Category Archives: Retail

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.

 


Thanksgiving retail sales–more evidence of a healing economy

November 28, 2011 By in Current Market Thoughts, Industry Analysis, Recent Market Action, Retail, Strategy Tags: , , , , , , , Leave a comment

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

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.

10th annual Bain Luxury Goods Worldwide Market Study, October 2011 (I)

October 31, 2011 By in Bain luxury goods study, Current Market Thoughts, economics, Industry Analysis, Luxury goods, Retail Tags: , , , , , , , , , 1 Comment

the study

Bain released its tenth annual Luxury Goods Worldwide Study on October 17th.  It’s based on data from 230+ luxury goods companies, compiled by Bain in cooperation with Altagamma, the Italian luxury goods trade association.  The analysis is directed by Claudia D’Arpizio, the well-known consultant who heads Bain’s fashion and luxury goods practice. (Thanks to Bain & Company for giving me a copy of the study.  You can find a summary on the Bain website.)

the results

I’m going to write about the Bain study in two posts.  Today’s will cover prospects for the full year, and for the holiday selling season, in 2011.  Tomorrow’s will deal with secular trends in the luxury goods industry.

another year of exceptional growth

Despite a litany of macroeconomic woes–the nuclear disaster in Japan, Libya, Greece, slowdown in emerging markets, political craziness in the US and EU–Bain is predicting that luxury goods sales in 2011 will reach €191 billion this year.  That’s up 10% from the all-time high of €173 billion posted in 2010.

Bain is projecting 6%-7% annual sales growth for the luxury goods market from 2012-2014.  I take these figures as general indicators rather than point estimates.  I think the ideas they are intended to communicate are that growth in this industry will continue to be healthy but that the torrid pace of the past two years is likely to slow somewhat.

the most important forces

Three factors are key to this assessment:

–affluent clients in the developed world continue to spend heavily on luxury goods.  This phenomenon is more than a bounce back to pre-financial crisis levels.  It’s a genuine upsurge in demand, despite a slowdown in overall GDP expansion in these markets.

–Chinese customers continue their buying binge, both at home and as tourists abroad.

–the negative effects in Japan of the earthquake/tsunamis have been milder than expected.  In fact, luxury goods’ consumption may be rising again after several years of decline.

the holiday season

Bain thinks the holiday selling season will be a good one.  Its base assumption is that sales will be up 7% vs. 2010.  However, it figures the chances of the season being considerably better than that, at +10%, are twice as high as that sales will be disappointing.  The more positive outcome would bring full-year sales to an 11% gain.

currency effects

Bain keeps score in euros.  This only makes some sense since it’s in partnership with an Italian trade association for this study and because many luxury goods companies are based in either France or Germany.  But political/economic instability in the EU has caused its currency to fluctuate more than usual in the past couple of years–which affects the results of the Bain study.

Constant currency numbers, which give a better idea of underlying unit volume growth worldwide.  They present an even rosier picture of the luxury goods industry today.  The 2010 results of up 13% break out into 8% constant exchange rate growth + a 5% boost from a weak euro.  Bain projects that this year’s underlying growth will be 13%, with a strong euro lowering the figures by 6%.  In other words, global demand for luxury goods is currently accelerating, not decelerating, as the euro-denominated results suggest.

China

Chinese customers now make up over 20% of global luxury goods sales.  Bain estimates that business in Greater China (the mainland + Hong Kong, Taiwan and Macau) will hit €23.5 billion in 2011, a year on year gain of 29%.  In addition, Chinese tourists will likely buy another €12-15 billion worth of luxury goods on trips abroad.  While the impact of Chinese tourists is noticeable in Hawaii and New York, in cities like Milan and Paris they are probably the main factor driving growth in sales.

Note:  In addition to the fact that travelers like to buy souvenirs, luxury goods prices are generally higher in China than everywhere else except possibly Japan.  You’re also much more confident the items you buy outside China aren’t counterfeit.  And there are outlet stores, as well.   On anti-terrorist grounds, both the US and the UK have made it very difficult for Chinese to get travel visas, a fact that merchants and hoteliers there complain about bitterly.  One result of this policy is to funnel Chinese tourists into continental Europe.

Japan

For many years, Japan has been nirvana for luxury goods companies.  Japanese have been persistent buyers of luxury goods, whether the general economy has been good or bad.  Domestic prices are very high.  And the market there is very deep.  It comprises perhaps the top half of the population, as opposed to the top quarter in the US or EU.

In 2007, the music–and Japanese luxury goods sales growth–finally stopped.  No one quite knows why.

