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March 2011
Oppenheimer Analyst Suggests that NWY’s EBIT Margin to Return to its Peak Levels. Not a Chance.
It’s too easy for a traditional sell-side analyst to suggest that a retailer’s EBIT margins “are heading back to their peak.”
Many traditional sell-side analysts use this particular rationale without fully grasping the fact that the competitive environment is much more challenging today than it was just 5 years ago when most specialty retailers achieved their operating margin peaks (e.g. Forever 21 and fast fashion, increased department store competition, Internet, increased store count). The fact is that over the next few years it will be rare for a specialty apparel retailer to return to its historical level of profitability.
An example is New York & Company (NWY – $7.29). NWY should continue to deliver top-line and bottom-line improvement through Q2 2011. Q2 2011 was an absolute disaster of a quarter as the company reported a dismal 8.6% GPM% (GPM% = 22.9% for the year).
Therefore, it’s a low-bar through Q2 2011. The company should be able to easily deliver marked bottom-line improvement in 1H 2011 versus LY. But, in 2H 2011 the profitability comparisons will begin to become more interesting (click here to see the company’s earnings model).
Big picture, we question whether NWY has a reason to be. The retail landscape has changed over the past 5 – 10 years. Today, moderately priced department stores such as Kohl’s and J.C. Penney offer a broader assortment of similar wear-to-work fashions as NWY at considerably lower price-points. NWY has, in our view, become less relevant.
But, we have to chuckle when we read some of the traditional sell-side analyst notes. While we’ve not seen the actual report (feel free to forward), on March 18th an analyst at Oppenheimer upped the target price on NWY. Why? This analyst (we believe it to be Pam Quintiliano but are not 100% certain) made the ridiculous suggestion that NWY “should return to 9% peak operating margins.”
Here is the report’s summary (via Briefing.com):
18-Mar-11 08:06 ET
New York & Co: Color on Quarter ($5.45)
Oppenheimer is raising their tgt to $6.50 from $5.70 following earnings last night. NWY reported 4Q10 EPS of $0.24 (with a $0.04 non-operating tax adjustment), above their/consensus ests of $0.17, guidance of $0.15-0.19 and vs. $0.04 LY. Revenues rose 1.7% to $303.2 mln on a 1.7% comp (vs. -7.7% LY) and a 10% average in-store inventory decline. GM increased 230 bps (150 bps buying/occupancy, 80 bps merchandise margin); SG&A was flat. Operating margin improved 300 bps to 4.1%. 1Q11 guidance implies EPS in line with our/consensus of $(0.09)/$(0.08). They’re encouraged by 4Q results and assert that NWY is in the early stages of a turnaround and should return to 9% peak operating margins…
NWY is possibly the worst performing specialty apparel retailer over the past 5-6 years. The company delivered close to an industry worst -4.7% EBIT margin (ex-Items) in FY 2010. This followed a -2.2% EBIT margin (ex-Items) in FY 2009. It’s hard for anyone to believe that NWY is heading back to a 9.0% EBIT margin. The world is simply much different today and much more competitive than it was in FY 2005.
We would be shocked if NWY were to break-even (flat EBIT margin) in FY 2011. At that point, maybe even Ms. Quintiliano would recognize that a return to an historical 9.0% EBIT margin level is not in the cards for NWY.
Sales Tax Parity May Be the Last Chance for BBY to Remain Relevant
There are plenty of reasons to be skeptical of Best Buy (BBY – $28.86) in the long-term. In a zero-growth macroeconomic environment, it’s difficult to battle an irrational competitor (AMZN) that solely cares about top-line growth at the expense of profitability.
Also, BBY apparently received nothing for that Super Bowl commercial this year. Comp store sales in January/February 2011 were worse than December 2010.
That said, the company did suggest that it planned to finally invest more heavily into online only product to better compete with the AMZN’s of the world. Will this strategic move make a difference? Here’s the quote from the company’s quarterly earnings call last week:
“I would say that the biggest singular thing that we are doing right now, and we began it in the second half of this year, is dramatically expanding our online-only assortment.” “For example, historically we would carry 100 televisions within the store. Now we will have over 400 televisions, of which 300 will be online only.”
What took so long? The inability for BBY management to react (until today) to the competitive threat of the e-commerce channel is a fireable offense.
Finally, we found one other managerial comment of interest in last week’s quarterly earnings conference call. BBY management appears to believe that online retailers such as AMZN will soon have to charge sales tax. Yes, the combination of a larger online selection, brick-and-mortar locations, and sales tax parity have the POTENTIAL to stem the downward slide at BBY.
Brian Dunn – Best Buy Co., Inc. – CEO
I think there’s a couple of other quick points that I think are important as you’re considering this. One, the notion that there are categories that we sell and represent better than anyone in the world that have to be experienced. Home theater is one of those, and we don’t see anything coming down the road that’s going to change the very personal nature of people picking out the home theater componentry that makes the most sense for them. That’s just sort of one example. And the second thing I’d ask everyone to consider — I think there’s changes on the horizon, potentially, around taxation.
