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
Intel CEO Paul Otellini Will Step Down
November 19, 2012
This morning, Intel (click ticker for report: ) announced its current CEO, Paul Otellini, will retire in May. The company will focus on finding a new CEO during that time period, with Otellini and board chairman Andy Bryant leading the search. Given the recent weakness in the firm’s share price, many seem to suspect that Otellini’s hand was forced by the company’s inability to become the dominant mobile technology player. Though we view this criticism as valid, we doubt Otellini’s exit was anything more than a planned retirement. During his tenure, he oversaw several billions of dollars in earnings growth, helped grow the company’s data center business, made a savvy acquisition in McAfee, and returned billions of dollars to shareholders.
Sears Slide Continues
November 19, 2012
Department store Sears (click ticker for report: ) continued its long decline during its third quarter, as evident from results Thursday afternoon. The company exceeded consensus revenue estimates, though revenue still fell 6% year-over-year to $8.9 billion. Earnings, adjusted for certain items, actually increased to a loss of $1.99, which was significantly better than consensus expectations. Though results were better than expected, the company’s deterioration continued during the quarter. Same-store sales growth was weak across the board, though we saw some signs of life from the Sears Domestic business. Same-store sales fell 1.6%, and management noted that net of consumer electronics, same-store sales would have increased. Appliances remain an area of strength due to the housing recovery, and management noted that apparel
Footlocker Surges on Fantastic Sales
November 17, 2012
Friday morning, athletic footwear retailer Footlocker (click ticker for report: ) reported fantastic third quarter results. Total sales soared 9.3% year-over-year to $1.5 billion, easily exceeding consensus estimates. Earnings growth was spectacular, surging 60% year-over-year to $0.69 (up 47% net of a tax allowance), which was much better than consensus expectations. We’ve been bullish on North American athletic footwear for some time now, noting that Footlocker is a North American derivative play on Nike (click ticker for report: ). Another strong quarter was headlined by several LeBron and Jordan Brand launches at higher average selling prices, as well as a new adidas Derrick Rose shoe selling at a 45% price increase over last year’s model. A huge boost in performance
