Paul Otellini leaving Intel (INTC)

Happy Thanksgiving  …a day late

resignation/retirement

Recently, Paul Otellini, CEO of INTC, informed that company’s board of directors that he intends to retire next May.  Stock market reaction has not been positive.  That’s understandable, since one of the key building blocks of the bullish case for INTC is the big change in corporate organization and direction Mr. Otellini created as chairman.  In many respects, his influence is similar to the positive effect Robert Iger has had on DIS.

It’s not 100% clear what’s going on, but there are several things we can conclude with a reasonable degree of certainty.  They are:

1.  This is Mr. Otellini’s decision, not the board’s.  Said another way, Mr. Otellini is not being forced out.  How do we know?  For one thing, Gordon Moore, a current board member and former INTC CEO, said the board tried unsuccessfully to convince Mr. Otellini to stay on for another year.  For another, if there were a problem, Mr. Otellini would never have been allowed to remain until next May.

The most likely reason for the resignation, in my view, is that either Mr. Otellini or a member of his family has developed a health or other personal problem that will require a lot of attention.  I don’t know that this is the case.  Thinking only as an investor in INTC, the exact reason is probably not important, however.

2.  There’s no heir apparent.  Were there a single clear successor to Mr. Otellini, his/her name would doubtless have been announced at the same time as the news of Mr. Otellini’s departure.   Either there’s no obvious internal candidate, or there are several roughly equal, highly qualified possibilities.  In the latter case, the board’s problem is how to promote one while not losing other stars who might leave to become the top person elsewhere.

3.  INTC may look to external candidates.   This may just be the board mouthing platitudes.  If not, it suggests there may be no satisfactory internal candidates.  Or the board may feel the company really needs a new infusion of out-of-the-box thinking.   Given the difficulties tech companies have often had under CEOs brought in from the outside (HPQ is the serial offender here), this is, to me, the most unsettling thing the board has said.

investment implications

For a holder of INTC like myself, the situation bears close watching.

The resignation comes as we’re waiting to see if Mr. Otellini has created enough innovation at INTC for the company to be able to provide a serious alternative to ARM-based chips for mobile devices.  If he has, then the identity of the next CEO is less crucial than if a more fundamental shakeup is still necessary.

The current stock price, which is around my cost, seems to me to be saying that ARMH will continue to run rings around INTC in the mobile arena.

According to Wall Street’s odd logic, either the consensus view is correct–in which case the stock will find it hard to move up, but will keep on paying a high dividend, or it’s not–in which case the stock will likely move up a lot.  As a stock, therefore, INTC would appear to have a load of upside potential and limited chance for loss.

That’s been my thinking all along.  On the other hand, I didn’t expect INTC shares would come anywhere close to revisiting $20, especially in a generally uptrending market.  But it has.

What’s changed in the situation is that with Mr. Otellini at the helm, INTC had a leader capable of making needed changes.  Now we can’t be sure.

For what it’s worth, I’m content to hold my shares awaiting further developments.  I’ve got enough stock that I have no inclination to add more.  If I owned none, would I buy INTC shares at today’s price?  Yes, but not as much as I would have this time a year ago.

11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (iii): market structure

Yesterday I wrote about long-term trends in the personal luxury goods industry, as seen by the Bain Luxury Goods study.  The prior day, Monday, the topic was short-term revenue growth prospects.

Today’s post will deal with the responses by luxury goods firms to the development of the global market for their products.  I’ll close with Bain’s estimates of the size of the personal luxury goods market in the context of the market for all luxury goods.

continuing slow vertical integration

The traditional model for luxury goods companies has been to design and manufacture their products and sell them at wholesale to third-party retailers, like department stores or multi-brand specialty retailers (think, e.g.: jewelry stores).

The virtues of this way of doing business are:

–it’s simple and

–the time that company cash is tied up in inventory is, under most circumstances, the shortest.  So its financing needs are the least.

Over the past decade or so, however, luxury goods firms have been entering retail themselves by opening free-standing stores of their own or company-owned boutiques in department stores.  Where necessary to do so, they’ve also been buying back territorial distribution rights they had previously granted to third parties.

The rate of change toward vertical integration is slow, but steady, at the rate of about a 1% increase in market share per year.  Currently, luxury goods’ distribution is still predominantly wholesale, with 30% through company-owned retail channels.

Why the shift?

