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Weekly Spin Cycle
Weekly Spin Cycle: February 20, 2012
Welcome to the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.
In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF
PFCB Delivers 6th Year of Comp Sales Declines at Core Chain – Takes Victory Lap for Weather Boost
It must be a misprint! On P.F. Chang’s (PFCB – $37.74) Q4 2011 earnings press release this week, the company’s CEO, Rick Federico commented that the company was “Pleased with our progress on the top-line.”
Huh! He’s kidding, right? The core Bistro chain has just reported 6 STRAIGHT YEARS of negative comp store sales. Essentially, every restaurant has enjoyed an improved top-line via weather versus the prior year over the past 2 months. Yet, Mr. Federico has the gall to suggest that “progress” is being made.
Here is an exchange on the quarterly conference call when an analyst questioned the company’s victory lap:
Destin Tompkins – Morgan, Keegan – Analyst
As you guys talked about the early sales trends in 2012 being improved, do you have a sense on weather benefit? I think there has been a lot of discussion about favorable weather trends in certain areas of the country. As you look at your markets outside of maybe weather-affected areas and weather-affected areas, can you kind of help us understand how much of the trend you think is really driven by the initiatives and how much may be favorable weather?
Mark Mumford – P.F. Chang’s China Bistro, Inc. – CFO
We are seeing strength across all of our systems. So from markets that had weather last year and markets that didn’t, we are seeing strength across the entire system. When we look at how Bistro is running this year, it is important to also note that it is really a two-year basis that we are seeing positive comps. So last year in January were positive and we are seeing it positive as well. So a two-year comp trend.
Despite Strong Sales – JWN Management Expects a 3rd Straight Year of Retail SG&A De-Leverage
This week, Nordstrom (JWN – $51.14) lowered EPS expectations for FY 2012. Many were seemingly ok with the company “investing” in online growth. But, the fact is that the company reported Retail SG&A Expense de-leverage in BOTH FY 2010 and FY 2011, despite incredibly strong sales growth.
While it’s convenient/clever for JWN management to attempt to shift investor focus to FY 2012, in our view, the lack of Retail SG&A Expense leverage over the past 2 years only highlights the potential to a bottom-line free fall if sales were to slow.
Weekly Spin Cycle: February 13, 2012
Welcome to the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.
In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF
Retail’s Worst Forecasters Try Again – ANF Management Now Guiding to $3.50 to $3.75 in FY 2012
In February 2011, ANF management was ‘guiding’ to a 15.0% EBIT margin in FY 2012. Then, in April 2011, ANF management dramatically increased its international store growth plans and unveiled a $4.75 EPS target for FY 2012.
The problem was that the $4.75 EPS target for FY 2012 implied an 11.5% to 12.0% EBIT margin… well short of the prior 15.0% target. Traditional sell-side analysts were so enamored by the incremental international store openings and the higher than consensus EPS target that they failed to focus as to why the company’s 15.0% EBIT margin target dramatically declined over the short two month timeframe (despite an increased mix of theoretically higher margin international sales).
Recently, the company unveiled what could be construed as its 3rd EBIT margin target for FY 2012 over the past 12 months. We estimate that the low-end of ANF’s current $3.50 to $3.75 EPS guidance range for FY 2012 implies a 9.5% EBIT margin.
In addition, on the Q1 2011 conference call in May 2011, ANF management suggested that its MG&A Expense would “moderate significantly” in 2H 2011. Three short months later, ANF management pointed towards positive double-digit year-over-year percentage increases of MG&A Expense in 2H 2011. Erratic much?
Simply, after effectively providing the company’s 3rd EBIT margin guidance target for FY 2012… do you believe them now? Not us. Relying on the current ANF management team to provide a reasonable expectation of forward earnings performance has been a losing proposition.
What makes the latest FY 2012 EPS guidance range even more interesting is a continuation of “charges for impairments and write-downs of store-related long-lived assets” and store closures that likely have materially improved (and continue to improve) the company’s level of profitability versus the prior year. Also, let’s not forget about the DC consolidation that is set for FY 2012 that will be a profitability driver this year versus FY 2011.
