Overstock.com Released From Google ‘Penalty Box’ Click to Open PDF Article
Links to “.edu” web sites appear to be given priority by Google’s search algorithm. OSTK management suggested on yesterday’s conference call that it was in the penalty box for approximately 8 weeks beginning in the latter half of February.
Posted: Posted: Tuesday, April 26, 2011
Source: WSJ

Landlords Try Thinking Outside the Big Box Click to Open PDF Article
It’s important to note that not only are vacancy rates higher, but lease rates have plummeted as well.
Posted: Wednesday, April 27, 2011
Source: WSJ

Saks Unveils Aggressive Game Plan Click to Open PDF Article
If SKS could close more stores, they would. Anchor tenant restrictions are the only thing standing in the way.
Posted: Wednesday, April 27, 2011
Source: WWD

Leifsdottir Wholesale Business to Close Click to Open PDF Article
What’s interesting is that we had not seen the Leifsdottir product in an Anthropologie store in over a year. This was a dud since day #1 and should be a warning to traditional sell-side analysts that are currently fawning over the BHLDN bridal concept. In our view, URBN management should keep this press release handy because 2-3 years from now they’ll be issuing a similar press release for BHLDN.
Posted: Thursday, April 28, 2011
Source: WWD

J.C. Penney Launches Big and Tall Concept Click to Open PDF Article
Another entrant into the big-tall arena. While we doubt JCP will have much success with The Foundry, we have to admit that we love the idea of having the Dallas Cowboy cheerleaders visit stores for the grand opening. That almost makes us want to put on a few pounds and attend opening day festivities.
Posted: Thursday, April 28, 2011
Source: WWD

This week, P.F. Chang’s Bistro (PFCB – $40.35) reported disappointing earnings for Q1 2011. The company’s $0.44 fell well short of the consensus estimate and the stock price took a hit. What was even more disappointing was the fact that Q1 2011 was the company’s easiest 2-year profitability comparison for the year (see pages #2 and #3 in our company Data Packet here). It only gets more difficult for PFCB in the quarters ahead.

Here’s where it gets interesting. In FY 2009, PFCB management unveiled a 3-year Performance Unit incentive for its Co-CEO’s that is simply tied to the company’s stock price (relative to the Russell 2000). The measurement dates are February 17, 2009 and January 1, 2012. As of today, both the Russell 2000 (861.75 today versus 428.90) and PFCB ($40.38 today versus $20.15) have almost exactly doubled since the plan’s inception.

Which now begs the question. Why do management teams tie a material bonus incentive to the stock price? We understand that investors want management to have the same incentives as investors (i.e. stock price). That’s a noble thesis. But, this bonus plan introduces a set of perverse and conflicting managerial incentives as we get closer to the January 1, 2012 measurement date.

For example, PFCB will report Q3 2011 earnings in late-October 2011. PFCB management will be heavily incentivized to shift expenses out of Q3 2011 and into Q4 2011 (e.g. shift bonus accruals into Q4 2011).

What if a key member of the management team wants to leave the company in early-December? Maybe this information would instead be announced in January 2012.

What if the company’s CFO decides that its annual EPS guidance range needs to be lowered in early-December? Well, PFCB’s Co-CEO’s would have a MAJOR incentive to wait until January 2012 to make that announcement.

Finally, did PFCB management artificially deflate earnings in Q1 2011 in favor of reporting stronger numbers in Q2/Q3 2011 as the company gets closer to the January 1, 2012 measurement date (i.e. does the company want to ensure that they’ll report strong numbers in Q3 2011, just two months ahead of the measurement date)? We were forecasting EPS of $0.58 in Q1 2011 as the company lapped easy profitability comparisons.

We’re not saying PFCB management would do any of the above. It is our belief that the company’s management team has always been honest and transparent in their dealings with investors. But, a material performance unit incentive that is tied to the company’s stock price introduces a dynamic this year that will force investors to question how the events of the next 8-9 months unfold.

We would have preferred a bonus plan that was tied to comp store sales AND operating margin improvement. PFCB was coming off a dismal year in FY 2008 as its Restaurant Margin and EBIT margin hit all-time lows. Material improvement versus those lows could have been incorporated into a bonus plan that rewarded management for its operational improvements (the top-line at the core chain has continued to decline since FY 2008).

The irony is that the flagging stock price could actually help the company achieve its annual EPS guidance range. Why? Per the company’s 10-K filing, $5.8 million had been accrued for the performance units through Q4 2010. If the company’s stock price underperforms the Russell 2000 (basically, from this point forward), that $5.8 million accrual will be reversed.

It’s going to be an interesting period over the next 8-9 months at PFCB. Do the Co-CEO’s at PFCB have a real-time Russell 2000 ticker flashing on a computer screen in their office? We would. But, this could have been avoided with a more compelling performance unit structure that was tied to top-line and operational improvements as opposed to the company’s stock price.

Here’s the company’s Performance Unit disclosure in the most recent 10-K filing:

Wow! What a doozy yesterday was. We’re betting that if we told you that EBIT margin would decline by -229 Bps in Q1 2011 versus LY, many of you (and us) would have expected a share decline in the stock price. Well, we would have been wrong as the stock is trading up +4.5% today.