After all, going all the way to the retail customer requires a much more complex company organization and a lot more capital to meet the heavy extra expense of building and keeping up a store network.  At the same time, a firm’s existing wholesale customers can scarcely be thrilled to see the luxury goods company entering into direct competition with them.

Several reasons:

–the price markup from wholesale to retail for luxury goods is immense

–the company has much better, and more current, information about customers, sales trends and inventories if it has a retail operation

–it has much better control over the brand message and the customer experience

–the company has the opportunity to make the customer its client, rather than the department store’s, thereby increasing the size and frequency of purchases.

single brand vs. conglomerate, private vs. public ownership

the rise of luxury conglomerates

In 1995, according to Bain, a majority (55%) of personal luxury goods sales were of products made by a single-brand company.  The rest came from multi-brand groups.

Today, in contrast, sales by multi-brand groups are double the size of those of their single-brand counterparts, which account for only a bit more than a third of industry revenues.

…and publicly owned firms

In 1995 companies that had raised expansion capital in the stock market represented only 30% of luxury goods revenues.  The vast majority of sales were by privately held firms, mostly family owned.

Today, those proportions are reversed.  Only 30% of industry sales come from traditional privately held companies.  Firms representing 65% of total revenues are publicly traded.  Private equity and sovereign wealth funds hold the other 5%.

The reasons behind this transformation are a bit more complex.  They include:

–the massive rise in world GDP over the past few decades that has made the luxury goods market accessible to many more consumers.  According to Bain, the personal luxury goods market has almost tripled in size since 1995

–the development of supply chain software, which makes the management control task more manageable

–revival of once moribund businesses through modern management techniques–Gucci, Tiffany, Coach are names that immediately come to mind, which has attracted capital to the industry

–often a diffuse group of second- and third-generation owners of a private firm would prefer to cash out rather than remain involved in the family business.

where the personal luxury goods industry stands in overall luxury spending

According to Bain, global luxury spending breaks out as follows:

luxury cars    €290 billion, up 4% from 2011

personal luxury goods     €212 billion, up 10%

luxury hospitality     €127 billion, up 18%

luxury wines/spirits     €52 billion, up 12%    (no beer?)

luxury food     €38 billion, up 8%

design furniture     €18 billion, up 3%

luxury yachts     €7 billion, up 2%

Total     ~ €750 billion

Note:  in the food and beverage category, Bain detects a trend toward in-home consumption rather than in restaurants.  Apparently even the wealthy need to economize somewhere.

11th Annual Bain Luxury Goods Worldwide Study, October 2012 (ii): long-term trends

post # 2

This is Day two (of three) blogging about the 2012 Bain global study of personal luxury goods.  Yesterday I wrote about Bain’s analysis of the industry’s growth prospects.  The consulting company’s general picture seems to be that after a post-Great Recession surge in luxury goods spending the industry is settling back toward trend growth.

In the Worldwide Study, Bain has pencilled in 4% – 6% annual revenue expansion as being “trend.”.  My sense, however, is these numbers are there more as prudent (read: low-ball) placeholders than the product of hard core analysis.

Trends

That was yesterday.  Today I’m going to write about the major trends Bain sees in the luxury goods market.  They are:

–tourism  

According to Bain, 40% of the total money spent by buyers outside their home country!  I knew that this phenomenon was big, but I didn’t realize it was so large.

Why not spend at home?

price   Prices are cheaper in the EU than anyplace else.  This is partly because luxury goods makers set prices higher in Asia and partly because of government duties imposed on foreign luxury goods imports.   Outlet shopping may also not be available in the home country (more below).

selection  Two-thirds of worldwide luxury goods distribution is through third parties like department stores, which may focus on only a small number of items.  In some cases (think: China) there may not be stores nearby

anonymity  Buyers may prefer to make purchases that don’t advertise their affluence to their friends and neighbors

–authenticity  Buying from a luxury firm’s retail store gives greater assurance that the merchandise isn’t counterfeit

vacation atmosphere  buyers may be less careful about spending when abroad.

How does Bain know this?  Traditionally, the information comes from credit cards, although in today’s world more progressive companies will be using “big data.”  If so, they’re probably not telling anyone, though.

the geographical spending mismatch

Chinese citizens do 25% of global luxury goods spending; China accounts for 7% of worldwide sales

Europeans do 24% of global spending; Europe accounts for 35% of worldwide sales

Americans do 20% of global spending; the US accounts for 31% of worldwide sales

Japanese do 14% of global spending; Japan accounts for 9% of worldwide sales

Everyone else does 17% of global spending, everywhere else accounts for 18% of worldwide sales.