FY 2011 was ANF’s 4th straight year in which its GPM% declined versus the prior year. This is all the more troubling because most apparel retailers reported materially higher GPM% in both FY 2009 and FY 2010.
While GPM% declines will decelerate as the year progresses in FY 2012, we’re betting that ANF is poised to report its 5th straight GPM% decline versus the prior year in FY 2012.
Potential HauteLook Earn-Out Liability Reversal?
JWN has effectively “muddied the waters” re: the outlook for HauteLook expenses in FY 2011. How?
JWN management has guided to HauteLook-related Retail SG&A expenses of $110M in FY 2011. This amount includes both operating expenses and “purchase accounting charges associated with the HauteLook acquisition.”
The problem is that the ‘composition’ of the $110M has not been explained. Therefore, the $110M number essentially means nothing to investors.
The company’s latest 10-Q filing suggests that $16M will be expensed in FY 2011 related to the amortization of intangible assets. What’s the composition of the remaining $94M? How much of the remaining $94M was expected to be a function of an adjustment to the HauteLook “earn-out” liability? Only the company knows.
In Q3 2011, JWN reversed the HauteLook “earn-out” liability to the tune of $5M versus the ending liability at the end of Q2 2011… presumably, due to worse than expected financial performance of the acquired company.
There’s another $39M of HauteLook “earn-out” liability (at end of Q3 2011) that could conceivably be reversed if the online retailer continues to underperform.
Competition for Keurig? CBTL Machines Prominently Displayed at BBBY
As part of our weekly Shopping Cart report this week, we included a discussion re: new CBTL coffee/espresso machines at BBBY.
In addition to continued strength of Keurig brewers, coffee/espresso elitists are making the switch to $149.99 Coffee Bean & Tea Leaf “high BAR” pressure machines that are prominently displayed in many BBBY stores today.
CBTL machines compete more closely with Nestlé’s $250+ Nespresso single cup coffee/espresso machines (sold at W-S and Macy’s). Unlike Nespresso cups that are only sold online, BBBY sells a broad assortment of CBTL compatible cups (cheaper than K-cups and filled with “handpicked” beans). Also, the CBTL machines make real espresso versus espresso FLAVORED coffee from the Keurig brewers. The CBTL milk frother is only $49 versus $79 for the Keurig version.
Weekly Spin Cycle: February 06, 2012
Welcome to the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.
In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF
Home Furnishings Category Continues to Strengthen
Keep an eye on home furnishings. A month ago, CPWM, HVT, and PIR reported stronger comp sales in the most recent period (CPWM = Nov/Dec, HVT = Q4, PIR = Dec) than in their fiscal Q3.
Today, furniture was mentioned as relatively strong at both BIG and BONT.
Is the home furnishings sector experiencing a pick-up following relatively dismal results over the past 3-4 years?
It’s worth a reminder that the Commerce Department data suggests that Furniture & Home Furnishing Stores reported impressive year-over-year sales growth in December 2011 (+5.6% in December 2011 followed +4.5% in November 2011 and +4.0% in October 2011).
That said, the category remains the worst performing category versus calendar 2007 (-14.6% in December 2011 versus December 2007). Is pent-up demand beginning to become a top-line tailwind for the home furnishings sector?
Finally, small appliances, electrics, and housewares continue to be specifically mentioned as stronger relative categories (e.g. COST and KSS). KSS suggests that its electrics category sales increased +20% in January 2012 versus LY. This follows a +19% year-over-year gain in December 2011.
Suddenly, WTSLA Management Not Comfortable with Inventory Levels
Last month, a few retailers are patting themselves on the back for strong sales the week leading up to Christmas. Again, fiscal week #4 in December 2011 benefitted from an advantageous calendar this year.
One of those retailers was Wet Seal (WTSLA – $3.37). A month ago, the company made the following statement re: inventory:
“We remain comfortable with our inventory levels overall as we exit the holiday season.”
Interestingly, the company changed their tune following results in January 2012 (note: a low-volume sales month):
“Tight inventory management through the quarter led to lighter than desired apparel inventory units at Wet Seal in January. Apparel units were down from high single-digits to low double-digit percentages versus the prior year during the month, which challenged sales performance. We are encouraged by the quality of the upcoming spring assortment deliveries. However, our light apparel unit levels, and related sales challenge, will persist until we build inventory over the course of February.”
