Category Archives: Retail

Wal-Mart (WMT)’s earnings miss: significance?

August 16, 2013 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

the coview

Yesterday, WMT reported 2Q13 earnings results, which came in below company guidance.  WMT also revised down its expectations for the rest of the year.  That news followed a similarly disappointing result from Macy’s (M).

Media comment has interpreted these reports as signaling the domestic economic recovery is stalling out, that “pent-up demand” –catch-up buying resulting from purchases postponed during the Great Recession has finally been exhausted.  Now, the talking heads opine, the true “fragile” state of the US economy is finally being revealed.  This realization is why the stock market declined sharply yesterday.

why I think the consensus is wrong

This interpretation may turn out to be the correct one.  But it’s not the only way to look at things.  In fact, in this case, I think the media view is wrong.  Here’s why:

1.  Interest rates went up yesterday.  The 10-year Treasury reached a yield of 2.77% on Thursday; the 30-year, 3.81%.  Both are highs for the year.  In other words, the bond market isn’t seeing economic weakness.  It’s seeing strength that will eventually lead to the Fed raising interest rates.

2.  WMT’s main business is selling food and general merchandise for cheap in no-frills stores targeted at middle- and low-income households.

When Sam Walton started doing this some 40 years ago, WMT had the field to itself.  But success spawned imitators.  In particular, recently, and especially during the recession, the dollar stores have been taking market share away from WMT.  In a way, this a replay of the competition between mainline department stores and specialty retailers that emerged in the 1970s-1980s.

3.  During recessions, people change their buying patterns.  They put off buying big-ticket items.  And they trade down to cheaper alternatives for everyday necessities.  When recession ends, they normally trade back up.  For the affluent, that is already happening.  For average and lower-income Americans, as I read the results from manufacturers of staples, that hasn’t occurred yet.

4.  About 30% of WMT’s traditional customers are low-income Americans.  I read the WMT earnings report as saying that economic recovery hasn’t yet reached this part of the company’s customer base.

This, I think, is the real news in the WMT results.  I think the earnings miss is evidence in favor of the idea that high unemployment in the US is a structural phenomenon that low interest rates can’t cure.  Action by congress and the administration is needed, instead.  But suggesting this is opening a can of worms that talking heads–and the securities analysts who feed them information–would rather not touch.  Easier to say (counterfactually, in my view) that the overall economy is cooling off.

my bottom line:  as a citizen, I have a strong opinion on the structural/cyclical unemployment issue. I think WMT’s weakness is a company-specific issue, not a macroeconomic one.

As an investor, however, there’s no need to either have an opinion on this issue or to make your view a major feature of your portfolio.  Just avoid low-end general retail.

Look, instead, for niche retailers who are showing strong same store sales growth   …or avoid retail altogether.  There’s no rule that says you always have to have retail stocks in your holdings.

Bill Ackman, J C Penney (JCP)’s largest shareholder, is leaving the board. What does this mean?

August 14, 2013 By in Current Market Thoughts, Portfolio management, Private equity, Retail, Stock ideas Tags: , , , , , , , 3 Comments

the JCP board and its CEO search

Bill Ackman is the activist investor who initially targeted (no pun intended) JCP as a serial laggard that could be made to perform better.  Recently, he has argued with the rest of that company’s board–at first in private–about the pace of JCP’s search for a new CEO.  Ackman believes the search could/should be done in two months.  The rest of the board seems to be thinking in terms of nine.

Last week he made public a letter he wrote to the board, which he concluded with, “We can’t afford to wait.”

This week, after being criticized by many, he resigned from the JCP board.

Certainly. the spat between the board and its largest shareholder won’t speed the flow of CEO candidates knocking on JCP’s door.  On the other hand, it won’t deter very many, either, in my view.  What it does do is raise the price the new CEO can command.

The media have portrayed Mr. Ackman as a shallow, petulant Ivy-Leaguer having a mini-tantrum because he isn’t getting his way.  Entertaining and gossipy as that may sound, the media assessment is probably not right.  In fact, Mr. Ackman may prefer that people view the affair this way, because is suggests that everything else, save Mr. Ackman’s personality, is all right.

It isn’t.

what’s really going on

Two possibilities, one based on back-of-the envelope calculations, the other pure conjecture.  Both are based on the idea that the fact of the board disagreement has information in it–and that it’s not gossip column fare.

1.  a castle in the air

Let’s say the properties JCP controls are worth $5 billion.  That’s halfway between brokerage house estimates (which may ultimately come from Mr. Ackman) and the recently announced, but incomplete, Cushman and Wakefield assessment of $4.06 billion.

If we think the rental yield on these assets should be 7%, then the annual rental income from them should be $350 million.  That’s the amount a third-party would pay to do business on those properties.

How much does JCP pay?  I don’t know.  Certainly it’s substantially less than $350 million.  Let’s say JCP actually pays $50 million. This means that in a sense JCP real estate subsidizes the department store operations by the difference between what it could get by renting the properties to someone else vs. operating JCP stores on them.  According to what I’ve written so far, that subsidy is $300 million.  After income tax, that amounts to about $200 million.