And as those things play out, it’s going to change the role of physical distribution and how multi-channel, the online works and coexists with the physical. So we are very, very carefully looking at our square footage. But we are also very clear that there are things we do better that need to be done physically, and we do it better than anyone in the world.
Since the arrival of Brian Dunn, the management team at BBY has been a poor predictor of the future. In 1H 2010, BBY management suggested that the top-line was supposed to improve in 2H 2010 and now we’re supposed to believe the same is true for FY 2011. His crystal ball has zero credibility.
But, if Congress or the states were to begin forcing AMZN to collect sales tax, the shelf life of the BBY business model may be extended.
Retail Geeks in NYC
We hope that you’re enjoying the Retail Geeks blog site and continue to welcome any and all feedback.
See for yourself how our combination of skill sets adds-value to some of the largest retail/consumer focused portfolio managers in North America. If you would like to meet Rob and Leah from Tiburon Research Group and learn more about how we can add-value to your trading/research efforts, please let us know by emailing Sonja Markova at Sonja@TiburonResearchGroup.com. We’ll be in NYC on April 4-5 and have 1-2 slots available to meet prospective clients.
Tiburon Research Group is dedicated to providing the highest quality earnings analytics and store-level primary research in the retail space. Our job is to provide completely independent and objective analysis of North American 50+ retailers. Our research is ‘truly’ unbiased and avoids the regurgitation of managerial spin that has tainted traditional sell-side analysis.
Below you can read our marketing brochure and two recent research notes.
Tiburon Research Group Marketing Brochure
Earnings Preview: BBY
March 22, 2011
The Shopping Cart
March 25, 2011
Retail Sector Facebook ‘Fan’ Winners and Losers – February 2011
Social media is fast becoming the most effective approach to boost brand awareness, understand the customer, get feedback, as well as direct traffic to a company’s web site.
We like to track the Facebook activities and monthly fan base growth for the retailers and brands that we follow (and a few others). Click here to see our compilation of monthly Facebook ‘fan’ numbers for February 2011.
It is worth noting that out of the 188 retail chains/brands covered in this survey, the following were the largest percentage gainers of ‘fans’ in February 2011 versus the prior month:
|
1-800-FLOWERS (FLWS – $2.74) |
97.3% |
Conversely, It is worth noting that out of the 188 retail chains/brands covered in this survey, the following were the lowest percentage gainers of ‘fans’ in February 2011 versus the prior month:
|
7UP (DPS – $36.06) |
0.4% |
Coca Cola (KO – $63.92) had the largest number of ‘fans’ at the end of February 2011 with 22.7 million followed by Starbucks (SBUX – $32.98) at 19.7 million.
Again, click here to see our compilation of monthly Facebook ‘fan’ numbers.
Other notes:
- Wal-Mart (WMT) seems to have really embraced social media over the past 12 months. Fan growth in February 2011 increased +21.8% versus the prior month.
- Why would Pacific Sunwear (PSUN) have a larger ‘fan’ following than Urban Outfitters (URBN)? In addition , the Urban chain’s ‘fan’ growth is anemic.
- While a small base, the Williams-Sonoma (WSM) brand really stepped it up in February 2011 with +31.5% ‘fan’ growth.
- New York & Company (NWY) continues to report impressive month-to-month ‘fan’ growth.
Weekly Top 5 – Five Articles Worth Reading
Police: Angry Taco Bell Customer Fires at Officers Click to Open PDF Article
Customer at Taco Bell in San Antonio starts firing at employees and police when he discovers the Beefy Crunch Burrito increased in price from $0.99 to $1.49. Harbinger of things to come?
Posted: Posted: Monday, March 21, 2011
Source: SFGate.com
With Sales Flabby, Wal-Mart Turns to Its Core Click to Open PDF Article
Why do we have the feeling that Mr. Simon will be unemployed sometime this year?
Posted: Monday, March 21, 2011
Source: WSJ
Judy Collinson Joins Anthropologie Click to Open PDF Article
Sales continue to be weak and there seems to be a lot of changing personnel for a company that believes it has the best merchants in the retail sector.
Posted: Monday, March 21, 2011
Source: WWD
Betsy McLaughlin Exits Hot Topic Click to Open PDF Article
A move that was made probably 5-6 years after it should have been made. Profitability started to fall off a cliff in 2004.
Posted: Tuesday, March 22, 2011
Source: WWD
Burned by Daily-Deal Craze, Small Businesses Get Savvy Click to Open PDF Article
Those wonderful deals don’t always bring the repeat business that many assume that they do.
Posted: Thursday, March 24, 2011
Source: WSJ