4-Year Top-Line Performance
Let’s keep things in perspective. Take a look at the 4-year comp store sales run rates for the following monthly sales reporters.
4-Year Comp Store Sales Run Rate (‘Stack’) Ranking – January 2012
Consumers Developing a Loyalty to Store Brands for Reasons Other than Price
According to an article in the WSJ dated January 31, 2012, consumers are “developing a loyalty to store brands for reasons besides price.” The article suggests that this could be a problem for food and consumer product companies.
It’s an extremely interesting article. Click the below link, if interested.
The Numbers Suggest Materially Tougher Profitability Comparisons Ahead for GMCR
We don’t spend any time focused on Green Mountain Coffee Roasters (GMCR – $66.21). But, it’s interesting to note that GMCR faces increasingly difficult 2-year GPM% following the company’s relatively easy comparison on Q1. Clearly, there’s some noise from last year’s acquisition in Q1, but it’ll be interesting to see whether GPM% improvements decelerate in the quarters ahead.
GMCR Quarterly GPM% Run Rates
Weekly Spin Cycle: January 30, 2012
Welcome to the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.
In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF
Irrationally Exuberant Management at JCP Better Suited for BBY
Last week, J.C. Penney (JCP – $41.42) unveiled their new strategic direction and the company’s shares skyrockedted +18.0% on the news. Clearly, new CEO Ron Johnson knows the drill. He gave the investment community an Apple-like presentation and decided to no longer provide monthly sales metrics or quarterly earnings guidance.
Here’s what we liked. Mr. Johnson made it clear that initial mark-up (IMU) does not matter. What matters is the merchandise margin as the product walks out the door (72% of JCP’s sales are at a 50% off or greater discount). How many times do investors have to listen to retail management discuss IMU as if it matters?
That said, we found it odd that new CEO Ron Johnson believes that the “#1 opportunity” in retail was the department store. Not the Internet. Nope. Yep, the department store. In addition, his longer-term idea of using 10,000 square feet to develop a “town square” is aspirational, but has ‘disaster’ written all over it.
The fact is that no matter how smart the presentation sounded, in our view, JCP has about a 5% probability of re-attaining their 13% EBIT margin goal by FY 2015. Yet, today, 95% of the investment community appears all too eager to believe that the 13% EBIT margin goal is within the realm of possibilities.
Many times investors listen to these presentations focused on longer-term strategic initiatives and forget, much like the management teams, that a retailer such as JCP does not operate in a vacuum. For argument sake, let’s say that JCP’s simplified pricing structure is a success. Don’t you think others would emulate the strategy and therefore limit JCP’s top-line benefit?
Yes, it was a smart, brilliant presentation by JCP’s Mr. Johnson. What analyst does not want to believe that Mr. Johnson can transform the industry especially given his previous successes? But, the new pricing strategy has yet to be tested.
This week, JCP management swung for the fences. The company needed to as it had performed miserably relative to its peers under the direction of ex-CEO Mike Ullman. But, don’t forget that The Gap (GPS) began to operate in a much leaner, smarter fashion a few years ago and is still under the direction of a shrewd CEO (Glenn Murphy). And you see where that got GPS. Nowhere.
At the end of the day, we doubt that Mr. Johnson will impact the department store arena as much as he thinks he will. Unfortunately, Mr. Johnson picked the wrong sector of retail. In our view, his skill set was tailor-made for Best Buy (BBY – $25.44) and the transformation that’s needed in the consumer electronics space.
Therefore, it’s a shame that Mr. Johnson’s vision could not have been better utilized in a retailing sector that is in greater need of a new strategic direction.
JCP Managerial Comments That Will Be Interesting to Review in 12-24 Months
This week, we were so fascinated by the overly-bullish proclamations made by J.C. Penney (JCP) management that we’ve decided to post the following managerial quotes from the 2-day presentation for future reference:
Ron Johnson – CEO
“The #1 opportunity in American retailing is not the Internet. It’s not discount. It is the department store.”