Why is this important?

In 2010, the last year before Mr. Ackman brought in Ron Johnson to run the company, JCP made $378 million in net income.  If my numbers are anywhere near correct, over half JCP’s profits came from owning real estate.  In 2011, selling stuff lost money.

Strip away real estate gains over a long period and JCP’s retailing profits look very highly cyclical.  That makes sense, because JCP’s traditional market has been less affluent consumers, whose incomes are the most cyclical.  The company may suffer a lot during recession but makes up for that by making a relative killing as recovery gets into year three or four.

In other words, JCP should be cleaning up now.  Instead, it’s piling up enormous losses.  This spells potential trouble as/when the economic cycle turns down, and–if past form runs true–profits evaporate.

Maybe this is the source of Mr. Ackman’s sense of urgency.

2.  pure speculation

Maybe Mr. Ackman’s chief worry isn’t his projected timeline for JCP’s profits but the structure of the fund he put together to invest in the company.  He’s told reporters that his cost basis in JCP stock is $25.  But he may have financial leverage or options or other derivative instruments that make the risk/reward clock tick faster for his fund than for JCP itself.

Whatever the cause of Mr. Ackman’s behavior over the past few weeks, it’s almost certainly not simply pique.

Bain Luxury Goods Spring update (II) : structural changes in the luxury market

June 21, 2013 By in Asian economic development, Bain luxury goods study, China, economics, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , Leave a comment

structural changes

Yesterday I wrote about Bain’s analysis of prospects for global luxury goods sales in 2013.  Today, I’m going to take a look at what the consulting company perceives as possible structural changes in the worldwide luxury goods market.

There are two big ones:

Asian tourists remaining closer to home

Japan:  Twenty years + of economic stagnation had finally begun to take a toll on the seemingly insatiable Japanese demand for European luxury goods a few years ago.  Recent sharp devaluation of the yen has depressed this appetite further.  Skeptics (like me) of the ultimate success of Abenomics must believe that this is a permanent change.  Given that, pre-devaluation, the price of luxury goods in Japan has typically been much higher than elsewhere, the negative effect of lower Japanese spending on the profits of luxury goods manufacturers will probably be disproportionately high.

China:  Weakness of the renminbi vs. the euro is a mild negative.  More important, Bain points out that Chinese luxury buyers are beginning to turn away from Europe toward Macau, Hong Kong and Australia as vacation destinations.  On the surface, it shouldn’t make much  difference whether Chinese customers on holiday buy in France or Cotai.  However, the change in vacation travel venue may give a significant opportunity for budding Pacific-based luxury brands to take business away from European rivals.  I think this is already happening.

the Baby Boom passing the baton

Bain characterizes the luxury goods preferences of different age groups as follows:

Baby Boomers (55+)  want:

–a bricks and mortar store

–a one-to-one interaction with a salesperson who represents the brand ans who also knows them well

–high-priced scarce or one-of-a-kind items that they think confer status on them individually as people of unusual taste and means

–a formal buying ritual.

In contrast, Generation Y (20-35) and Generation Z (0-20)–i.e., the children of Baby Boomers–want:

–instant availability 24/7, whether through physical stores or online makes no difference

–to be defined by brand values, but to be able to influence those brand values as well

–unique or novel items, which are not necessarily the most expensive, but which are personalized and which identify them as members of a certain group

–to be entertained.

In a nutshell, this is the difference between buying statement jewelry in a private room and buying a handbag in an online flash sale.  The branding, selling and infrastructure skills differ greatly from the first transaction to the second.

This difference in outlook is increasingly important, because the Baby Boom is retiring and its children are emerging as a new generation of luxury buyers.  One might even argue–with how much validity I’m not sure–that the sudden drying up of demand for traditional high-end European luxury goods in Japan is mostly a function of an aging population and a shrinking workforce.  If so, we may begin to see the same phenomenon in Continental Europe before this decade is out.  Again if so, luxury goods companies that don’t refocus themselves to cater to the preferences of a younger generation of consumers will find themselves struggling to retain relevance.

Bain Luxury Goods Worldwide Study: Spring 2013 update

June 20, 2013 By in Bain luxury goods study, Industry Analysis, Luxury goods, Recent Market Action, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

Consulting firm Bain issued the latest in its series of important studies on the global luxury goods industry last month.  Thanks to Bain, I’ve just received a press copy of the study itself.

I’m going to write about it in two posts.  Today I’ll cover Bain’s view of industry prospects for 2013.  Tomorrow, I’ll write about longer-term structural changes underway for luxury goods.

