the Bain luxury goods worldwide study, winter 2015

I haven’t owned Tiffany (TIF) for a long time, but the ticker is still on my screen.  Watching the stock slide on a weak earnings report yesterday prompted me to look for the latest Bain study of the luxury goods industry, which was published about a month ago.

Although structural change is not the main focus of the report, that’s what really jumps out to me from it.

exiting the twentieth century…

Fifteen years ago, the personal luxury goods market was perhaps 40% European purchasers, 35% American and 25% Asian, most of that being Japan.  Each purchased primarily in his own region.

Although the report doesn’t mention this, the pricing structure for identical items was/is 100 in Europe, 120 in the US and 140 in Asia.  This difference is partly a function of import tariffs outside Europe, partly a judgment about what the market would bear.  Asian sales were unusually lucrative because, in addition to the much higher selling prices, wholesale margins were significantly higher and most profits recognized in Hong Kong, where the corporate tax rate for international concerns is zero.

Virtually all sales were at full price.  European luxury goods makers had few retail stores;  their distribution was primarily wholesale.

…and now


Chinese consumers, who represented 1% of the market in 2000, accounted for about a third of all purchases in 2015.  Japanese consumers, who were about a quarter of the market at the turn of the century, now make up about 10%.

Today, sales in Europe and the US each make up about a third of the personal luxury goods market, with Japan and China dividing the rest about equally.  However, more than half the European sales are by extra-regional tourists.  About a third of US sales and 25% of Japanese are also by tourists.  Tourist sales in China are negligible.  I’m not sure why; high prices and counterfeiting are my guesses.

Looked an nationalities a different way, European customers buy 90% of their luxury goods in Europe in 2015.  Americans bought almost exclusively in the US, with a tiny fraction in Europe.  Japanese consumers made 40% of their purchases outside Japan, primarily in non-China Asia, with the US and Europe taking smaller slices.  Chinese consumers bought only 20% of their luxury goods domestically last year.   They made about 30% of their purchases in Europe, another 25% elsewhere in Asia and the rest in the US and Japan.

One of the factors driving the large tourist market is, of course, the much higher domestic prices for Asians.  A second is the significant currency depreciation of the yen and the euro, which have made not only foreign stays but also foreign luxury goods purchases much less expensive.

10% of the global market is now in off-price stores.  That’s double the percentage of three years ago.  Markdown sales, including off-price stores, accounted for about a third of the market last year.

7% of sales are online, most of that in the US.

an inflection point

Bain thinks–correctly, in my view–that much greater awareness of regional price differentials, significant recent currency fluctuations, the rise of markdown sales at a time of steady price increases by luxury goods manufacturers have all conspired to undermine the belief that branded luxury goods have enduring value.

I suspect there’s more at work as well–generational change and the rise of new high-end local brands with greater appeal to younger customers.


Back to TIF for a moment, the company’s announcement that it expects a 10% fall in earnings for fiscal 2015 and “minimal” earnings growth in 2016 limits its near-term appeal.  At some point, though, it could become attractive again, despite ructions in the overall luxury goods market.  …$50 a share?


4Q15 for Intel (INTC)

After the close last Thursday, INTC reported results for 4Q15 and the full year.  For the final three months of last year, INTC posted revenue of $14.9 billion, operating income of $4.3 billion, net of $3.6 billion and eps of $.74–all better than the Wall Street analyst consensus. The company also announced an 8% increase in the dividend, to a yearly total of $1.04.

Nevertheless, in Friday trading the stock was down by 9.1%.

What’s going on?

There are lots of moving parts, but in a nutshell INTC appears to be forecasting another flattish eps year for 2016–vs. market (and my) expectations of a return to earnings growth.

The main reason is softness in demand that INTC is already experiencing in its important Asian markets, particularly in China.  My back of the envelope calculation is that pre-tax income for INTC will still be up by about 15% this year, despite a China slowdown.  But I think the shift of business growth from Asia to the US + the EU is the main reason the company is projecting a rise in its income tax rate from 19.6% in 2015 to around 25% this year.  That’s enough to wipe out virtually all the pre-tax improvement in the business.  So the bottom line remains basically unchanged.

Another worry:  during 4Q15 revenue from INTC’s important server business decelerated from a 10%+ growth rate to just over 5%.   Operating income fell by about 4% yoy, as high margin cloud sales cooled while low margin networking sales boomed.  INTC points out that 4Q14 was a record quarter, so simple yoy comparisons may be misleading.  It also says that the fourth quarter has become important enough for online sales that cloud customers don’t want to fool with their websites by installing new equipment.  So for its most important class of customers, 4Q is no longer the seasonal peak for orders, as it has been in prior years.

