RetailGeeks

One per caller, please

How convenient for The Gap (GPS - $11.30) management to avoid an insightful question with the old "we're limiting callers to one question each" trick.  The reality is that Glenn Murphy has done a great job cutting expenses.  BUT, he's done a miserable job improving the product and/or getting consumers in the store.  In addition, Mr. Murphy has continuously suggested of late that Todd Oldham and Patrick Robinson would begin to improve the product by Summer/Fall 2008.

We don't believe that CEO Glenn Murphy has a clue as to when the product will improve (he does not seem to have any previous specialty apparel experience).  So, what happens when someone wants to query you on the success of your two key designers?  You avoid the question!

Question:  Glenn, could you evaluate the contribution or success level of Patrick Robinson and Todd Oldham to Gap and Old Navy?

Answer:  We are going to limit it to one per caller.

   

Desperate Times Call for Desperate Measures

The perennially disappointing family run department store Dillard’s (DDS - $10.43) recently unveiled grade school level yellow sale signs in an effort to reduce its clearance inventory levels.  This strategy was certainly employed at the last minute. 

Can the visual merchants come up with something better than makeshift yellow signage advertising heavy clearance discounts?

Not Smarter Than Your Average Bear

Today, Build A Bear (BBW - $7.58) reported dismal financial results for Q2.  Nothing new here.  The company has consistently underperformed. 

But, take a look at this chart.  Same store sales in the Q2 fiscal quarter have dropped a dramatic -53% over an 8-year period.  Wow! 

Of course, the company continues suggest that all of its stores are “cash flow positive.”  We’d love to see the definition of “cash flow” at BBW. 

The company generates enough cash each year to keep the doors open.  But, this is certainly a dead business model walking.

   

An Unsafe Way to Boost Revenue

A desperate attempt to drive same store sales?

Safeway (SWY - $26.63) recently announced disappointing same store sales for its 2nd quarter.  But, this?  Safeway is currently mailing $10 off $50 Purchase coupons via mailers (good through through August 14, 2008).

These new mailers are similar to the 20% off coupons sent regularly by Bed, Bath, & Beyond (BBBY - $29.44) but offer Safeway cardholders four $10 off coupons (ug, one per week?).

 

Earnings with Integrity?

We just listened to the Chipotle Mexican Grill (CMG - $83.80) quarterly conference call.  How can a restaurant chain report +7.1% comp store sales, yet watch its Restaurant Margin decline 80 basis points?  Higher food costs are understandable, but they only accounted for 30 basis points. 

It’s a scary sight when a retailer or restaurant cannot drive profitability higher despite large comp store sales gains. 

One other note to management - the analyst community does not care to listen to 5 minutes of dribble related to your management development program and your corporate culture.  We care more about how you believe you can continue to drive EPS higher +25% each year with slowing relative store growth and restaurant margins that are now declining.

The Hyperinflation of PNRA's Performance

We enjoyed listening to the following quote from the CEO at Panera Bread (PNRA - $51.00) this morning:

“Frankly, I’ve been looking forward to this call for some time.  Simply put, we had a great Q2.  The EPS was up and the future looks bright.  This is particularly so when one considers the hyperinflation in wheat we are presently absorbing and the extraordinary weakness in our economy that we in this industry confront.  So rarely have I felt so good about a quarter.” 

Let’s not get too carried away, Mr. Schaich.  This quote is symbolic of the many times when the media and Wall Street analyst community heap mis-placed praise on a company that, at first glance, is outperforming its peers.  But, the reality of the situation is that PNRA greatly underperformed last year. 

In Q2 2007, the company’s Restaurant profitability declined approximately -400 Bps versus the prior year.  Therefore, Q2 2008 was a layup quarter for the company.  In essence, the company only got back approximately half of the ‘lost’ profitability from the train wreck fiscal quarter a year ago.

There will be a lot of research notes written today that are likely to praise the company for its relative outperformance versus its peers.  But, PNRA stumbled badly a year ago.  Too many times Wall Street analysts and the financial media compare a company's financial performance versus last year without thinking through how easy or difficult the comparison was.  Many of PNRA's peers delivered strong performances a year ago and had more difficult comparisons this year.

Kentucky Fried Earnings

Yum Brands (YUM - $36.47) reported EPS of $0.45 in Q2 2008 this afternoon.  Analysts were expecting $0.42.  But, the company reported a 14.8% tax rate after previously forecasting a tax rate that would be “significantly higher than the 21.5% rate” in Q2 last year.  Assuming a tax rate in Q2 2008 in the 25% range, it could be argued that YUM artificially generated $0.05 to $0.06 in Q2 2008 to pad their earnings report.  Therefore, YUM materially ‘missed’ the consensus EPS expectation.   

