Wednesday, February 28, 2018

Scattered Thoughts: Xi, Macy's, Dillard's and Kevin


A lot to focus on now, so let's offer up some of the key stories. Can expand on them later, but I don’t believe in padding words..

1.     China abolishes Term Limits-
So Xi Jinping will stay in power for the foreseeable future.  IF you read and believe the US press, it is a shadowy reminder of Munich in 1933. Not.

Yesterday, The New York Times  editorial was entitled, “Xi Jinping Dreams of World Power for Himself and China.” Questions: a. How do they know what he dreams? b. Isn’t China already a world power?  C. Isn’t it his job to “dream” of how to increase China’s power? This is typical ethnocentric writing, implying that only the US can and should dream of world power. A shame one of the world’s most influential journals can’t be more adult and objective.

The editorial ends with a criticism (of course) of President Trump:
In this regard, the White House’s response to Mr. Xi’s power grab was not encouraging. “That’s a decision that would be up to China,” the White House press secretary, Sarah Huckabee Sanders, said on Monday.

How refreshing and damn right. Who else would it be up to? The New York Times?

I would argue that this is not new for China. The cultural dynamic of the Mandate of Heaven is thousands of years old and reflects the Chinese mentality about government-as long as it is seen as benevolent and protecting the people, it can stay until it doesn't.

Second, China faces some financial and political challenges, so if I am the leadership I would feel that disruption at this time is not viable. There is precedent for this right here in US with Roosevelt. So we needn't act shocked.

This need not be a reflection of agreement or disagreement with Xi Jinping's policies or thought (another subject). Just the political reality in China. Yo..they would be a little stupid not to do what is right for them. And they are not stupid.



2.    Dillard’s and Macy’s-Dreaming of a White Christmas Past?
Wow. Is that all it takes to make the investment community happily spend their money?

Macy’s, on the heels of a positive 4th quarter report (which happens when your sales unexpectedly go up), has increased 14.8% since yesterday (27 February). So, knowing that, I have one question-Why?

All the questions about fundamentals that drove the stock to below $20 last year have been answered? The viability of the department store format has been resurrected as the retail of the future? Macy’s will not have to resort to price upon price marketing to keep volume up? Category killers like Inditex and Uniqlo have disappeared?

Macy’s Backstage format has been mentioned as further salvation, thrusting them into the mass market retail mix. I have been to these stores and I would call them WTW (Worse than Walmart). At least Walmart does testing on every garment in its store. Macy’s does NOT.
And TJX has nothing to fear.

So please tell me why should I buy the stock now?

Similar questions occur with Dillard’s. The stock jumped 10% yesterday based on the Q4 result. Nice. But wait, take a look at this-




The blue bar is revenue and the orange line is net margin. What do I not understand here about why you would bid up this stock 10% in one day?

I worked at Dillard’s and I will say that it has something that Macy’s (and the rest of the department store world, even the higher priced ones) do not have: a true belief in and standard of customer service. So Dillard’s can stand out and forge its own path. That being said, it cannot stubbornly bring in expensive (albeit good quality) merchandise of questionable aesthetic and hope to compete. Customers just don’t care that much anymore. So let’s keep the service and give the merchandising a wash and rinse.

Sorry, dear folks, I am shorting Macy’s and Dillard’s.

3.     Under Armour and Kevin Plank and Under Armour-
I wrote about this before, you can read the article. (Adidas, Nike and Under Armour-The War for Your Workout http://www.isourcerer.com/2018/01/adidas-nike-and-under-armour-war-for.html)
In which article I expressed my opinion about the opportunities for the UA brand to correct itself and its’ stock price.

Seems founder and CEO Kevin Plank is being thrown under the bus for all the troubles that have befallen the company. This may or may not be true, but I have a hard time believing the same guy who built an iconic brand in the company of giants has lost his mind completely.

I just don’t know here, but I would like to.  In the meanwhile, what would I do with the stock? Wait. Currently it sits about 50% higher than its low in November 2017. That may or may not be sustainable given all the bad gossip. So here I wouldn’t short it, but wait for something substantial before making a decision. Like change of management? I believe in this brand, but bigger brands have been tanked due to mismanagement.





Wednesday, February 21, 2018

What’s the Problem with Walmart?


At this writing , Walmart’s stock price is down more than 12% in 2 days. This is roughly an $40 BILLION loss of Market Capitalization. Sounds like a lot? It is. Target’s ENTIRE market cap is about $40B. Macy’s market cap is $7.81Billion. Adidas entire market cap $45Billion. So Walmart, in the last two days only, lost 5 Macy’s, or a Target, or an Adidas.

