“Desperate times call for desperate measures” is a famous saying and given the weeks of COVID-19 led lockdown, it’s not surprising to see businesses being hit by sagging sales are getting creative. This creativity includes leveraging Tematica’s Digital Lifestyle investing theme and in the case of 7 Eleven, it also means tapping into our Guilty Pleasures one as well. Who can blame the company, but the question lingering in our collective Tematica brains is if this is a sustainable shift in consumer consumption habits or is it just a short-term fix while bars and restaurants are closed? Time will certainly tell.
7-Eleven customers can now use the 7NOW delivery app to order wine, beer or liquor anytime in participating markets, as well as hot or ready-to-bake whole pizzas on weekends. The convenience store chain is running a promotion on pizzas each Friday, Saturday and Sunday until May 17, according to an announcement.
Sales of wine, beer and liquor for off-premise consumption are also seeing increases, as most bars and sit-down eateries are now closed. Alcoholic beverages were up 22 percent in the week concluding March 28, per one study cited in the announcement, which claimed that 7-Eleven “is one of the top retailers of cold beer and other canned alcoholic beverages in the U.S.”
The 7NOW delivery app is available in about 400 cites, providing more than 35 million U.S. households with access to more than 3,000 products they might require during the pandemic. Merchandise includes hot and fresh foods, groceries and over-the-counter medicine, among other products.
As 5G fires up across the nation and beyond, this chip-maker will likely be called on to let phones connect to new and old generations of networks.
As the smartphone market has matured, it has become increasingly tied to replacement demand.
Look at these statistics: As of December 2019, there are 5.175 billion unique mobile subscribers across the globe, according to the Global System for Mobile Communications, or GSM Association. As surprising as it may sound, the last big quarter for smartphone shipments was the fourth one in 2016. So, despite the seasonal pattern for stronger smartphone sales in the back half of the year, the 1.4 billion units shipped in 2018 was relatively unchanged year-over-year. Prospects for shipments in 2019 also point to modest growth year-over-year.
As we move through 2020, mobile operators will light up their next generation 5G networks that will likely be…
Read more here
This is a quaint idea, but as the data published by ShopperTrak for Black Friday 2019 showed there is no putting the digital shopping genie back in the bottle, especially not after companies like Target and Walmart have ramped up their digital commerce efforts to battle Amazon.
Some holiday traditions are easy to explain — things like wrapping presents, drinking hot chocolate and baking cookies are all neatly summed up with the knowledge that the vast majority of people like opening presents and eating cookies.
Key points inside this issue
- The Fed Takes Center Stage Once Again
- Farfetch Limited (FTCH) – A fashionable Living the Life Thematic Leader
- Digital Lifestyle – The August Retail Sales confirms the adoption continues
Economics & Expectations
The Fed Takes Center Stage Once Again
As we saw last week, the primary drivers of the stock market continue to be developments on the U.S.-China trade front and the next steps in monetary policy. As the European Central Bank stepped up its monetary policy loosening, it left some to wonder how much dry powder it had remaining should the global economy slow further and tip into a recession. Amid those concerns, along with some discrepancy among reports that President Trump would acquiesce to a two-step trade deal with China, stocks finished last week with a whimper after rebounding Wednesday and Thursday.
We continue to see intellectual property and national security as key tenets in negotiating a trade deal with China. We will watch as the lead up to October’s next round of trade negotiations unfolds. Given the Fed’s next two-day monetary policy meeting that begins on Tuesday and culminates with the Fed’s announcement and subsequent press conference, barring any new U.S.-China trade developments before then, it’s safe to say what the Fed says will be a key driver of the stock market this week.
Leading up to that next Fed press conference, we will get the August data for Industrial Production and Housing Starts as well as the September Empire State Manufacturing Index. Paired with Friday’s August Retail Sales report and last Thursday’s August CPI report, that will be some of the last data the Fed factors into its policy decision.