CEO David Novak went on the offensive in his company’s press release by proudly exclaiming that YUM was raising its full year EPS outlook by $0.02.  Yet, any rational analyst would see through the optics and discern that YUM was only able to raise its full year EPS guidance via a materially lower tax rate in Q2 2008. 

Here’s what is truly going on once you sift through the spin.  YUM’s US division has now reported a year-over-year decline in Restaurant Profit in 8 straight fiscal quarters.  YUM’s China division has reported similar year-over-year Restaurant Margin declines in 5 straight fiscal quarters.

YUM management has always been extremely promotional (i.e. discussing operating performance in “glass half full” terms).  At every opportunity, the company implores analysts and investors to concentrate on the China story.  But, it’s now time to think outside the bun and find a management team that can improve the profitability of these businesses. 

This incessant managerial spin and focus on China's top-line growth is only masking the true ills of the company's profitability implosion. 

Made Not So Well

J. Crew Group (JCG - $28.55) recently opened a new Madewell location in Atlanta, GA at Lenox Square Shopping Center.  Naturally, the sheepish media at WWD lauds the opening and the equally sheepish sell-side analysts jump up and down in affirmation.

Here’s the problem.  Madewell is expected to lose $15 million in the current fiscal year.  Only 6 stores were open at the end of January 2008 and the company will likely only open a handful of new stores this year.  Therefore, the company is losing AT LEAST $1 MILLION PER STORE. 

The WWD reporter, Georgia Lee, went on to suggest that “industry sources project first year sales of $2.5 million to $3.0 million for the 3,000 square foot store.”  We’re not sure who her sources are, but we do know that it’s completely illogical to believe the store will do upwards of $1,000 of sales per square foot in its first year.  Why?  If Madewell was pulling in even $500 per square foot, the chain would likely be handsomely profitable. 

So, put us down for $300 of sales per square foot as our estimate for sales in the first year ($900K).  Also, we predict this store will close within a year as JCG management finally realizes that this chain was DOA (dead on arrival).  This chain has no reason to be. 

Ms. Lee could use some new industry sources.   

Dumb Money

Discount clothing chain Steve & Barry’s announced its Chapter 11 filing last week.  The press is focused on the drying up of the company’s leasehold incentive payments as the primary contributor to the company’s bankruptcy filing. 

But, the media is focused on the wrong thing here.  Most retailers receive leasehold incentive payments when signing long-term leases.  But, Steve & Barry’s filed Chapter 11 because of its inability to conserve capital and more effectively plan its growth. 

Many retailers have negative operating margin, but generate a modest amount of cash on an EBITDA basis.  It’s takes years for a retailer to die once the stores are built.  Ex-BBA, ex-LIN, and ex-SHRP are prime examples of retailers that lost money hand over fist for many years before finally filing for Chapter 11.  As best as we can discern at this juncture, Steve & Barry’s only lost money for a couple of years pre-filing. 

This leads us to TA Associates, a private equity firm that funneled $320 million into Steve & Barry’s coffers in late-2006 for approximately half of the company.  How could a legitimate private equity firm allow such dismal capital decisions to be made in such a short timeframe?  We’re not surprised though.  Generally, the private equity folks that we’ve met over the years are brilliant MBAs but have little insight into the consumer/retail industry.  How many times do we have to watch many of these retailers file for Chapter 11 shortly after buy-out from the supposedly “smart money” (see Linens N’ Things, Whitehall Jewelers, Goody’s, Claire’s, etc.) before determining that private equity investors are more appropriately labeled the “dumb money.”

Don’t Want to Play By the Rules… Just Change ‘Em

Today, Macy’s (M - $15.58) CEO Terry Lundgren issued a letter to his executive team indicating that same-store sales at Macy’s, Inc. are “down 1.9%” for the months of May and June.  This letter was clearly meant to reassure the management team that the company is performing well and to dispel any notion that the company is anything less than financially healthy.  It’s clear that the investor community assumed that comp store sales were much worse than -1.9% in the quarter-to-date period. 

The problem is that the company this year decided to stop releasing monthly same store sales results in favor of quarterly disclosure.  The company also decided against providing quarterly EPS guidance.  Theoretically, this shift was supposed to result in a less volatile stock price and a management team that was more appropriately focused on longer-term metrics.  Yet, when the company’s stock price implodes, YOU CHANGE THE RULES!

In our view, the M management team is loaded with B-players and they were never able to deliver upon most of the promised synergies from the May acquisition (despite a great economic environment).  Actually, M management has struggled for years to deliver upon its quarterly sales and earnings guidance (hence, likely why they just gave up providing guidance this year).  But, this was a rookie move by Mr. Lundgren. 

It’s also worth noting that there was no discussion in his letter to the management team re: profitability in the quarter.  We can’t wait to see how much profitability imploded when quarterly earnings are released in mid-August.