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22
May-18
Tuesday

Toys "R" Us demise continues

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Various media outlets reported that following the collapse of their parent company in the US, Toys "R" Us Australia and their baby goods offshoot Babies "R" Us also went into administration.  The chain operates 44 stores in Australia and employs around 2,000 people, 700 of them on a permanent basis.  The business hoped to find a buyer, but according to the AFR the final bidder has withdrawn the offer, forcing the business into voluntary administration.

Burberry’s strategic thinking

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The NRA pointed us to an article in Glossy, explaining Burberry’s strategy of selling directly rather than through their wholesale channel.  Direct sales lifted from 75% last year to 80% and Burberry's overall sales went up by 3% to nearly A$5 billion.  Part of the strategy includes reduced promotions, which wholesale partnerships overused, undermining the brand.  Another driver behind the shift to direct selling was the declining traffic in department stores.  The business is revising its approach to all the core areas, including product, employee, operations and customer engagement.
21
May-18
Monday

Mixed reaction to Nordstrom’s results

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According to the NRF, Nordstrom booked a 38% jump in first-quarter profits.  Yet, the market reacted in a strange way – Nordstrom shares dropped by 9% on Friday.  Market Watch attributed this to weakness in same-store sales growth, which has been less than 1%.  Interestingly, Nordstrom now publishes a figure for “digitally-enabled sales”, which went up 29%.  Digital Path to Purchase seems to be gaining momentum.

The other side of the coin

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 The Wall Street Journal reported that hundreds of technology firms raising money for cryptocurrencies are using deceptive or even fraudulent tactics to lure investors. The  Journal reviewed documents produced for 1,450 digital coin offerings and found 271 with red flags. Warning signs included plagiarised investor documents, promises of guaranteed returns and missing or fake executive teams. In total, more than $1 billion has been poured into those 271 coin offerings, and investors have so far claimed losses of up to $273 million in the projects.  We have warned in the past that without inherent value and without backing by a state, such 'currencies' are not real.
18
May-18
Friday

Sadly, no tax reform in Australia

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According to Reuters, based on data from S&P 500 companies, first-quarter capital expenditure in the US totalled around U$160 billion, up more than 21% from a year ago.  This has been attributed to the US tax reform and it would be good if people in Canberra paid attention to the movements in the US economy resulting from a comprehensive tax restructure.  Wouldn’t we want similar statistics in Australia?  Focus on cutting a pie rather than making it bigger never pays off in the long-term.

Myer speculation continues

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The AFR commented on Myer’s evolving situation. The position of the business is difficult and some changes are unavoidable.  Apparently, Myer has been in talks with its banking syndicate since March, to renegotiate bank covenants.  The business has many constraints, limiting its options – the most onerous one being lease liabilities of $2.7 billion.  Myer has previously ruled out voluntary administration as a means to resolve the lease issue.  One option would be to raise capital, but we think that this won’t be easy in Myer’s current situation.

Technology is not enough

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The AFR published an article about iRexchange, “the digital start-up threatening Metcash’s dominance of the $18 billion wholesale grocery market”.  iRexchange operates a supplier-retailer portal and two years ago claimed that it would be turning over $8 billion by 2018.  Predictably, this did not eventuate, because order taking and processing is only a minute part of what Metcash does.  The most important part in the iRexchange business model, the logistics, had to be handled by DHL and Emergent and we can’t see how distribution companies can compete with a specialist grocery wholesaler at their core game.  Also, the only way an independent grocer can have a meaningful relationship with a supplier is via volume.  So, groups such as Ritchies in Victoria or Drake in South Australia can source directly and they have the infrastructure to do so.  They don’t need a third party portal, so we think that iRexchange is overly optimistic thinking that they will still get to $8 billion in the future.
17
May-18
Thursday

The battle we cannot win

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We have been pointing out that retail sales statistics compared to the month before makes no sense whatsoever. In retail, the only material measure is year-on-year corresponding period comparison. We can understand when the general media make such mistake, but we have been disappointed by our favourite Inside Retail magazine. It published an article titled “Troubling signs for retail in April” because April sales were 0.2% below March, but at the same time, it also stated that year-on-year growth was 9.3%. If this number is correct, we would suggest a better title: “Extraordinary retail growth in April”.

Walmart’s costly experiment

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The Chicago Tribune reported that Walmart has ended its Mobile Scan & Go program, which it had running in around 150 locations. Mobile Scan & Go allowed shoppers to scan and pay using a handheld device or smartphone.  There are a few things we don’t get: why are such experiments run in 150 stores rather than one, and why didn't the people in charge see that asking customers to weigh and tag their purchases before scanning them was far-fetched. In our view, the fact that certain technologies exist doesn’t mean that they always make sense in a retail business.
16
May-18
Wednesday

US retail statistics

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Reuters reported that in April US retail sales went up 4.7%, year on year.  And, they referred to this as a ‘moderate increase’. We remain puzzled why news agencies continue to misunderstand the industry and as a consequence completely misinterpret the figures.  At 4.7% growth, US retail is booming – big time. On a somewhat unrelated matter, but since Reuters mentioned it, the US petrol price in April was AUD1.02 per litre.  Makes you wonder where the 40 cents differential in Australia goes…
 

Mothercare UK woes

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The Telegraph in the UK reported that the embattled, publicly listed Mothercare chain plans to accelerate store closures and will need a cash injection from its shareholders.  They are likely to enter into a Company Voluntary Arrangement, to gain flexibility in shutting down stores (from about 140 to 80-100) and renegotiating rents.  It looks like Australia is not the only market where this retail segment is under pressure.

Zara’s Australian numbers

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The AFR reported that the Lew family has divested from Zara Australia. What we found even more interesting in the AFR’s article were the trading numbers released by Zara to ASIC. For the year ending in January 2018, Zara's sales went up to $282 million, i.e. about 10%, but mainly due to new store openings.  Pre-tax profit fell to $12.8 million, so even if the figure represents EBIT rather than EBITDA, at 4.5% this doesn’t qualify as a great outcome.  Apparently, gross profit hovers around 55%, which in our assessment is borderline for an apparel retailer.  One number that must be making other retailers envious is Zara’s per store turnover – close to $15 million.