Per the CME Group’s FedWatch tool, the market sees an 82% probability for the Fed to cut interest rates by 25 basis points this week with possibly one more rate cut to be had before we exit 2019. Normally speaking, parsing the Fed’s words and Fe Chair Powell’s presser commentary are key to getting inside the central bank’s “head,” and this will be especially important this time around. One of our concerns has been the difference between the economic data and the expectations it is yielding in the stock market. Should the Fed manage to catch the market off guard, odds are it will give the market a touch of agita.
On the earnings front
there are five reports that we’ll be paying close attention to this week. They are Adobe Systems (ADBE), Chewy (CHWY), FedEx (FDX), General Mills (GIS) and Darden Restaurants (DRI). With Adobe, we’ll be examining the rate of growth tied to cloud, an aspect of our Disruptive Innovators investing theme. With Darden we’ll look to see if the performance at its full-service restaurants matches up with the consumer trade-down data being reported by the National Restaurant Association. That data has powered shares of Cleaner Living Thematic Leader and Cleaner Living Index resident Chipotle Mexican Grill (CMG) higher of late, bringing the year to date return to 82% vs. 20% for the S&P 500. Chewy is a Digital Lifestyle company that is focused on the pet market serving up food, toys, medications and other pet products. Fedex will not only offer some confirmation on the digital shopping aspect of our Digital Lifestyle investing theme it will also shed some light on the global economy as well.
Farfetch Limited – A fashionable Living the Life Thematic Leader
In last week’s issue, I mentioned that I was collecting my thoughts on Farfetch Limited (FTCH), a company that sits at the intersection of the luxury goods market and digital commerce. Said thematically, Farfetch is a company that reflects our Living the Life investment theme, while also benefitting from tailwinds of our Digital Lifestyle theme. Even though the company went public last year, it’s not a household name even though it operates a global luxury digital marketplace. As the shares have fallen over the last several weeks, I’ve had my eyes on them and now is the time to dip our toes in the water by adding FTCH as a Thematic Leader.
Farfetch Provides Digital Shopping to the Exploding Global Luxury Market
Farfetch is a play on the global $100 billion online luxury market with access to over 3,200 different brands across more than 1,100 brand boutique partners across its platform. With both high-end and every-day consumers continuing to shift their shopping to online and mobile platforms, we see Farfetch attacking a growing market that also has the combined benefit of appealing to the aspirational shopper and being relatively inelastic compared to mainstream apparel.
Part of what is fueling the global demand for luxury and aspirational goods is the rising disposable income of consumers in Asia, particularly China. According to Hurun’s report, The Chinese Luxury Traveler, enthusiasm for overseas travel shows no signs of abating, with the proportion of time spent on overseas tourism among luxury travelers increasing 5% to become 70% of the total. Cosmetics, (45%), local specialties (43%), luggage (39%), clothing and accessories (37%) and jewelry (34%) remain the most sought — after items among luxury travelers. High domestic import duties and concerns about fake products contribute to the popularity of shopping abroad.
It should come as little surprise then that roughly 31% of FarFetch’s 2018 revenue was derived from Asia-Pacific with the balance split between Europe, Middle East & Africa (40%) and the Americas (29%). At the end of the June 2019 quarter, the company had 1.77 million active customers, up from 1.35 million exiting 2018 and 0.9 million in 2017. As the number of active users has grown so too has Farfetch’s revenue, which hit $718 million over the 12 months ending June 2019 compared to $602 million in all of 2018 and $386 million in 2017.
Farfetch primarily monetizes its platform by serving as a commercial intermediary between sellers and end consumers and earns a commission for this service. That revenue stream also includes fees charged to sellers for other activities, such as packaging, credit-card processing, and other transaction processing activities. That business accounts for 80%-85% of Farfetch’s overall revenue with the balance derived from Platform Fulfillment Revenue and to a small extent In-Store Revenue.
