmed the slowdown.

Elsa Peretti

TIF has an exclusive license to sell Elsa Peretti jewelry, which makes up about 10% of company revenues.

The company filed an 8-K with the SEC on May 23rd in which it says that Ms. Peretti, 72, wants to retire and to sell her brand name and designs.  Negotiations between her and TIF are now in progress.  The Peretti intellectual property should have more value to TIF than to anyone else, so in a completely rational world TIF would end up obtaining it.  Earnings would be affected by, say, +/- 7%-8%, depending on whether negotiations result in purchase or not.

the stock

A short while ago, I sold the last of the TIF I held while I was doing a portfolio housecleaning.  My position was small and–as I’ve written elsewhere–I think the stock market is moving toward playing recovery of the average American rather than the continuing prosperity of the affluent.

I don’t feel a huge urge to buy back the stock I sold.

On the other hand, the stock looks cheap to me at 15x earnings.

15x was the place where I became interested in the stock–which I had owned in my portfolios, off and on, for many years–during the bounceback from Great Recession lows.  There’s always the possibility that the company could be acquired by a luxury goods conglomerate or a sovereign wealth fund.  We also know TIF management, which should know the value of the firm better than anyone else, has been buying the stock at above $60 a share.

I guess I’d like to watch the price for a while-and possibly get a better understanding of the current dynamics of the US customer.

 

 

 

 

consumer electronics: a new front on the online/bricks-and-mortar battlefield

April 11, 2012 By in Industry Analysis, internet, Retail, Stock ideas Tags: , , , , , , , , , 1 Comment

I’d been planning to write this post before the announcement yesterday that the CEO of Best Buy is resigning.  Maybe it’s a bit more topical today.

trying to end discounts on consumer electronics

Early in the month, Korean and Japanese consumer electronics firms–among them, Samsung, LG, Sony and Panasonic–announced new rules for sales of their high-end products in the US.

Previously, the device manufacturers had at least threatened to, and perhaps actually withheld sales incentive payments to retailers who aggressively discounted the recommended selling prices set by the brands.  That didn’t stop internet retailers from undercutting their bricks-and-mortar rivals, however.  The manufacturers are now taking a new tack.

From April 1st, the consumer electronics companies say they won’t just not pay marketing money to discounters.  They won’t ship “hot” products to them at all.  To get the latest and greatest, buyers will have to go to full-price outlets.

Sounds crazy. 

Why would they do this?

Two reasons occur to me:

1.  The manufacturers want to preserve the bricks-and-mortar distribution channel.  In particular, they want to preserve the big-box strip mall retailers like Best Buy.

This would be somewhat like what the book publishers did a year ago, when they forced Amazon–by withholding newly-published “best seller” e-books from the internet retailer–to charge higher prices.  That provided a pricing umbrella under which independent bookstores could a least continue to limp along and under which Barnes and Noble could complete development of its own e-reader, the Nook.

2.  As far as I’m aware, the consumer electronics companies aren’t going to raise wholesale prices.  So they won’t initially make more money.  They may think, however, that if all retailers become more profitable, then they’ll be less likely to resist future increases in wholesale quotes–or future reductions in sales incentives.

the new plan won’t work

My guess is that this new plan will do more harm than good.  Four reasons:

1.  When prices go up, consumers buy less.  If the price of, say, high-end HDTVs rises by the $800 a unit that some are suggesting, sales volumes will doubtless contract.  Pre-Great Recession, a customer might think of a new HDTV as being like a new car–and finance it.  Not today.  Absent easy availability of cheap credit–and customer willingness to use it–the falloff in unit volume that higher prices brings might be surprisingly large.  And not every manufacturer is in rude financial health, so profit contraction could be painful.

2.  There’s no reason to think that loss in unit volume will be distributed equally across all competitors.  In an environment of smaller price differentials, competition won’t disappear.  It will just take a new form.  My candidate is perceived product quality.  If so, I think this means the market will gravitate toward Samsung and away from Sony.   In any event, market share losers would be under enormous pressure to go back to the old system, before the new competitive game causes irreparable damage to their businesses.

3.  The umbrella of higher prices will potentially allow competitors who don’t adopt the new system–or new market entrants, for that matter–to compete successfully by discounting aggressively.

4.  The move won’t fix what ails Best Buy, in my opinion.

Thirty years ago, suburban big box retailers were an evolutionary advance over urban department stores and local mom and pop shops.  They still are, but the latter, like the dodo, aren’t the competition anymore (actually, the dodo never were).

Today’s competition takes two forms:

–internet retailers, and

–Wal-Mart/Target/Costco, the discount retailers who are the modern successors to the department store.

Compared with the latter group, Best Buy stores are too big and too seasonal (think:  Toys R Us). Best Buy has to lease, light, heat/cool and staff its retail space for the full twelve months of the year, even though 60% of its profits come from sales that happen between the year-end holidays and the Super Bowl.  The others just expand and contract their seasonal departments, depending on the time of year.