Two oddities:

–for reporting to shareholders (financial accounting)  INTC is changing the way it expenses the chip manufacturing equipment it uses.  It previously wrote their cost off in equal installments over four years.  It’s now going to use five.

Nothing changes in the way the business is being run or in the way the equipment is written off for income tax purposes.  But annual depreciation cost on the income statement will be about $1.5 billion less than under the old method.  In broad terms, this is enough to offset the rise in the tax rate for 2016.  It’s also the largest factor involved in my thinking pre-tax income will rise significantly in 2016.

It’s hard to know whether Wall Street will regard this accounting change as a good thing of a sign of weakness.  I presume algorithmic traders won’t care.

–for the past couple of years, INTC has tried to buy its way into the tablet business by essentially paying customers to use its chips (the company calls this support contra revenue).  The company appears to have pared back the subsidies significantly during 4Q15.  Tablet units decreased from 12 million in 4Q14 to 9 million in 4Q15, as a result.  But overall tablet revenues increased.–and operating losses in the segment appear to have shrunk.

My bottom line:

For the moment, I’m content to hold the stock.  There’s enough evidence from other hardware companies to suggest that the Asian slowdown is an industry phenomenon, not an INTC specific one.

We’ll also know in a quarter or so whether the cloud business bounces back or not.  Given the significant shift in retail from bricks and mortar to online this holiday season, I’d expect to see strength in cloud orders during 1Q16.

Finally, I’m a bit troubled about the change in depreciation policy.  The effect is to make earnings look better than they would otherwise be.  Is that the purpose, though?  Was INTC forced to do so by its auditors, or is this simply optics (which would be a very bad thing, in my view)?  I’m not sure.

three S&P 500 levels to watch

I’ve written before that when all else fails, when there seems to be no rhyme or reason to the daily movement in stock prices, even the most fundamentals-oriented portfolio manager closes his door and starts to look at charts.

At one time, technical analysis was a respectable occupation–no door-closing needed.  But that was in the first quarter of the last century, before the Federal government began to force publicly traded companies to present meaningful financial statements.  It’s also before Washington clamped down on manipulative behavior by large investing syndicates and on trading on inside information, types of activity that studies of trading volume and daily price movements were designed to detect.

However, when stock prices are being driven by greed, or in the present case, by fear, it may make sense, even in today’s data-filled world, to take a look at index points where investors have been willing to buy and sell in the recent past.


Three S&P 500 levels stand out to me.  They are:

–1867, which is the intraday market low of August 24, 2015

–1871, which is the intraday low the market returned to on September 28, before starting to rise again, and

–1904, which represents a 10% decline from the latest intraday high of the S&P 500 on last November 3 (the close that day was 2109–a 10% decline from the close would be 1898).


The S&P 500 fell sharply to 1878 in early trading yesterday, before reversing itself and closing at 1921.

The market closed at 1890, two days ago, which is more than 10% below both the high and the close of last November 3rd.


In technical terms, then, we’re at an important juncture.  We’ve fallen by 10% from the highs and are flirting with an important low around 1870.  As I’m writing this, futures are indicating an open for the S&P around 1880.  This in itself could be a source of traders’ anxiety.

If the market can stabilize at current levels, it’s possible that fear will gradually ebb away.  If not, we’ve got to go back to the drawing board and figure out where next level of potential market support may be.  1815?



GoPro (GPRO) and the mood of the market

a concept stock

I’ve watched GPRO from the sidelines since it went public in mid-2014 at $24 a share.  It’s the maker of the HERO line of wearable cameras for self-recording sports action.

The stock peaked at close to $100 a share in October 2014, amid discussion that the real value of GPRO was not in the devices themselves but in the potential for creating a YouTube-like video sharing network that could, Wall Street proponents thought (and wrote), add billions of dollars to the company’s market cap.

a long fall

The stock closed regular trading yesterday at $14.61 (!), up a penny from the day before.  According to Reuters, of the 20 analysts that cover the company ten are still bullish and eight neutral.

last night’s bad news

After the close, GPRO announced that the seasonally most important fourth quarter sales would fall 14% below the company’s prior guidance.  As I’m writing this trading in New York has just begun and GPRO shares are down about 19% at around $11.70 and are trading at a little less than 10x trailing earnings.

What has changed since GPRO was a $100 stock?

It’s not the company, although one might quibble that management must have known that 4Q15 would be problematic at least a month ago.

No, GPRO is still the same one-product niche firm whose chief protections from the predatory urges of much larger consumer products firms are:

–its first-mover advantage and

–the presumption that its target market is too small for the big boys to be interested in.