New Acquisition Transformed Farfetch’s Revenue Mix
In August, Farfetch announced the acquisition of New Guards Group, the Milan-based parent company of Off-White, Heron Preston and Palm Angels, in a deal valued at $675 million. New Guards will serve as the basis for a new business segment at Farfetch, one that it has named Brand Platform. Brand Platform will allow Farfetch to leverage New Guards’ design and product capabilities to expand the reach of its brands as well as develop new brands that span the Farfetch platform. For the 12-month period ending April 2019, the New Guards portfolio delivered revenue of $345 million, with profits before tax of $95 million. By comparison, Farfetch posted $654 million in revenue and an operating loss of $183 million over that time frame.
Clearly, another part of the thought behind acquiring New Guards and building the Brand Platform business is to improve the company’s margin and profit profile. And on the housekeeping front, the $675 million paid for New Guards will be equally split between cash and stock. Following its IPO last year, Farfetch ended the June quarter with roughly $1 billion in cash and equivalents on its balance sheet.
In many ways what we have here is a baby Amazon (AMZN) that is focused on luxury goods. Ah, the evolution of digital shopping! And while there are a number of publicly traded companies tied to digital shopping, there are few that focus solely on luxury goods.
Why Now is the Time to Add FTCH Shares
We are heading into the company’s seasonally strongest time of year, the holiday shopping season, and over the last few years, the December quarter has accounted for almost 35% of Farfetch’s annual sales. With the company’s active user base continuing to grow by leaps and bounds, that historical pattern is likely to repeat itself. Current consensus expectations have Farfetch hitting $964 million in revenue for all of 2019 and then $1.4 billion in 2020.
At the current share price, FTCH shares are trading at 1.6x expected 2020 sales on an enterprise value-to-sales basis. The consensus price target among the 10 Wall Street analysts that cover the stock is $22, which equates to an EV/2020 sales multiple of near 3.5x when adjusting for the pending New Guards acquisition. As we move through this valuation exercise, we have to factor into our thinking that Farfetch is not expected to become EBITDA positive until 2021. In our view, that warrants a bit of haircut on the multiple side and utilizing an EV/2020 sale multiple of 2.5x derives our $16 price target.
- Despite that multiple, there is roughly 60% potential upside to that target vs. downside to the 52-week low of $8.82.
- We are adding FTCH shares to the Thematic Leaders for our Living the Life investing theme.
- A $16 price target is being set and we will wait to put any sort of stop-loss floor in place.
Digital Lifestyle – The August Retail Sales confirms the adoption continues
One of last week’s key economic reports was the August Retail Sales report due in part to the simple fact the consumer directly or indirectly accounts for two-thirds of the domestic economy. Moreover, with the manufacturing and industrial facing data – both economic and other third-party kinds, such as truck tonnage, railcar loadings and the like – softening in the June quarter, that quarter’s positive GDP print hinged entirely on the consumer. With domestic manufacturing and industrial data weakening further in July and August, the looming question being asked by many an investor is whether the consumer can keep the economy chugging along?
In recent months, I’ve voiced growing concerns over the spending health of the consumer as more data suggests a strengthening tailwind for our Middle-Class Squeeze investing theme. Some of that includes the Federal Reserve Bank of New York’s latest Household Debt and Credit Report, consumer household debt balances have been on the rise for five years and quarterly increases continue on a consecutive basis, bringing the second quarter 2019 total to $192 billion. Also a growing number of banks are warning over rising credit card delinquencies even as the Federal Reserve’s July Consumer Credit data showed revolving credit expanded at its fastest pace since November 2017.
Getting back to the August Retail Sale report, the headline print was a tad better than expected, however once we removed auto sales, retail sales for the month were flat. That’s on a sequential basis, but when viewed on a year over year one, retail sales excluding autos rose 3.5% year over year. That brought the year over year comparison for the three-months ending with August to up 3.4% and 1.5% stronger than the three months ending in May on the same basis.