2012 results

(It’s important to note that the study, conducted by well-known Bain analyst Claudia D’Arpizio, is done in cooperation with the Italian luxury goods trade association, Altagamma.  This means the sales figures are presented in €.  Also, the concept of luxury goods used has a strong traditional European emphasis.)

in € terms

In € terms 2012 was an above-trend sales year, one very close to being on par with 2011.  In both period luxury goods revenues grew by just over 10%, in an industry whose long-term growth rate is closer to +5%-6%.

in constant currency

In constant currency terms, however, 2011 was a +13% year (meaning strength in the € understated how strong the worldwide luxury good business was).  In contrast, 2012 was a +5% year in constant currency (meaning half the revenue rise came from € weakness).

the holiday season

Four factors characterized the key yearend holiday sales season in 2012:

–weaker than expected traffic in the US and Europe

–purchases tended to be for the buyer’s own use, rather than as gifts for others

–online sales, especially mobile, were very strong

–online sales were increasingly driven by special offers and by discounted shipping

2013 prospects…

1Q13 appears to have been a low point.  Sales were up a mere 3% year-on-year in constant currency.  € strength cut that in half in current currency terms.

Bain forecasts a 4%-5% full-year rise in €-denominated sales.

…by region

Japan:  Sharp devaluation of the ¥ has had a strong negative effect on Japanese luxury goods consumption–driven by the resulting loss in wealth and purchasing power of Japanese citizens.

Bain expects luxury purchases by Japanese abroad–notably Hawaii and the EU–to be down by 40% yoy as foreign travel declines and because $- or €-denominated goods have become less affordable.

Bain estimates that an estimated 10% increase in domestic luxury goods purchases will offset some of the shortfall.  But the overall effect will be about a 20% yoy contraction in luxury goods consumption by Japanese this year, a figure more or less in line with the fall in the Japanese currency.

In  Bain’s view, continuing ¥ weakness will limit the luxury goods industry in Japan to +4%-6% growth in € terms in 2013.

China

Chinese spending on luxury goods grew by 20% in constant currency last year, and by 30% the year before.  Bain is forecasting a relatively modest increase of +7% for 2013, however.

The main reason is change in policy by the newly installed central government.  The new leadership in Beijing is discouraging conspicuous consumption by the ultra-wealthy, particularly those with family connections to high-level present or former Party officials (although Macau gambling doesn’t appear to be suffering).  Perhaps more important, the administration has launched an anti-corruption campaign aimed at the widespread soliciting of “gifts” by officials from those seeking, say, business or construction permits.  Some estimates I’ve heard are that such gifting has made up as much as 25% of the sales of certain luxury brands.  Bain only mentions that sales of watches have been especially hurt.

No mention of a shift away from European to domestic Chinese luxury brands, but I think this is also part of the story.

Europe

Although it seems to me that Europe has passed its cyclical low point, and will gradually improve through 2013, the region will scarcely grow at all this year.  As a result of continuing economic weakness, aspirational buyers of luxury goods continue to trade down.  Japanese tourism has slowed dramatically.  And Chinese visitors are purchasing less on their European trips, as renminbi weakness makes €-denominated goods look more expensive.

Bain pegs European luxury goods sales in 2013 at 0%-2% growth.

US

Bain has little to say–good or bad–about US luxury goods buying.  It has penciled in growth of +5%-7% for this year.

the world

Asia ex China’s the best, at +7%-9% growth.  China’s a close second.  Europe’s the worst.  Overall, Bain thinks worldwide luxury goods sales will advance by +4%-5% in 2013.

More tomorrow.

a promising 1Q13 for Tiffany (TIF)

May 29, 2013 By in China, Current Market Thoughts, earnings conference calls, economics, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

my bottom line on the stock

I no longer hold TIF.  Great company, expensive stock (the current 22x fiscal 2013 eps is at the high end of the company’s historical PE range).  Also, thematically, I’d prefer to get Consumer Discretionary exposure through firms that cater to average Americans, the segment where I think spreading economic rebound will bring the best year-on-year earnings gains, rather than the affluent.

Nevertheless,

TIF is an important bellwether

for how the wealthy, foreign tourists and China are feeling. So the results are well worth monitoring.   All three  groups appear to be starting to come out of their recent spending funk.

April quarter results

Tiffany reported 1Q13 (ended April) results before the bell yesterday.  They were surprisingly good.  Worldwide sales were up by 9%, yoy.  Eps came in at $.70, also up 9% over the $.64 posted in the year-ago quarter.

The figures were massively better than the consensus estimate of Wall Street analysts, who had penciled in $.52 for the April period.  This is also the first quarter in the past five where yoy earnings gains have been significant.  And 1Q13 exceeded the previous high water mark for the first quarter of $.67 a share set in 2011.  Good news.

all regions looking up

Here are TIF’s yoy sales gains by region:

US          +6% in 1Q13   vs    +2% in 4Q12

Asia Pacific          +15%   vs     +13%

Japan          +2%    vs     -6%

Europe          +6%     vs      +3%

Total         +9%  in 1Q13     vs.     +4% in 4Q12

a dividend increase

Two weeks before the earnings report TIF’s board increased the quarterly per share dividend from $.32 to $.34.  On the one hand, the rise comes at the normal time of year for TIF.  And the bump up is smaller than 2012’s.  On the other, if we make the reasonable (to me, anyway) assumption that the board of directors is targeting a payout of 25% of cash flow and/or a third of profits, the dividend increase signals there’s still upside to the Wall Street consensus.

More important, the board is comfortable that business is improving.