Tilting the playing field away from internet retailers and to the benefit of bricks-and-mortar will, it seems to me, just intensify the battle between Best Buy and Wal-Mart et al.  I think we all know who’s going to win that struggle.

there is a better solution for consumer electronics

By the way, this all shows how prescient Apple was in opening its Apple Stores.

pricing out a polo shirt: investment implications

February 7, 2012 By in Current Market Thoughts, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , Leave a comment

teardowns in tech…

Teardowns have become a staple of IT investing.  Every time a new consumer device appears, tech websites get hold of one and rip it apart. They then publish lists of the components the device contains, along with cost estimates and a guess at assembly time and expense.

It’s all very interesting information.  Sometimes it can be the key factor in deciding whether to buy or sell the stock of a component manufacturer or designer.  Who wouldn’t like to have his chips in the iPhone4S, for example?  Or, suppose your company had a key chip in an older model but has been bumped out by a rival in the latest one?

…and for garments

The Wall Street Journal had an article last week where it did the same thing for a polo shirt.  Not exactly high tech, but I think it’s still interesting  in showing industry structure and where the money is.

KP MacLane

The article is about KP MacLane polo shirts, created by Katherine and Jared MacLane, two former Hermès sales managers who decided to become fashion entrepreneurs.  They sell their shirts online, at www.kpmaclane.com, for $155 a pop.

There certainly is a market for expensive polo shirts.  A Hermès polo, for example, retails for almost 3x as much, at $455.  Unlike KP MacLane’s, the Hermès offering does have a pocket.

selling points

According to the company website, the key selling points for the KP MacLane product appear to be:

–environmentally friendly;

–made in the US;

–upscale, niche;

–fusion of European tradition with American “craftmanship,” “ingenuity” and “pride.”

unit costs

The merits of this polo shirt aside, unit costs are as follows:

materials               $10.35

manufacturing     $11.05

shipping               $8.17, including $3 for an embroidered bag the shirt comes in

total                     $29.57 .

pricing

The MacLanes have set the wholesale price for their shirts at $65, a markup of something over 100%.  The wholesale to retail markup is about another 150%.

why is this interesting?

What do I find interesting about this business?

The MacLanes are a startup, so their unit costs are very high.  If they become a success, they’ll be ordering fabric in much larger lots.  This will mean they get a better price.  The same with the cloth-cutting and sewing.  My guess is that they’ll easily shave $2 each off their materials and manufacturing costs, even if they make no sourcing changes.  That would push their per unit outlays down below $25.

That would only be for starters.  But the MacLanes would certainly never lower their prices.   Any cost declines would only become extra margin for them.

On the other hand–and this is what’s really important–if the MacLanes can achieve a $155 price point, their cost of goods is almost irrelevant.

They currently mark up by $125 over the cost of each shirt.  With the economies of scale in sourcing that I’ve assumed, they would increase the markup to $130.  That’s only 4%.  If the MacLanes had a different objective and decided to source both materials and assembly from China, they could probably get their unit costs to $10 or less.  They’d lose their Made in the USA selling point, of course, which might be fatal; their quality control problems would increase exponentially; and they’d only raise their markup by $15.

In addition, it would also defeat the whole purpose of their business, which is to use marketing to create a non-commodity product, that is, one whose selling price is not based on the cost of production.

In other words,…

…the real money in the garment business is not in the manufacturing.  It’s in the brand creation.  The Hermès polo shirt I mentioned above probably doesn’t have production costs higher than the MacLanes’.  But Hermès has spent years of time, effort and spending on creating a brand image that wealthy people want to embody and are willing to spend extraordinary amounts of money to exemplify.

Notice also that the retail markup is hugely greater than the wholesale markup.  Yes, there’s a greater risk in owning retail outlets and in-store merchandise.  But the control of the brand message and of overall inventory is far superior to what a wholesaler is able to do.

the Internet

The internet is still in relative infancy, so I don’t think all its implications for retail are yet apparent.  Some already are, however:

–The role of physical distribution networks as gatekeepers for new products is diminished.  Entrepreneurs like the MacLanes can reach directly to the consumer through the internet, to create pull-thorough demand for their products at low cost.

–Weak brands, like those of many department stores, will face increasing difficulty, as will the brands they carry that use them as their principal means of distribution.  I think this means strong brands will be forced to establish their own retail outlets.  Weaker brands will fall by the wayside.

–For startups, a sophisticated web presence that clearly defines and exemplifies the brand attributes will be essential.

current investment implications

The number-one lesson is to avoid garment manufacturing in favor of branded retailing.

There’s a secular case in favor of luxury retailing, especially for firms that control the majority of their retail distribution.  The same line of thought argues against generic physical distribution, especially physical distribution of the type department stores have.

On the other hand, the broadening of economic recovery in the US is creating a cyclical investment argument in the opposite direction.

What to do?  Several possibilities:

–let relative valuation decide whether you want to make the secular bet or the cyclical one (personally, although I love luxury retail stocks, I’d prefer he cyclical),

–don’t bet.  Avoid the area entirely if you’re an individual investor; look like the index if you’re a professional,

–look for non-garment retailing, like sporting goods,

–find an indirect way to play the recovery of the average consumer.  This is my choice.  I’m betting on hotels.  I’ve owned IHG for a while and I’ve recently bought MAR.

TIF’s 4Q11 earnings misstep

January 16, 2012 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , Leave a comment

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.

 

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