Again, perspective can be illuminating when looking at the data, but what really shined during the month of August was digital shopping, which rose 16.0% year over year. That continued strength following the expected July surge in digital shopping due to Amazon Prime Day and all the others that looked to cash in on it led year over year digital shopping sales to rise 15.0% for the three months ending in August.
Without question, this aspect of our Digital Lifestyle investing theme continues to take consumer wallet share, primarily at the expense of brick & mortar retailers, especially department stores, which saw their August retail sales fall 5.4%. That continues the pain felt by department stores and helps explain why more than 7,000 brick & mortar locations have shuttered their doors thus far in 2019. Odds are there is more of that to come as consumers continue to shift their dollar purchase volume to online and mobile shopping as Walmart (WMT), Target (TGT) and others look to compete with Amazon Prime’s one day delivery.
- For all the reasons discussed above, Amazon remains our Thematic King as we head into the seasonally strong holiday shopping season.
Key points inside this issue:
- Apple’s 2019 iPhone event – more meh than wow
- GameStop – It’s only going to get worse
- Elliot Management gets active in AT&T, but its prefers Verizon?
- California approves a bill that changes how contract workers are treated
- Volkswagen set to disrupt the electric vehicle market
I’m going to deviate from the usual format we’ve been using here at Tematica Investing this week to focus on some of what’s happening with Select List residents Apple (AAPL) and AT&T (T) this week as well as one or two other things. The reason is the developments at both companies have a few layers to them, and I wanted to take the space to discuss them in greater detail. Don’t worry, we’ll be back to our standard format next week and I should be sharing some thoughts on Farfetch (FTCH), which sits at the crossroads of our Living the Life, Middle Class Squeeze and Digital Lifestyle investing themes, and another company I’ve been scrutinizing with our thematic lens.
Apple’s 2019 iPhone event – more meh than wow
Yesterday, Apple (AAPL) held its now annual iPhone-centric event, at which it unveiled its newest smartphone model as well as other “new”, or more to the point, upgraded hardware. In that regard, Apple did not disappoint, but the bottom line is the company delivered on expectations serving up new models of the iPhone, Apple Watch and iPad, but with only incremental technical advancements.
Was there anything that is likely to make the average users, not the early adopter, upgrade today because they simply have to “have it”?
Not in my view.
What Apple did do with these latest devices and price cuts on older models that it will keep in play was round out price points in its active device portfolio. To me, that says CEO Tim Cook and his team got the message following the introduction of the iPhone XS and iPhone XS Max last year, each of which sported price tags of over $1,000. This year, a consumer can scoop up an iPhone 8 for as low as $499 or pay more than $1,000 for the new iPhone 11 Pro that sports a new camera system and some other incremental whizbangs. The same goes with Apple Watch – while Apple debuted a new Series 5 model yesterday, it is keeping the Series 3 in the lineup and dropped its price point to $199. That has the potential to wreak havoc on fitness trackers and other smartwatch businesses at companies like Garmin (GRMN) and Fitbit (FIT).
Before moving on, I will point out the expanded product price points could make judging Apple’s product mix revenue from quarter to quarter more of a challenge, especially since Apple is now sharing information on these devices in a more limited fashion. This could mean Apple has a greater chance of surprising on revenue, both to the upside as well as the downside. Despite Apple’s progress in growing its Services business, as well its other non-iPhone businesses, iPhone still accounted for 48% of June 2019 quarterly revenue.
Those weren’t the only two companies to feel the pinch of the Apple event. Another was Netflix (NFLX) as Apple joined Select List resident Walt Disney (DIS) in undercutting Netflix’s monthly subscription rate. In case you missed it, Disney’s starter package for its video streaming service came in at $6.99 per month. Apple undercut that with a $4.99 a month price point for its forthcoming AppleTV+ service, plus one year free with a new device purchase. To be fair, out of the gate Apple’s content library will be rather thin in comparison to Disney and Netflix, but it does have the balance sheet to grow its library in the coming quarters.