Yet that relatively thin story was worth 80-90x anticipated 2015 earnings in late 2014 and only 10x actual earnings now.

How so?

What’s changed is the tone of the stock market.  It was bullish/speculative in late 2014, meaning that market participants factored good news into stock prices and ignored bad–at times concentrating on the lipstick and ignoring the pig.  Today, buyers and sellers are much more alert to possible bad news and less interested in dreaming about how profitable the long-term future may be.

I don’t think the the more sober tone has much to do either with oil or China.  I think it’s all about preparing for a higher interest rate world.  Yes, to my mind, the market has now gone a little bit overboard on the negative side.  Still, I don’t expect a change in mood any time soon, maybe not until we’ve had one or two more interest rate hikes.

The lesson I take from GPRO, and the main reason I’m writing about it today, is that we should look long and hard at any stocks we hold where the main virtue is the long-term concept/story.   For a while at least, the market’s driving force will be PE, not the dream.
 and stocks

A couple of days ago my California son sent me a picture of a Stockpile kiosk in an office supply store.  I’d known about the company, a subsidiary of stock market clearing house Apex, for a while but hadn’t looked into it before this.

The idea is that you can buy or gift small fixed dollar amounts of high profile stocks, like Amazon, Nexflix or Tesla, or index ETFs for that matter, either using a gift card you buy in office supply stores, supermarkets etc. or find online (gift card or e-card) at  The recipient can either redeem the card for cash or use it to purchase fractional shares of the stock whose name is on the card.

My son’s first reaction is that this is a symptom of the kind of craziness that marks the top of a stock market cycle, like when strangers on the subway start to trade stock tips or when a cab driver does the same thing, explaining he’s a day trader who now drives as a hobby.  (I was a cab driver in Manhattan once and I can’t imagine anyone doing this who doesn’t have to.)

My hunch is that this isn’t a sign of the market topping, however (I’d be more worried if the kiosk offered bonds).  Of course, I think I’m pretty good at recognizing bottoms, but I know I’m bad at seeing tops.

Rather, I think this is another step in the evolution of stock investing away from the traditional brokerage model.  That model has three main defects:  the prices are outrageously high; the brokerage salesperson (around 90% are men) has no legal responsibility to do what’s best for the client; and in my experience the service and advice are poor., in contrast, is bare bones.  No advice.  All trades are done at the day’s closing price.  Commissions are $.99 a trade.  And, of course, you can buy and sell fractional shares.

Target customers appear to be either impulse buyers, desperate gift givers or younger investors without much money to spare.  It’s hard to know how long the service will stay this way or how it will evolve.

I remember speaking with traditional brokers when marketing my mutual funds who believed (correctly, I think) that many clients kept most of their investment assets with Fidelity or Charles Schwab.  That way they would get advice from their brokers but only do, say a third of their trading at several hundred dollars  pop and the rest for $7 or $8 with a discount broker.

Maybe Millennials will end up keeping a third of their money with Fidelity or Schwab to get access to the statistical information they have available but do most of their trading for $.99 with Stockpile.  Maybe retiring Boomers, now more money-conscious, will do the same thing.

My overall reaction:  another evolutionary step, another nail in the coffin of traditional brokers.





Millennials and job-hopping

Knowing my interest in the behavior of Millennials, my friend (and regular reader of PSI) Bob sent me a link to a 538 Economics article on Millennials and job-hopping.  The post is short and worth reading, as is most everything on 538.

538 says that if we follow press accounts, Millennials are inveterate job-changers.  We can see this, the argument goes, if we compare how long they hold down a given position vs. the behavior of the cohort a decade or so older than them.  The numbers are clear.  Millennials change jobs more frequently than their older brothers and sisters.

So far, so bad.  This is the wrong comparison.  The real question should be, 538 says, how the behavior of Gen Xers compares with that of Millennials when Xers were the same age as Millennials are now.  Government data show that when they were 20-somethings, Gen Xers were more rapid job-changers than Millennials are now.

As 538 puts it, “The myth of the job-hopping millennial is just that — a myth.”

Why is this interesting, other than the gotcha moment for the press?

The virtue of the “bad Millennial” story is that it’s attention-grabbing, initially plausible, doesn’t require much thinking and is easy to write.  The not so good part is that it’s wrong.

We can probably figure this out, especially if we have friends like Bob.  I wonder how the newsfeed reading and parsing computers run by algorithmic traders deal with stuff like this.  Not well, I would think.

I think this kind of situation should present continuing opportunities to take a contrary position.  As always, one trick will be to try to figure out when momentum has shifted far enough in the wrong direction to make this profitable.  Another, harder one, will be to figure out when the pendulum has gone far enough and will soon begin to reverse itself.