In the aggregate this is an East/West phenomenon.  Yes, Americans do a little bit of luxury shopping in Europe and Europeans in the US.  But Japanese and Chinese citizens do the majority of their personal luxury goods buying abroad.

–China accounts for 25% of the global luxury goods market.  That’s more than any other country.  And it’s up from basically nothing 12 years ago.

–accessories, not apparel   Accessories, typified by leather goods and shoes, are now the largest segment of the luxury goods market, comprising 27% of total sales vs. 26% for the #2 category, apparel.  They’re also growing faster than apparel.  Reasons:  lower prices, greater recognizability, faster innovation

–men, not women…  Fifteen years ago, men made up a third of the luxury goods market.  Today, that’s up to 41%.  The impetus for this change is the emergence of younger male consumers in China.  Now luxury brands are beginning to cultivate males in the US and Europe as well, where men hav e traditionally been second-class citizen, on the view that men “normally” buy less than women–and are much more highly business cycle sensitive customers.

–…except maybe for China, where Bain notes, for the first time I’m aware, that women business owners, “power women,” are becoming a significant force in luxury goods consumption

–off-price  Outlet shopping, long a staple in the US (59% of global off-price sales this year) , has arrived in Europe–and is being rapidly developed from a very low base in Asia.  Bain reports growth in luxury outlet sales from Chinese customers in Europe of up to 100%+.

The category as a whole will likely grow at a 30% clip in 2012, although it will only account for about €13 billion in total sales.

–online  This market, which is still tiny at an estimated €7 billion in sales this year, is growing at about a 25% annual rate.  It’s 2/3 full price, 1/3 off-price, with off-price growing faster.  Private sales, flash sales and sites for men are the hottest sub-categories.

That’s it for today.  Tomorrow, structural features of the personal luxury goods market.

11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (i): short-term performance

the study

Bain and Company published its 11th annual study of the global luxury goods industry in Milan last month.  The study is authored, as usual, by Claudia D’Arpizio, the head of Bain’s luxury goods practice.  It’s developed in cooperation with Altagamma, the Italian luxury goods trade association.  (Thanks to Bain for giving me access to the study, a summary of which can be found on the Bain website.)

three posts

I’m going to write about this year’s study in three posts.

Today I’ll cover Bain’s assessment of the personal luxury goods industry’s prospects for the upcoming holiday season and for full-year 2012, as well as what’s likely to be in store for 2013 and beyond.

Tomorrow I’ll write about the longer-term trends developing in the luxury goods market.

On Wednesday, I’ll add Bain’s view of the geographical structure of the luxury goods market, in addition to–something new this year–the consultant’s sense of where the €212 billion in annual sales of luxury goods stands in the context of the overall €750 billion “market of markets” of all worldwide luxury expenditure.

€ vs. constant currency

The Bain study is framed in euros.  This makes sense, since a majority of the important luxury brands are European and the largest single bloc of affluent customers still remains the EU.  Also, historically the € has been relatively stable.  However, the currency has been uncharacteristically volatile over the past several years, as the Great Recession has brought long-simmering economic, political and demographic issues in the EU to a head.

From an equity investment point of view, it’s no bad thing in an area under economic strain to hold stock in companies with strong global brand names and lots of overseas sales.  So luxury goods firms will find support from local investors.

We’re not all €-based buyers, however.   Also, almost 2/3 of luxury goods sales, and the lion’s share of the growth, lie outside the EU.  For both these reasons, it’s important to separate underlying expansion in demand from fluctuations in currency.

2012

the recent past

The personal luxury goods market hit what was then an all-time peak of €170 billion in 2007.  The market fell by 10% over the following two years to €153 billion in 2009, before rebounding to hit new highs of €173 billion (+13%) in 2010 and €192 billion (+11%) in 2011.

Bain predicts another new record of €212 billion in personal luxury goods sales (+10%) for 2012.

2012 to date

The first two quarters of 2012 are already in the books, showing +14% growth.