Apple also announced that its game subscription service, Apple Arcade, will launch on September 19 with a $4.99 per month price point. Others, such as Microsoft (MSFT) and Alphabet (GOOGL) are targeting game subscription services as well, but with Apple’s install base of devices and the adoption of mobile gaming, Apple Arcade could surprise to the upside.
To me, the combination of Apple Arcade and these other game services are another nail in the coffin for GameStop (GME).
GameStop – It’s only going to get worse
I’ve been bearish on GameStop (GME) for some time, but even I didn’t think it could get this ugly, this fast. After the close last night, GameStop reported its latest quarter results that saw EPS miss expectations by $0.10 per share, a miss on revenues, guidance on its outlook below consensus, and a cut to its same-store comps guidance. The company also shared the core tenets of a new strategic plan.
Nearly all of its speaks for itself except for the strategic plan. Those key tenets are:
- Optimize the core business by improving efficiency and effectiveness across the organization, including cost restructuring, inventory management optimization, adding and growing high margin product categories, and rationalizing the global store base.
- Create the social and cultural hub of gaming across the GameStop platform by testing and improving existing core assets including the store experience, knowledgeable associates and the PowerUp Rewards loyalty program.
- Build digital capabilities, including the recent relaunch of GameStop.com.
- Transform vendor and partner relationships to unlock additional high-margin revenue streams and optimize the lifetime value of every customer.
Granted, this is a cursory review, but based on what I’ve seen I am utterly unconvinced that GameStop can turn this boat around. The company faces headwinds associated with our Digital Lifestyle investing theme that are only going to grow stronger as gaming services from Apple, Microsoft and Alphabet come to market and offer the ability to game anywhere, anytime. To me, it’s very much like the slow sinking ship that was Barnes & Noble (BKS) that tried several different strategies to bail water out.
Did GameStop have its time in the sun? Sure it did, but so did Blockbuster Video and we all know how that ended. Odds are it will be Game Over for GameStop before too long.
Getting back to Apple, now we wait for September 20 when all the new iPhone models begin shipping. Wall Street get your spreadsheets ready!
Elliot Management gets active in AT&T, but its prefers Verizon?
Earlier this week, we learned that activist investor Elliot Management Corp. took a position in AT&T (T). At $3.2 billion, we can safely say it is a large position. Following that investment, Elliot sent a 24-page letter telling AT&T that it needed to change to bolster its share price. Elliot’s price target for T shares? $60. I’ll come back to that in a bit.
Soon thereafter, many media outlets from The New York Times to The Wall Street Journal ran articles covering that 24-page letter, which at one point suggested AT&T be more like Verizon (VZ) and focus on building out its 5G network and cut costs. While I agree with Elliot that those should be focus points for AT&T, and that AT&T should benefit from its spectrum holdings as well as being the provider of the federally backed FirstNet communications system for emergency responders, I disagree with its criticism of the company’s media play.
Plain and simple, people vote with their feet for quality content. We’ve seen this at the movie box office, TV ratings, and at streaming services like Netflix (NFLX) when it debuted House of Cards or Stranger Things, and Hulu with the Handmaiden’s Tale. I’ve long since argued that AT&T has taken a page out of others’ playbook and sought to surround its mobile business with content, and yes that mobile business is increasingly the platform of choice for consuming streaming video content. By effectively forming a proprietary content moat around its business, the company can shore up its competitive position and expand its business offering rather than having its mobile service compete largely on price. And this isn’t a new strategy – we saw Comcast (CMCSA) do it rather well when it swallowed NBC Universal to take on Walt Disney and others.