What is the reason for such a steep decline in stock price after a less than desirable earnings report and a less than crushed ecommerce growth? Really- we have seen MUCH worse reports than this in the past year- See Sears, Under Armour, L Brands, Bed Bath & Beyond, etc. So why freak out over this one (make no mistake-this qualifies as a freakout)?

Here’s why the precipitous decline in stock prifce-and nobody is telling you, but it IS why- such a dramatic response to a not so dramatic report: Everyone was counting on Walmart to be the antidote to, and the competition for, a rising and seemingly unstoppable Amazon. So the expectations that rode up the stock price from $80 in October 2017 to $109 at the end of January 2018 were-false? Too optimistic? Not borne out by facts? Poorly thought out? All of the Above?

We will go further into the problem in a minute. But here is the battlefield report for today: Walmart’s moat is breached. Now Amazon, at a Market Cap of $710Billion, is 2.5 Walmarts. What is worse or better depending on who you are is that, in the last two days, Amazon stock price has increased from $1457 to $1490. The drawbridge is down, and the rats are leaving the ship.

I believe some stock analysts are smelling around the problem, and some have come close to the answer. But they didn’t get the real smoking gun-to be revealed below.

What they did get:
1.     Only 23% growth in ecommerce is what freaked out the investment community;
2.     Walmart has leaned on Marc Lore and ecommerce growth to make its argument and defensive plan against Amazon, and showed that face to the public-Walmart as ecommerce destination;
3.     Walmart has given it up for ecommerce growth, and damn the torpedos on margin- Per one analyst’s estimate*:





IF this is even a little bit true, Walmart is losing money on each ecommerce order, VERSUS the margin they might make on instore sales.

4.     Here’s something that didn’t escape the analyst, and that we ALL probably know: It is not pleasant to shop in Walmart: Overcrowded, too big, staff not even a bit helpful (do NOT believe the smiley faces you see on TV ads), very difficult to find what you want ON YOUR OWN. So, as the analyst said,

The nearest Walmart location near my home is a few miles away but I never really enjoyed shopping in any Walmart stores. I find them to be too big and too crowded. However, I do like a good deal. (https://seekingalpha.com/article/4148677-deep-drill-walmarts-problem-e-commerce)   Please go ahead and forward the comments to me of anyone who says they LIKE shopping at Walmart.

I have repeatedly said that the key to the brick and mortar world now is the EXPERIENCE. Here Walmart has repeatedly failed and sacrificed improving that aspect for the holy grail of ecommerce.

So here we are- an unimproved brick and mortar experience, given up for the quest to compete with Amazon online. So fail online and the brick and mortar experience already is-how to say this-subpar; what you got left?

Maybe to say Walmart’s moat is breached is giving too much credit. What would be more appropriate is to say that Walmart attacked Amazon with inadequate thought, preparation, understanding of the big picture and-BANG-12+ % stock decline. All your troops died in the assault.

Here's a graphic of Walmart's latest investment in ecommerce-what does this have to do with the shopping experience (I plead ignorance of deeper strategies which I don't get):



What does any of this have to do with improving the shopping experience at Walmart?

As if that were not enough, here is the poison pill that Walmart took that nobody else will tell you (assuming they even know): Walmart’s headlong rush into ecommerce missed a key aspect which I am sure will come back to bite them in the ass, unless they get out of their bubble and deal with it:
Walmart’s stores, at approximately 250K square feet, must produce enough sales per square foot to justify the ROA metrics. BUT-a +44% in ecommerce sales cannibalizes store sales. It is NOT a get out of jail free card on sales robbed from Amazon or anyone else-the switched sales are coming from Walmart. Walmart customers have found a great way to get the prices Walmart offers without the nasty store experience. So the net gain is-NEGATIVE. All the store workers (those you see with the smiles on TV) must be paid. Oops.

Here's some propaganda from Walmart:




If you think the above is even close to accurate, please contact me. Or stop reading.

Does this mean that Walmart is on the eve of destruction? Only if arrogance and the bubble of denial leads them there (see SEARS).

Let’s see if they can get a grip on reality. If they can, they are still the no.1 contender for the title.

What I have said repeatedly in my articles, and will continue to say: Ask for help. Nobody has all the answers.