In fairness, items that were difficult to forecast all went against Amazon (AMZN – $192.30) to the tune of $0.13. Other Income/(Expense) cost AMZN ($0.06) versus a reasonable forecast. Taxes cost AMZN ($0.03) versus a reasonable forecast. Finally, Equity Method Investment activity cost AMZN ($0.04) versus a reasonable forecast.

Therefore, AMZN’s EPS in Q1 2011 was approximately $0.57 excluding items that were near impossible to forecast (these items are likely to continue to be a drag on AMZN’s bottom-line performance in the future).

That said, it’s interesting to hear many analysts laud the company’s strategy to “invest ahead of its growth.” That thesis works when discussing the company’s capital investment in fulfillment centers. But, AMZN’s Marketing Expense de-leverage (14 straight fiscal quarters) and a “shipping drag” of 83 Bps are material top-line drivers that will need to be anniversaried to maintain today’s market share gains.

If anyone thought AMZN management ‘cared’ about profitability prior to today… they certainly don’t any longer. Take a look at the company’s trailing 4-quarter EBIT margin run rate (click here). It’s ugly.

Clearly, investors are willing to stomach the company’s “investment spending” as long as top-line growth rates continue to remain at these levels. If the company’s top-line growth rate were to decelerate, AMZN’s stock price would suffer a dramatic blow.

While profitability comparisons ease a bit as the year progresses, a best case scenario seems to suggest EPS of $2.43 in FY 2011. This scenario assumes that top-line growth rates stay at Q1 2011 levels and that the company’s EBIT margin declines -189 Bps in Q2 2011, -91 Bps in Q3 2011, and are flat in Q4 2011.

Even these projections of material de-leverage may be a bit optimistic. We’ll see.

Click here to see our latest EPS model and company Data Packet.

Occasionally, we share a full-fledged research note with our readers. Today, let’s take a look at a note we published last week on Amazon ($185.42) ahead of their Q1 2011 earnings release.

Summary:

AMZN’s consensus EPS estimate for Q1 2011 is $0.61. This implies an approximate -200 Bps EBIT margin decline versus LY. Interestingly, the company’s consensus EPS estimate for Q2 2011 implies only a -60 Bps EBIT margin decline versus LY.

We think both of the consensus estimates (Q1 2011 and Q2 2011) are flawed. We’re forecasting much higher than consensus EPS in Q1 2011, yet much lower than consensus EPS in Q2 2011.

For the full year, AMZN will likely deliver much weaker than consensus EPS results. Here’s why:

• FY 2010’s Kindle revenue recognition change and the Zappos acquisition inflated revenue growth rates in FY 2010 and provided ‘optically’ incremental expense leverage. There is a serious risk that the company’s sales growth will decelerate this year when the company begins to report apples-to-apples top-line numbers.
• Fulfillment Expense will continue to de-leverage after the company completed the build-out of 13 distribution centers in FY 2010 (+33% additional facilities versus end of FY 2009).
• Marketing Expense has now de-leveraged in 13 straight fiscal quarters as AMZN clearly has been ‘buying’ sales. The top-line will be pressured if management ever decides to leverage its marketing investment.
• On a somewhat related note, shipping was an approximate -50 Bps drag on the company’s GPM% in FY 2010 versus FY 2009. This represented the worst “shipping drag” on GPM% since at least FY 2007. While a clear top-line driver, free or reduced shipping offers are negatively impacting the company’s profitability. But, any attempt to improve the company’s “shipping drag” would likely have a material impact on the company’s top-line growth rate.
• The North American Division’s sales growth was materially stronger than the International Division’s growth in Q2 – Q4 2010. Unfortunately, the North American Division has a relatively lower EBIT margin. The increasing North American Divisional sales mix will pressure the total enterprise’s profitability.

Click here for the full report.

As earnings season kicked off last week, what did we learn from the week’s quarterly earnings releases that will provide clues about what transpires over the next few weeks (AAPL, CAKE, CMG, MCD, and YUM)?

MCD provided the bread crumbs as to how many U.S. based global retailers will generate EPS upside versus consensus expectations… via a much weaker U.S. Dollar. The company expects a $0.15 to $0.17 boost in FY 2011 via FX.

CMG and MCD both professed an inability to effectively pass along price increases in the short-run that will effectively offset this year’s commodity price pressures.

MCD management was asked on their quarterly earnings conference call as to why they could not forecast this year’s impact of commodity inflation in January 2011. But, the reality is that MCD management has consistently altered their forecast of commodity deflation/inflation (click here for link to the company’s guidance history). Their crystal ball is no better than the next guy.

MCD management suggested that they had not seen a negative top-line impact thus far from austerity measures in Europe.

CAKE repurchased 1.7 million shares in Q1 2011. Yet, the company’s basic share count remained flat in Q1 2011 versus Q4 2010. Were the shares repurchased late in the quarter, or were there option exercises that may have offset the positive impact of the share repurchase?

YUM management suggested that its U.S. Division’s results in Q2 2011 would be ugly, largely via a hangover from the Taco Bell lawsuit. But, it’s more likely that the U.S. Division’s biggest headwind in Q2 2011 is a materially more difficult 2-year profitability comparison. The U.S. Division will lap a +369 Bps company-operated Restaurant Margin improvement over the past 2 years. This compares to the -19 Bps 2-year run rate that the division lapped in Q1 2011.