Let’s also remember that following the acquisiton of Time Warner, AT&T is poised to follow Walt Disney, Apple and others into the streaming video service market next year. Unlike Apple, AT&T’s Warner Media brings a rich and growing content library but similar to Apple, AT&T has an existing service to which it can bundle its streaming service. AT&T may be arriving later to the party than Apple and Disney, but its effort should not be underestimated, nor should the impact of that business on how investors will come to think about valuing T shares. The recent valuation shift in Disney thanks to Disney+ is a great example and odds are we will see something similar at Apple before too long with Apple Arcade and AppleTV+. These changes will help inform us as to how that AT&T re-think could play out as it comes to straddle the line between being a Digital Infrastructure and Digital Lifestyle company.
Yes Verizon may have a leg up on AT&T when it comes to the current state of its 5G network, but as we heard from specialty contractor Dycom Industries (DY), it is seeing a significant uptick in 5G related construction and its top two customers are AT& T (23% of first half 2019 revenue) followed by Verizon (22%). But when these two companies along with Sprint (S), T-Mobile USA (TMUS) and other players have their 5G network buildout competed, how will Verizon ward off subscriber poachers that are offering compelling monthly rates?
And for what it’s worth, I’m sure Elliot Management is loving the current dividend yield had with T shares. Granted its $60 price target implies a yield more like 3.4%, but I’d be happy to get that yield if it means a 60% pop in T shares.
California approves a bill that changes how contract workers are treated
California has long been a trend setter, but if you’re an investor in Uber (UBER) or Lyft (LYFT) — two companies riding our Disruptive Innovators theme — that latest bout of trend setting could become a problem. Yesterday, California lawmakers have approved Assembly Bill 5, a bill that requires companies like Uber, Lyft and DoorDash to treat contract workers as employees.
This is one of those times that our thematic lens is being tilted a tad to focus on a regulatory change that will entitle gig workers to protections like a minimum wage and unemployment benefits, which will drive costs at the companies higher. It’s being estimated that on-demand companies like Uber and the delivery service DoorDash will see their costs rise 20%-30% when they rely on employees rather than contractors. For Uber and Lyft, that likely means pushing out their respective timetables to profitability.
We’ll have to see if other states follow California’s lead and adopt a similar change. A coalition of labor groups is pushing similar legislation in New York, and bills in Washington State and Oregon could see renewed momentum. The more states that do, the larger the profit revisions to the downside to be had.
Volkswagen set to disrupt the electric vehicle market
It was recently reported that Volkswagen (VWAGY) has hit a new milestone in reducing battery costs for its electric vehicles, as it now pays less than $100 per KWh for its batteries. Given the battery pack is the most expensive part of an electric vehicle, this has been thought to be a tipping point for mass adoption of electric vehicles.
Soon after that report, Volkswagen rolled out the final version of its first affordable long-range electric car, the ID.3, at the 2019 Frankfurt Motor Show and is expected to be available in mid-2020. By affordable, Volkswagen means “under €30,000” (about $33,180, currently) and the ID.3 will come in three variants that offer between roughly 205 and 340 miles of range.
By all accounts, the ID.3 will be a vehicle to watch as it is the first one being built on the company’s new modular all-electric platform that is expected to be the basis for dozens more cars and SUVs in the coming years as Volkswagen Group’s pushed hard into electric vehicles.
Many, including myself, have been waiting for the competitive landscape in the electric vehicle market to heat up considerably – it’s no secret that all the major auto OEMs are targeting the market. Between this fall in battery cost and the price point for Volkswagen’s ID.3, it appears that the change in the landscape is finally approaching and it’s likely to bring more competitive pressures for Clean Living company and Cleaner Living Index constituent Tesla (TSLA).
Here at Tematica, one of the things we like more than anyone of our investing themes is when two or more of them intersect as it forms a super-theme of sorts. We’ve seen numerous examples over the last several quarters, but there are also times when the tailwind of one of our themes presents a headwind for another. We are seeing that unfold between the cashless consumption aspect of our Digital Lifestyle investing theme and our Middle Class Squeeze and Safety & Security ones.