So, in summary: Walmart’s stores, at something like 250,000 square feet, are dependent on sales/square foot for their metric of profitability. As it has been since the dawn of time. BUT- an increase in ecommerce of 40+ percent per year comes from where? Amazon? Nope. It is cannibalizing Walmart’s brick and mortar sales-why? Because nobody likes shopping in Walmart, and, if you can get the same price deals and NOT have to go to the shop, yesss. Meanwhile, NOBODY in Walmart has EVER commented on improving the shopping experience from nasty to pleasant, much less delightful. We KNOW brick and mortar growth today depends on delightful.

Can Walmart strengthen its moat and pose a legitimate threat, or at least  competition, to an Amazon that is 2.5 times its size? Takes a dose of HUMILITY and some strategy. Oh, and maybe some investment in resources and people (which, at ground level, has been an enduring issure for Walmart).


So Walmart, the elephant in the room for much of recent retail history, turns into the mouse that roared. Check this forecast out:


We are privileged today to live in a dynamic environment where anything can change. Depends on how you approach your business-and your moat.





Wednesday, February 7, 2018

Sometimes, In Sourcing, It Pays to Marry the Ugly Girl





One of our biggest clich├ęs and often-repeated advice is “don’t judge a book by its
Cover.”

Whether in China or elsewhere, it may be wise, if given the choice, to choose the internal qualities of a woman who is not so beautiful on the outside as opposed to the gorgeous woman who doesn’t have the character, spirit and heart of the plain one.

Sometimes-often- in my experience, the same applies to factory choice:

1.     A small and modest factory, which may be somewhat unkempt and look like someone has been working hard there;
2.     A big factory with an attractive exterior and workshop which is neat and pristine.

So would you choose #2 over #1? If your answer is “absolutely,” you are wrong.

The choice seems clear and obvious to the majority of foreign visitors. They are put off by the physical surroundings, and maybe the humble appearance and demeanor of the owner, leading them to choose the beautiful girl.

I can say without hesitation that, in a great many cases, the smaller, more modest factory with the ugly-girl experience is the better choice. Any factory can be cleaned up and re-organized; what cannot be changed is the character of the people that work there, their desire to make a quality product and a sincere wish to grow relationships with buyers, not just take orders.

In my career, I have chosen the ugly girl several times; never have I been disappointed. Please note that, when you make that decision, you also make a commitment to hold their hand from day one. IF you do that, you will gain another asset: their undying loyalty. This will reflect in price, performance, quality and will count for a lot in a crisis.

My proudest personal story in this area is about when I chose a small, storefront (yes, storefront) factory in Thailand to do some of my underwear business in that country. Why did I make that decision? Because I could see the smarts and the heart of the owner and I believed (this takes some faith in your own intuition), that, given the chance, he would be successful. Years later, the factory had expanded to take over sever adjoining buildings, and what was a dead street became alive with commerce. Economic development 101.

That is not to say that there are not big factories with an owner that has heart, or that there are not small factories which you should avoid at any cost.

So how do you figure this out? It is a judgement and intuition call, but it always has to do with the owner/General Manager and management and your assessment of their commitment to you as a new customer, if not their commitment to the business itself.

Some factories that have grown big find an owner who has made a lot of money, and maybe gone from poor to rich in a short time. More often than not, human nature takes over and the owner things he is all that-which he isn’t- he is just the same guy with more money.

What am I talking about here as an indicator? Humility.

On the other side, there are small and ugly factories that will always be that way and that should be avoided at all costs, despite their price. How to tell? 1. The attitude of the owner and management 2. The quality of the product they are producing 3. The general body language of the factory workers-either “busy, focused” or “I really don’t care.” Again, this is largely intuitive, but after a while you can smell it (that’s another thing- a bad factory has a bad smell).

With all due respect to the great C-Level executives that run our companies, more often than not they do not have the battlefield experience to be able to tell if the ugly girl is worth marrying. If THEY are smart, they leave the decision to those of us who are experts in the field.

Each case is different. But as Malcolm Gladwell has said, after enough experience you are capable of thin splicing the conclusion.- quick and accurate assessments with little information.

A word of caution: I am not telling you to commit your whole production to these little gems (and, for that matter, the big ones). Any new factory should be given a test order first; you only know for sure after they have delivered your order.  Then, if you were wrong in either conclusion, your damage is minimized.

NOTE: For the sake of absolute equality to everyone, I chose the “girl” here because it applies to me. The subject matter is same no matter which gender or preference way you turn it.




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