“Nothing was bought at full price, fewer than one out of 500 units… 72% of the revenue, three-quarters of everything sold in the stores was at 50% off or greater discount.”
“Starting August 1st of this year, we will begin an exercise to add 2-3 shops each and every month for the next 3.5 years until the entire store, every store, is merchandised in shops… in 2013, we will launch Town Square. In 2014, we’re going to launch our whole new prototype and by 2015 every one of our stores will be completely transformed.”
“This simplistic (pricing) model allows our merchants to do what they do best and that is focus on great product versus focusing on pricing cadence.”
“So, if orders are down it doesn’t mean the sales expectations are down. What it means is that we want to turn our inventory faster, right… When you make this most money is when you chase the business.”
“Shrinkage can be controlled through technology and so we’re not going to use labor to protect the merchandise… so, we are not at all concerned about that.”
“Localization will not be a primary strategy at J.C. Penney because I think that is something that is exaggerated in its importance… if we miss a local item or two, that’s okay, because the things we do well will more than offset the opportunity that you can find in localization.”
“I don’t think that there’s any need to go out and close those small stores. And that’s looked at by the economics of the stores, not the condition of them.”
“Our online percent of sales is still about 9% where Macy’s with all their growth I believe is at about 6%.”
“We do think there’s an opportunity over time to slightly reduce the private brand to replace that with more global brands.”
“I really believe in credibility and there is absolutely no way that guidance for 2012 that we didn’t have extraordinary confidence we could meet or exceed.”
Michael Kramer – COO
“We’re confident that we can reduce our SG&A as a percent of sales to a sub-30% rate by 2013… we are strongly committed to the fact that we can reduce our SG&A structure to 27% by 2015.”
“There’s roughly $400M of expenses in the stores that we can cut over the next year, advertising $300M and home office $200M. So, that $900M run rate will not be effective till 2013, but we’ll get a portion of that in 2012.”
“Here’s what we know. Ron said yesterday he’s confident that we can get to 40-plus margins. I said today that we’re confident that we can get to 27% SG&A structure by 2015. Clearly, doing the math represents a 13% contribution. That’s in stark comparison to the 6% contribution that JCP provided in 2010.”
“Sephora as an example, as we’re rolling out Sephora we’re seeing a 2% lift in the rest of the store. So, if you take that and exponentially calculate what that can do, as we’re bringing in great brands in terms of shops over the course of those 4 years, you can imagine what that can do.”
“J.C. Penney has roughly 400 stores in those same markets that Kohl’s has 722… That represents just a comparison of roughly 300 more stores that we can do. And I think that’s really important to understand as we roll-out this transformation and when you take a look at the upside potential.”
Weekly Spin Cycle: January 23, 2012
Welcome to the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.
In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF
Pricing Changes at JCP/TGT = Recipe for Disaster
This week, we noticed that J.C. Penney (JCP – $35.09) stores began to implement the new EDLP pricing strategy that many have been expecting. Interestingly, Target (TGT – $50.17) is rumored to be thinking about a new pricing strategy as well (see Associated Press article on Friday January 20th).
Have you seen the changes that are taking place in JCP stores today? Many store associates believe that the “elimination of promotional signage” may be a recipe for disaster. Not a good sign for the beginning of Mr. Johnson’s tenure.
If anyone needed further evidence that TGT’s RedCard and PFresh remodels were an abysmal failure versus the company’s original expectations… the company’s move towards a new “pricing strategy” may put a nail in that coffin and has an air of desperation about it.
Big picture, JCP and TGT have “disaster” written all over them.
Mickey Drexler Criticizes Mall Owners and Says Holiday 2011 “Most Discounted Ever”
Check out this week’s article in WWD where Mickey Drexler criticized mall owners/operators.
In that article, Mr. Drexler suggests that the holiday 2011 season was “one of the most discounted ever” and that last season was marked by “enormous apparel deflation.” In addition, he wondered “what the optimism is about” after sitting through a Financo-organized panel that gave no hint of the travails of retailers.
Mall owners that were criticized by Mr. Drexler for “lacking innovation” suggested that the spread between high-performance malls and low-performance malls is widening.
It’s a very interesting article. Click to Open PDF