There are benefits to be had with the move by business to digital commerce…
Some retailers are cutting out cash to speed up transactions, reduce the risk of theft and accommodate the increased use of credit and debit cards, as well as digital wallets like Apple Pay and Google Pay, to purchase services and products.
… and there are times when having to pay only by cash can be a hassle, especially if you’ve gotten used to paying with a swipe or a tap. There are also those folks that are tapping their credit cards harder than others as they look to make ends meet. According to the Federal Reserve Bank of New York’s latest Household Debt and Credit Report, consumer household debt balances have been on the rise for five years and quarterly increases continued on a consecutive basis, bringing the second quarter 2019 total to $192 billion.
But as the below excerpts note, not everyone in the entire population is able to participate in cashless consumption be it because they lack a debit or credit card. Others have those but are wary about leaving a digital trail that could be exploited by cyber attackers and compromise their privacy.
But with 6.5% of U.S. households in 2017 not having bank accounts, according to the FDIC, and 18.7% having accounts but also using financial services outside of insured institutions, some are pushing back on the trend
But it’s not just those without credit and debit cards who may balk at being told they can’t use cash. In an era when data breaches have occurred at institutions such as Capital One and credit rating agency Equifax, some consumers worry that cashless payments can infringe on their privacy.
“You do hear a good portion of people saying ‘Once we move to this cashless economy, there is a digital trail for every single one of my purchases, and I’m not entirely comfortable with that,’’’ Santana says. “And there’s a possibility there could be a data breach where your information gets compromised. The probability of a data breach happening is very low, but it is isn’t zero.”
Interestingly enough, despite these headwinds, the tailwind for cashless consumption continues to blow as evidenced by the continued decline in using cash.
Square Inc. found that four years ago, shoppers used cash for 46% of purchases that were less than $20. But this year, shoppers used cash for 37% of transactions in the same price range.
And while there may be some overlap in the user numbers, earlier this year Paypal’s (PYPL) Venmo reported 40 million users that completed one transaction in the prior 12 months, while Square reported 15 million Square (SQ) Cash App users for “monthly actives (at least one transaction in the past month).” While those numbers are larger than some digital user figures at banks — Bank of America (BAC) reported that its active base of digital users was 37 million in the March 2019 quarter and for the same period Wells Fargo & Co. (WFC) had 29.8 million active digital users – during the June 2019 quarter Apple (AAPL) Apple’s Apple Pay completed nearly 1 billion transactions per month, nearly transaction levels in the year-ago quarter.
What those figures tell us is in today’s increasingly connected world filled with more consumers embracing digital shopping and mobile ordering, for both convenience and in many cases better affordable prices, we will likely see a continued movement away from cash usage… but we may not see the use of cash disappear just yet. In thematic speak, two powerful tailwinds may be impeded by one headwind, but that will likely only slow the impact, not eliminate it.
As that shift away from cash continues, odds are we will see more companies embrace our Disruptive Innovators tailwind and bring new solutions to market. One such company is Tematica Select List resident USA Technologies (USAT) that is bringing mobile payments to vending machines and unattended retail.
Another is the cash to debit card ReadyStation kiosk found at the now cashless Mercedes Benz stadium in Atlanta. The kiosk by ReadyCard that converts cash to a prepaid debit card that can be used anywhere VISA is accepted. That is but one solution that could thwart regulatory headwinds, especially if like the ReadyStation kiosk the resulting debit card is fee free.
From Philadelphia to San Francisco, several cities and states have passed or are considering bills that prohibit retailers from refusing to accept cash, a policy they say shuts out the millions of Americans who don’t have a bank account, lack credit cards or don’t have photo identification.
Another reminder that where there is a pain point, solutions tend to result.
Plus the Biggest Threat to the German Auto Industry
On this episode of the Thematic Signals podcast, we’re digging into the July Retail Sales and quarterly earnings results from Walmart as both confirm the hard-blowing tailwinds associated with our Digital Lifestyle, Middle-Class Squeeze, Aging of the Population and Cleaner Living Investing themes.