For 2011, however, despite a 12% year on year drop in luxury goods purchasing during 1Q due to the earthquake/tsunamis, Bain is projecting a small (+2%) year on year gain for Japan.  The consulting company thinks results will come in at €18.5 billion, meaning Japan retains its place as the second-largest luxury good market in the world.

world rankings

The top five luxury goods markets in the world at year-end 2010 are:

US        €48.1 billion         28% of the world market  (NY at €15 billion represents 9% of the world)

Japan     €18.1 billion     10.6%

Italy       €17.5 billion     10.2%

France     €13.3 billion     7.8%  (Paris = €8.5 billion    5%)

China     €9.6 billion     5.6%

Strong growth propelled China up from 7th a year earlier, displacing the UK and Germany in the rankings.

That’s it for today.  Market trends tomorrow.

AAPL’s 4Q11: another strong quarter

October 19, 2011 By in Current Market Thoughts, e-readers, earnings conference calls, Industry Analysis, Retail, Stock ideas, Technology, Wireless Tags: , , , , , Leave a comment

the results

AAPL reported 4Q11 results after the close of trading in New York yesterday.  The company earned $6.6 billion ($7.05 per share) over the three months, on revenue of $28.2 billion.  This is an advance of 52% in eps, year on year, on sales growth of 39%.  Although the company exceeded its guidance of $5.50 per share handily, it failed to beat the Wall Street analysts’ consensus, $7.39 a share, or the first time in a long while.  (The StarMine consensus of analysts who have historically been the most accurate forecasters–which in this case may simply have been the most aggressive–had been $7.51.)

EPS for the full fiscal year 2011 (ended September 24th) were $27.68, or 82% better than results for fiscal 2010.

AAPL also gave guidance for the holiday quarter we’re in now.  APPL’s 1Q12 will have 14 weeks in it instead of the normal 13.  This is an adjustment companies who organize themselves on a “weeks” basis rather than a “months” basis must make every six years or so to make sure their fiscal year remains aligned with the calendar year.  Anyway, AAPL’s guidance for 1Q12 is eps of $9.30.  My rough guess is that this equates to a “normal” quarter of $8.50,  which would be a gain of about a third over the $6.43 AAPL reported in 1Q11.

As a result of its earnings “miss,”  AAPL shares are down about 6% in pre-market trading as I’m writing this.

details

iPhone

Let’s get straight to the heart of the earnings “shortfall,” if that’s the right word to describe a quarter that’s up more than 50% year on year.  It comes in the iPhone.

AAPL sold 17.1 million iPhone units in 4Q11.  That’s up 21% year on year, and an all-time record for a September quarter, but down 16% from the record 20.4 million the company sold in 3Q11.  There were two reasons sales weren’t higher, both related to the introduction of the new iPhone 4s.

–AAPL decided not to add any new carriers to its iPhone network in the September quarter; and

–consumers slowed down purchases of the iPhone 4 in anticipation of the new model they expected to debut during 4Q11.  As demand waned toward quarter end,  carriers slowed down purchases of iPhones from AAPL.  Apple Store sales of iPhones were particularly weak.

APPL has since reported that the iPhone 4s has sold over 4 million units during the first three days of its launch in early October, more than double the rate at which the original iPhone 4 left the warehouses when it first came to market.  At $645 each, those sales amount to $2.6 billion, or about $.85 a share.  They could just as easily have occurred in 3Q11 if AAPL had moved the launch date of the 4s back to late September rather than early October.

How good is the iPhone business today? “In our wildest dreams we couldn’t have gotten off to a start as great as we have on the 4s,” says CEO Tim Cook.  Cook also noted that AAPL had anticipated a much larger reduction in telecom purchases of the original iPhone during the quarter than what actually occurred.

iPad

AAPL sold 11.1 million units during the quarter, an all-time record.  That’s up 20% quarter on quarter and 166% year on year.  AAPL finally seems to have obtained enough manufacturing capacity to keep up with demand.

Macs

Unit sales were up 37% year on year and 30% quarter on quarter.  That’s also an all-time record.  AAPL sees some cannibalization of the Mac business by iPads, but is still producing growth much greater than the PC industry.

iPods

Once half the company, iPods are now less than 10% of AAPL’s revenue.  Unit sales were 6.6 million during the quarter, down 27% year on year and 12% sequentially.

my thoughts

Even with an extra week to work with, I don’t think AAPL’s profits can be up 82% again this fiscal year.  Suppose they “only” reach $35, with (to make the arithmetic easy) $1 of that coming from the 53rd week.  Organic growth would then be in the low 20% range, which I think is easily doable.  It could be very much higher.

At a $400 stock price, AAPL would be trading at a forward multiple of under 12x on my low-ball figure.  Subtract out the $86 a share in cash (remember, AAPL has no debt) on the balance sheet from the stock price and the multiple shrinks to about 9x.  Even factoring in a substantial maturing of AAPL’s businesses, of which there’s no credible evidence yet, AAPL shares seem very cheap to me.

 

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