Author Topic: Anybody else looking at bombed out retail sector?  (Read 16620 times)

johnny

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Re: Anybody else looking at bombed out retail sector?
« Reply #80 on: August 21, 2017, 01:24:01 AM »
What really worries me about LB is their huge debt. The question in my mind is can they readjust to a lower base of earnings while carrying this debt or is it possibly fatal?

What worries me is that they spent $2.9B on in-store capex in five years (2012-2016) and every VS store I walk by looks exactly the same as it did when I was 16.


CorpRaider

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Re: Anybody else looking at bombed out retail sector?
« Reply #81 on: August 24, 2017, 06:06:27 AM »
Here.we.go. ;D
Finally...another finance blog! 

http://thecorpraider.com

JayGatsby

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Re: Anybody else looking at bombed out retail sector?
« Reply #82 on: August 24, 2017, 01:45:51 PM »
Here.we.go. ;D
Signet?

I sold KIRK after they reported a good quarter. Small profit, although I left some on the table. I find the combination of "growth" and "value" in these retailers to be nearly impossible to value. Meaning companies that are actively investing to continue to grow their footprint while they have declining same store trends, producing a company that trades exceptionally cheap on a trailing EBITDA / maintenance FCF basis, but not at a discount on actual FCF basis. There's potentially some additional selling pressure as the growth investors move out. KIRK or NGVC are both examples of that. NGVC has been discounting their bacon massively so for now I've decided to play it that way...  8)

LanceSanity

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Re: Anybody else looking at bombed out retail sector?
« Reply #83 on: August 27, 2017, 02:34:04 PM »
Build-A-Bear (BBW) could be a good bet given the share repurchases.

JayGatsby

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Re: Anybody else looking at bombed out retail sector?
« Reply #84 on: August 27, 2017, 02:56:24 PM »
Build-A-Bear (BBW) could be a good bet given the share repurchases.
I was looking at this one a week or so ago (before the repurchase announcement). It feel into my bucket of companies of "growth" retailers that are tough to value. Free cash flow over the past few years has been pretty minimal as they seem to both open and close a lot of stores.

Cameron

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Re: Anybody else looking at bombed out retail sector?
« Reply #85 on: August 28, 2017, 12:58:01 PM »
I've found success with micro-cap retailers that are trading way below book value that quick ratio's remain stable.

seshnath

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Re: Anybody else looking at bombed out retail sector?
« Reply #86 on: August 29, 2017, 03:50:22 AM »
Maverick Capital has an interesting essay on "Retail Shorts" in their 2016 letter. Skip to page 9:
http://www.superinvestorbulletin.com/2017/03/20/maverick-capital-q4-2016/


What did they mean by the Omni Channel short?

I'm betting baby clothes will work well too...

I believe they are talking about the fact that brick and mortar is moving towards e-commerce and vice versa and hence, retail short becomes Omni Channel Short now.  Essentially when you short a brick and mortar retailer, you are shorting their omni channel short as well, no?

Baby clothes is interesting.  I read recently on Kitex Garments in India, second largest capacity wise in infant wear - the CEO was saying about how babies grow fast between birth and two years of age and the birth rate is pretty much constant in the US and back up to the almost pre-2008 levels.

DooDiligence

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Re: Anybody else looking at bombed out retail sector?
« Reply #87 on: August 29, 2017, 07:54:27 AM »
Maverick Capital has an interesting essay on "Retail Shorts" in their 2016 letter. Skip to page 9:
http://www.superinvestorbulletin.com/2017/03/20/maverick-capital-q4-2016/


What did they mean by the Omni Channel short?

I'm betting baby clothes will work well too...

I believe they are talking about the fact that brick and mortar is moving towards e-commerce and vice versa and hence, retail short becomes Omni Channel Short now.  Essentially when you short a brick and mortar retailer, you are shorting their omni channel short as well, no?

Baby clothes is interesting.  I read recently on Kitex Garments in India, second largest capacity wise in infant wear - the CEO was saying about how babies grow fast between birth and two years of age and the birth rate is pretty much constant in the US and back up to the almost pre-2008 levels.

Makes sense, thanks.

Carter's Q2 2017 net sales were up 8% & operating Income was up 2% with EPS up 10%.

Most of Carter’s growth in sales came from US retail which are up 11% over last year IN A HORRIBLE ENVIRONMENT and this allows them to take advantage of their operating leverage.

Bricks & mortar comps are up with dual store format (Carter's / Oshkosh) leading the way.

1st Half Year net sales & gross profit up 4% in a highly promotional market & management is guiding up 4% to 6% for 2017 with $300m to $325m in OPCF & around $90m in CAPEX with most of the companies FCF to be generated in the last half of the year.

Inventories are up 4% over last year which indicates to me that the inventory sourcing & management initiatives are going according to plan & the new distribution center in Braselton, GA is running nicely.

Debt went up due to working capital needs in the wake of the Skip Hop purchase & the continued capital return program (should be somewhere around $400m in LT senior unsecured (2021) notes out there with the remaining $266m in revolvers.) In 2013, Moody’s rated them Ba2 stating “The Ba2 rating assigned to the senior unsecured notes reflects their junior ranking positive vis-à-vis the company's $375 million senior secured revolver which has a first lien on substantially all domestic assets of the company.” (I don’t have access to more recent ratings & I’m not a debt guy anyway so I’ll stick with the equity…)

Carter’s is successfully expanding their store count while competitor Gymboree is in BK and will close a ton of stores over the coming months & is planning to open 200 more stores over the next 4 years with most in the co-branded format.