Although publicly traded companies have by and large not yet reported 3Q12 earnings (many have fiscal periods ending in October), monthly sales announcements, industry data and anecdotal evidence give us a good sense of how the quarter will play out.  Year on year deceleration is the operative word.  Bain has pencilled in a 7% yoy revenue advance.

two forecasts for the holidays

For the upcoming holiday season, Bain has two forecasts.  Its base case is that 4Q12 will show the same yoy gain as 3Q12, up 7%.  It’s optimistic case is that the holidays will show the same yoy growth they did in 2011, +12%-+13%.  (For what it’s worth–personally, I’m not familiar enough with Ms. Arpizio’s work to have an opinion–both Bain’s base case for 4Q11 (+8%) and is optimistic case (+10%) were conservative.)

Bain continues to project annual +4% to +6% growth in personal luxury goods growth in constant currency over the next several years.  This will be driven by Asian consumers, tourism, deeper penetration of emerging markets and of second-tier cities in developed markets, and rapidly expanding online and outlet channels.  I think this figure may prove to be too low.

Accessories–leather goods and shoes–will likely be the best categories.

weaker than it looks in 2012

2010 industry growth of +13% breaks out into +8% in constant currency and +5% from € weakness

2011 growth of +11% breaks out into +13% in constant currency and -2% from € strength

2012 growth of 10% breaks out into +5% in constant currency and +5% from € weakness.

The Bain study, then, is projecting a continuation of the current environment of slower growth through 2015.

my take

There’s an increasingly large separation between the nationality of the buyers of luxury goods and the places where the purchasing takes place (more about this tomorrow).  If we look at the economies where the large groups of buyers reside,

–China (25% of the market) is, I think, at a cyclical low point from which growth will accelerate next year.  Luxury purchases should be a high-beta function of this rebound.  +20% in 2013?

–Europe (24%) is a continuing mess, from which I’m expecting no better than flat

–the US (20%) is an enigma.  Layoffs of high paid bankers will continue to dampen growth in luxury goods purchases.  But the current slowdown in luxury goods sales is more widespread.  Who knows why?  My guess is that this isn’t the affluent anticipating higher personal income taxes.  Rather it’s the worry, symbolized by the “fiscal cliff,” that gridlock in Washington will undermine economic growth.  Legislators on both sides of the aisle appear refreshingly open to compromise in their post-election statements.  The administration doesn’t sound so willing.  Negotiating stance?…tin ear?  We’ll know more in the coming few weeks.

If I’m correct about Chinese growth in 2013, that country alone will provide Bain’s 5% constant currency growth.  The big imponderable for me is how much the US will add to that number.

At this point, therefore, to me the safest bet–maybe the only safe one–seems to be on accessories sold to Chinese luxury consumers.

better days ahead for Facebook(FB)?

yes

I think so.  Insiders appear to be unwilling to sell at the current market price and Wall Street seems to have forgiven FB for what I regard as the less than ethical behavior of the company’s main underwriter during the IPO.

recent trading

Yesterday marked the end of the third–and final–period over which FB employees and early investors had agreed not to sell shares.  Just north or three-quarters of a billion shares were thereby released from lockup.  Wall Street was bracing for the worst.

But only about 50 million shares appeared for sale at 9:30.  Total volume for the full day yesterday was just under 230 million shares, or about 5x normal.  More important, the stock went up 12.6% in a flat market.

As I’m writing this just after midday Friday, FB is up about 6while the S&P 500 is flattish.  Volume is high again, but I read this as professional investors reacting positively to the small percentage of insider shares that were put out for sale and to the strong price action that soon developed.

the IPO, in hindsight

Not Morgan Stanley’s finest hour.

The main underwriter threw gasoline on speculative flames instead of tamping them down.  And NASDAQ’s computers broke down just as it was dawning on individuals dreaming of instant riches that they’d been had.

That was bad enough.  But the really damaging part of the IPO, to my mind, was the way I think the underwriters “spun” the mandated company disclosure in a way that made FB look better than it is.

Any professional investor would take it for granted that Morgan Stanley knew exactly what it was doing.  The real question is whether company management was complicit in this shady process–in which case they couldn’t be trusted and buying the stock could be hazardous to your career.  On the other hand, maybe FB executives were just too inexperienced or naive to understand what was going on.

The price action of the past two days seems to me to be saying portfolio managers and buy-side analysts have decided the latter is the case.

So, two plusses for FB.