Solid Cyber Monday
November 27, 2012
According to IBM Digital Analytics, Cyber Monday sales surged 26.6% year-over-year and are expected to total $1.5 billion. These results were consistent with our previous belief that the online channel would continue to become a more important retail destination, though we’re a bit surprised that growth was so strong on one day (since we’ve seen retailers run a variety of sales all week long). Two of the big winners yesterday appear to be Amazon (click ticker for report: ) and eBay (click ticker for report: ), where sales volumes increased 52% and 57%, respectively. Sources cite the percentage of retailers participating in Cyber Monday sales at 97%, or almost every company that sells products on the Internet. It’s not easy to
Ralcorp Accepts Buyout From ConAgra…Finally
November 27, 2012
Early Tuesday morning, ConAgra (click ticker for report: ) announced that it will acquire Ralcorp for $5 billion, or $90 per share in cash, a cool 28.2% premium from yesterday’s closing price. This deal is slightly surprising, given that Ralcorp rebuffed the firm’s previous $94 per share offer in 2011, as it opted to spin-off its Post Cereal (POST) business instead. However, given Post’s share performance, and the $90 per share buyout offer, we think Ralcorp shareholders came out slightly ahead. If we use Ralcorp’s fiscal year 2012 adjusted earnings per share from continuing operations ($2.97), the deal certainly doesn’t look cheap at 30 times this year’s earnings. Even when that figure is adjusted for acquisition-related amortization, the company paid 24
Cliffs Natural Resources Dividend Cut on the Horizon
November 26, 2012
On Friday, BMO Capital cut its dividend outlook for Cliffs Natural Resources (click ticker for report: ). The iron and coal producer currently yields in excess of 8% at current levels, but we’ve long thought its yield was unsustainable. In our 16-page report on the firm, our investment highlights section includes (see image to the right) that the firm’s dividend doesn’t score very well on the Valuentum Dividend Cushion. We encourage readers that are focused on dividend income to use the Valuentum Dividend Cushion to better safeguard their income portfolio against a potentially devastating dividend cut. Unfortunately, accidental high yielders always seem like a great bargain, but we’ve seen that’s rarely the case. The Valuentum Dividend Cushion has recently predicted cuts at Roundy’s (click
Who Wins in the Move to Online Retail?
November 26, 2012
Over the weekend, turkey took a backseat to consumer spending with respect to the financial markets. According to ShopperTrak, total Black Friday sales dipped 1.8% year-over-year to $11.2 billion; however, online sales jumped 26% year-over-year to over $1 billion (ComScore). Due to the hyper-competiveness of the retail cohort during the holiday season, Black Friday (and Cyber Monday) has become more of an all-week promotional event. We expect online sales to continue be a driver of revenue expansion going forward, and we’ve identified a few names that we think will particularly benefit. Visa/Mastercard Although we prefer Visa (click ticker for report: ) from a valuation and brand strength perspective, it and Mastercard (click ticker for report: ) will be major beneficiaries of the
Deere Posts Decent Sales Growth, But Profitability Disappoints
November 22, 2012
Agricultural equipment giant Deere (click ticker for report: ) reported mixed fourth quarter results Wednesday morning. Revenue increased strongly, growing 14% year-over-year to $9.8 billion, better than consensus estimates. Earnings grew just 8% year-over-year to $1.75 per share, which was well below consensus expectations. Gross margins remained roughly flat, falling just 20 basis points year-over-year to 25.4%. Both research and development costs, as well as SG&A soared during the quarter, jumping 16% and 10%, respectively, and negatively impacting profitability. In fact, when adjusting for healthy share repurchases, net income per share grew only 3% year-over-year. Though it’s probable these investments could yield solid long-term results, we never like to see companies ramp SG&A expenses unless they are able to leverage
Best Buy’s Performance Continues to Tumble
November 21, 2012
Electronics retailer Best Buy (click ticker for report: ) announced weak third quarter results Tuesday morning. Revenue dipped 3.5% year-over-year to $10.8 billion, roughly in-line with consensus estimates. Earnings, adjusted to reflect continuing operations, dropped 94% year-over-year to $0.03 per share, which was worse than consensus expectations. Perhaps the most encouraging parts of the report came from the headline and CEO Hubert Joly’s remarks. The company showed its sense of frankness with the headline, “Best Buy Confirms Significant Decline in Fiscal Third Quarter 2013 earnings.” Further, Joly stated: “In line with trends experienced over the last three years, Best Buy’s third quarter financial performance was clearly unsatisfactory. On November 13, we shared our candid assessment of Best Buy’s situation and
HP Embarrassed by Poor Acquisition
November 20, 2012
In addition to reporting declining earnings and sales, Hewlett Packard (click ticker for report: ) announced an enormous $8.8 billion write-down on the purchase of UK-based software firm Autonomy. Fourth quarter 2012 revenue dropped 7% year-over-year to $30 billion, a larger decline than previously anticipated. Earnings, net of $4.65 per share of impairment charges, fell by just a penny to $1.16 per share, which was slightly better than expected. The meaningful write-down of Autonomy stole the thunder from the actual underlying results, as several short sellers had questioned the validity of Autonomy’s financial reporting prior to it being acquired by HP. CEO Meg Whitman herself confessed the business was somewhat fraudulent, stating: “The majority of this impairment charge is linked
Lowe’s Results Continue to Improve, But Lag Home Depot
November 20, 2012
Hardware retailer Lowe’s (click ticker for report: ) reported third quarter results that were roughly in-line with consensus expectations. Revenue grew a paltry 1.9% year-over-year to $12.1 billion, slightly better than expected. Earnings improved tremendously thanks to higher gross margins and cost cutting, nearly doubling year-over-year to $0.35 per share. Same-store sales growth didn’t fare any better than the company-wide sales growth, increasing 1.8% in both the US and company-wide, though we expect some acceleration due to Hurricane Sandy in the fourth quarter (management agrees). Still, the pace of expansion doesn’t compare favorably to Home Depot (click ticker for report: ), which has been growing same-store sales closer to 4.2% due to its superior execution, in our view. Gross margins
Urban Outfitters Third Quarter Results Were Lackluster
November 20, 2012
Teen and twenty-something apparel retailer Urban Outfitters (click ticker for report: ) reported mediocre third quarter results Monday afternoon. The company grew total revenue 14% year-over-year to $693 million, roughly in-line with consensus expectations. Earnings were a penny short of consensus, coming in at $0.40 per share, a 21% increase. Gross margins improved 220 basis points year-over-year to 37.6%, but we weren’t incredibly impressed with profitability. We think a lot of the increase came from moving Free People to a more heavily direct-to-consumer business rather than a wholesale business, though management also noted that discounting was less prevalent during the quarter. Performance across the brands diverged, with comparable retail net sales at Free People up 24%, up 7% at Urban
Di-worsification? That Could Be the Starbucks/Teavana Deal
November 19, 2012
Last Wednesday, Starbucks (click ticker for report: ) announced that it will acquire tea retailer Teavana (TEA) for $15.50 per share in an all cash transaction valued at $620 million. The deal is expected to add one cent to Starbucks’ earnings in 2013. Though the deal represented a significant premium to the recent share price, the acquisition price is below Teavana’s IPO price, which will certainly set off some shareholder lawsuits. We’re more interested in the impact it will have on Starbucks. Unlike the recent lack of innovation we’ve seen at a company such as McDonald’s (click ticker for report: ), Starbucks hasn’t been afraid to make drastic moves to drive store traffic and keep the brand relevant. In addition
