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10
May-18
Thursday

Post-budget musings

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Standard & Poor rating agency has warned that Australia’s AAA outlook remains negative, post the budget announcement.  S&P quoted growing global risks, which aligns with our earlier comments about the 2018/19 budget and its future projections – they rely on an overly optimistic assumption that nothing of substance will change in the global economy over the next seven years.
9
May-18
Wednesday

AI at H&M

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According to The Wall Street Journal, Hennes & Mauritz, aka H&M, used AI to tune its range and will now be stocking fewer basics and a wider fashion offer.  This is intended to reverse profit decline (20% down) and overstocks (U$4 billion).  Hopefully, H&M are aware of our earlier revelations that AI stands for ‘Appearance of Intelligence’ rather than for ‘Artificial Intelligence’ and still double-check their computer predictions with experienced merchants. Stockholm based H&M operates 4,500 stores worldwide.

Strong results from Adairs

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Adairs, a publicly listed Australian mid-tier bedding, towels, and linen retailer provided a trading update, with the expected sales for the financial year to be in excess of A$310 million and EBIT of approximately A$45 million, i.e. 14.5%.   The business operates in excess of 160 stores, mainly in Australia, competing against department stores and similar operators such as Bed Bath & Table, Sheridan and Pillow Talk.  The share market responded favourably. A word of caution about businesses that EBIT in excess, while fantastic, it acts like a honeypot, attracting competitors to the market.  So, in the medium to long-term, it is better to spend more on strengthening the business rather than to keep the extra profit.

Australian Federal Budget

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The Australian Government published its 2018/19 budget.  Other than shifting money around a bit, minute income tax changes, and a focus on squeezing more money from everyone through stronger compliance measures, the budget doesn’t promise any constructive, structural changes.  Record high public expenditure and business-hostile regulations remain in place.  Consequently, we don’t expect any significant boost to the economy.  Also, in its projections, the budget assumes that nothing of substance will change in the global economy over the next 7 years.  Somewhat foolish, we think.

Lidl’s first anniversary in the US

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Lidl is a part of the German Schwarz group, which turns over around U$120 billion.  The group includes the Kaufland chain, which is about to open in Australia.  There are over 10,000 Lidl stores world-wide.  According to the NRF, Lidl aimed to open 100 stores in its first year in the US, but only opened about 50.  Apparently, Lidl currently has 40 sites in the planning stage, 14 under construction and 11 awaiting opening, so they are serious.  They've taken some key learnings in the US market, adjusting their focus to smaller footprint stores, in more dense demographic areas.  They have definitely made a dent in the areas where they have opened, forcing price reductions amongst competitors.
8
May-18
Tuesday

Baby Bunting's short-term pain, long-term gain?

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Baby Bunting announced that it expects earnings before interest, tax, depreciation, and amortisation (EBITDA) to be in the $18-$20 million range, down from the $23 million previously forecasted. The recently flagged administrations of its third and fourth largest competitors, Baby Bounce and Baby Savings, have undermined the company’s sales performance due to the high levels of clearance discounting in the market. Shares went down by 3.5%, but we think that this is a strange reaction, as, with some competitors now gone, the long-term prospects for the business are better than they were a few months ago.

Godfreys’ troubles continue

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The AFR reported that the ailing vacuum cleaner retailer has gone into a trading halt.  The business was bought in 2011 by a syndicate of investors and then floated in 2014 at $2.75 a share.  The shares traded at $0.30 on Friday.  An offer to buy the business is on the table (from one of the original investors, John Johnson) at $0.32.  We are watching with interest how the Godfreys’ saga will unfold.  The trading hold is expected to be in place until Wednesday, 9 May.
7
May-18
Monday

How to double your business overnight

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Reece Limited announced its intention to acquire US company Morsco for A$1.9 billion.  Morsco has a similar business profile to Reece.  The combined business will turn over A$4.8 billion per year.  The deal will be financed through A$560 million equity rising and a U$1.2 billion loan in the US.  A bold move for the leading Australian plumbing and HVAC supplier.

Walmart’s flip?

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According to Bloomberg, Indian Flipkart Online, one of the nation's fast-growing and largest retail platforms, has agreed to a deal to sell 75% of the company to Walmart for around US$15 billion.  It is expected that the deal will be finalised in the next 10 days.  This would be an interesting twist, with Walmart divesting its UK business and entering India instead.

Reactive retailing costs jobs and hurts consumers

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According to the Washington Post, some of the world’s largest clothing chains, such as Zara, H&M, Gap and Topshop, intend to discontinue selling mohair apparel.  The decision is apparently based on allegations of animal cruelty at a dozen goat farms in South Africa.  If this is the only reason, then it looks like rational thinking no longer applies in some parts of the business world.  Consider this: these are unconfirmed allegations based on video footage from unaudited sources, no analysis has been made as to what % of farms are affected by the alleged cruel practices, and the retailers are not even clear whether any of their brands sourced mohair from these farms.  The same concerns raised in relation to the South African goats can be raised in relation to ordinary wool and many other animal-sourced fibers.  We would suggest that the question needs to be asked: who would benefit from such a ban?  Surely not the people employed in the industry, nor the consumers.
6
May-18
Sunday

JD.com to be 100% run by AI and robots?

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Forbes reported that JD.com founder (Richard Liu) expressed a hope that at some stage his company will be run without human beings, 100% operated by AI and robots.  Forbes hailed this as an audacious goal, which based on our research, makes little sense.  Organisations continually execute algorithms  - most of them are computational and as such can be automated, but quite a few are heuristic and rely on decisions.  Decisions require human judgment, using incomplete information and intelligence.  In our earlier writings, we pointed out that while increasingly smart, animated matter will continue to proliferate, machines with real human-like intelligence make little commercial sense.  The so-called "Artificial Intelligence" actually means the mere ‘Appearance of Intelligence’. It's safe to say that humans won’t be retiring any time soon.

UK House of Fraser's rocky road

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According to Reuters, House of Fraser will need to close some of its stores as a condition of securing new funds from international retailer C.banner, which will become the majority owner of the department stores group with a 51 percent stake.  House of Fraser said it would launch a Company Voluntary Agreement (CVA) next month to allow it to restructure its store portfolio.  The company was founded in 1849 and it operates close to 60 stores in Britain and Ireland.  Under UK’s CVA, as long as 75% (by debt value) of the creditors vote for the CVA, then it binds all of the company's creditors irrespective of whether or not they voted for the deal. Creditors are also unable to take further legal action.