I was thinking that Carter’s would be able to capitalize on Gymboree’s closures but a question by Janet Kloppenburg with JJK Research at the Q2 2017 earnings call put the kibosh on that.

Janet Kloppenburg - “And just lastly, with the announcement by Gymboree of closing 330 stores, I think probably that those stores will be closed over the next couple of months, I'm wondering if you see any positive impact to your business?”

Richard Westenberger - “Your question with respect to Gymboree, we've taken a look at all of the site locations that they disclosed as part of their bankruptcy. And many of those locations are in high-priced mall locations, that's not part of our real estate strategy. There are some centers that may provide some opportunity. But I'd say by and large, their real estate strategy was very different from ours. Most of our stores are in high-value open air strip centers, and we've had good success with that. The economics are much more attractive for that store model relative to the mall model.”

In addition to a better real estate strategy, Carter’s management has been laser focused on getting e-commerce & omni-channel & it shows with online sales growing by 27.6% (representing 23% of total net sales which is up from 20% last year.)

This is excluding Amazon revenues which are booked as wholesale.

Carter’s designed the “Simple Joys” multi pack essentials replenishment brand exclusively for Amazon Prime customers.

Amazon commits to the merchandise & Carter’s delivers to distribution centers weekly (management won’t break out the Amazon numbers specifically but said they’ve been “scrambling the jets” to get product to them.)

Wholesale (which has been in decline) grew 1% primarily due to the addition of Skip Hop  (excluding Skip Hop, wholesale declined 6%) & operating profit declined slightly, reflecting a difficult wholesale environment & increased bad debt provisions in wholesale.

All in all, Skip Hop added 4% to year over year (YOY) net sales growth for the company & management expects wholesale to grow in the low single digits this year as a result of the purchase of Skip Hop.

Management has been aware of the declines in wholesale for some time now & appears to be making the right moves to bolster the business & in boosting DTC for the future as wholesale continues to put up somewhat dismal numbers.

Carter’s has key relationships with Kohl’s, Babies R Us, Macy’s Walmart, Target & of course Amazon (which just started up this year.)

Their mall based big box wholesale business has been downsized (management called it “right sized”) to about 13% of their business.

Management believes that wholesale is a valuable link in their omni-channel strategy as evidenced by the purchase of Skip Hop. Before being acquired by Carter’s, their products were sold through wholesale & e-commerce. They expect $90m to $100m million in sales from Skip Hop for 2017.

Another bright spot in wholesale is in international which was up 28% & helps compensate for shrinking business in the US.

International sales up 15% (19% constant currency) with Canada & China leading the way.

Canadian sales up 9% with SSS up 5.9% (Canadian e-commerce up 47%)

Carter’s now has 25 stores in China with Pau Sheng (Carters retail partner) opening 50 new Carter’s stores this year in China.

Retail & wholesale in China are lumped together in financial reports so it’s kind of hard to break out unit economics here but the business has been experiencing an operating loss in China due to start up costs & unexpected higher wholesale bad debt provisions.

Carter’s management see’s China as an $80m to $100m biz in the next 4 years with expanding margins as they achieve the scale necessary to take advantage of operating leverage as they’ve already done in North American retail.

Management is forecasting China sales to increase 50% this year which should go a long way towards achieving profitability in the potentially explosive market (they’re making a lot of babies over there!)

Carter’s management had some interesting China macro views in the most recent quarterly earnings call. They’re seeing lots of excess manufacturing capacity in China which is playing in their favor. Wages are still under pressure although not in as much as recent years. Cotton is up modestly. Overall not a bad environment for Carter’s.

There will undoubtedly be a few hiccups in the China expansion but management is moving at a measured pace & is successfully integrating omni channel through their presence on TMall, Alibaba’s online channel.

Carter’s international e-commerce sales are up 17% with Canada & China being the main drivers.

A few key international e-commerce partners are Zalando.com in Europe, Riachuelo in Brasil
& of course TMall in China (BTW, Richuelo means “small stream”)

Overall, management is targeting $4B in annual sales by 2020 with expanding margins.

They have a proven track record of maintaining growth & profitability (and more importantly free cash flow (FCF) in a heavily promotional industry where the bodies are mounting & I believe they’ll continue to perform well until the retail clothing industry normalizes again, at which time they could boost their growth significantly.

On another note, although I wouldn’t necessarily call Carter’s a compounder, they have returned over $1.2B to shareholders over the past 10 years, mostly through tax advantaged share repurchases (that amounts to nearly 30% of todays $4B market cap, not too shabby…)

In the 1st half of 2017, the company continued their commitment to shareholder returns & bought back another 1,131,409 share for $98m (an average of $86.82 per share.) There’s still $176m remaining under the current share buyback authorization.

(incomplete writeup)
abc | abev | aapl | bbh | brk.b | cri | cvs | dva | dis | ew | ffxdf | gpc | mo | nvo | sftby | vde

8 months left in the BRK.B 1st of the month DCA program (hoping 4 a selloff 2 go all in!)

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