We also breakdown a recent article in The Wall Street
Have a topic or a conversation you think we should tackle on the podcast, email me at email@example.com
And don’t forget to subscribe to the Thematic Signals Podcast on iTunes!
Resources for this podcast:
A look at the thematic outlook we can piece together from the flow of earnings reports we’ve received thus far.
On this episode of the Thematic Signals podcast, we find ourselves in the thick of earnings season and Tematica’s Chris Versace not only provides an overview for how all of these reports are coming together to form a larger picture, he shares a thematic look at what’s moving several stocks, including Amazon (AMZN), Apple (AAPL), International Airlines Group (ICAGY), IBM (IBM), Netflix (NFLX), Skyworks Solutions (SWKS) and the impact of spending on cybersecurity. In thematic speak, it’s the Digital Lifestyle, Digital Infrastructure, Disruptive Innovators, and the Safety & Security themes, with an added dash of privacy. Of particular note, Chris is really excited about one of the latest signals for Tematica’s Cleaner Living investing theme as Nestle SA has found a way to dramatically reduce the sugar content of its KitKat bar. Why? Because it and other food and beverage companies are under pressure from consumers and governments alike to make healthier products amid rising obesity and diabetes rates. If Nestle keeps this up maybe one day it could land in the Tematica Research Cleaner Living Index.
Have a topic or a conversation you think we should tackle on the podcast, email me at firstname.lastname@example.org
And don’t forget to subscribe to the Thematic Signals Podcast on iTunes!
Resources for this podcast:
Key points inside this issue
- Boosting our stop loss on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) to $240.
- Safety & Security Thematic Leader Axon Enterprise Inc. (AAXN) catches a TAZR win.
- Housekeeping: The next issue of Tematica Investing will be published during the week of July 29th. Why? Because next week I will be on vacation. Even though I’ll be catching up on some reading and thematic thinking, I’ll be kicking back and recharging for what lies ahead.
Last week, we started the June-quarter earnings season. While there were only 20 reports, what we heard from BASF SE, Fastenal (FAST), and MSC Industrial (MSM) served to remind us that, even though the Fed will likely cut interest rates, odds are the current earning seasons will be a challenging one. That view was reaffirmed this week with results from JB Hunt (JBHT) and CSX (CSX) that confirmed the slowdown in freight traffic, an indicator that we here at Tematica watch rather closely as a gauge for the domestic economy’s health.
Given the declines in the Cass Freight Index over the last seven months, the results out of JB Hunt, CSX and other shippers should hardly be news to the investment community. On the other hand, what is somewhat concerning to me is that these declines in freight are coming in even as June Retail Sales surprise to the upside and e-tailers, like Thematic King Amazon (AMZN), Walmart (WMT), Target (TGT) and others, are embracing one-day and same-day shipping from the prior table stakes that were two-day shipping. The growing concern that I have is that despite the tailwind associated with our Digital Lifestyle investing theme, continued declines in the Cass Freight Index and other freight indicators could signal that the domestic economy is moving from one that is slowing into one that is in contraction territory.
Despite the upside surprise in the June Retail Sales report, it was counterbalanced by a revelation contained in the June Industrial Production & Capacity Utilization report. What we learned yesterday from that report was that domestic factory production fell at an annualized rate of 2.2% in the June quarter. Paired with the slowing freight-related signals mentioned earlier, there is little question over the vector of the domestic economy. Clearly the June quarter will be slower than the March one, but the real question we need to face as investors is, how slow will it be in the current third quarter, as well as the fourth quarter this year? That speed along with the degree of the expected July Fed rate cut and the continuation of the current US-China trade war will influence business spending and earnings expectations for the back half of the year.
As far as the June Retail Sales report goes, while I am all for consumers spending, I’m not in love with the fact that it is increasing credit card debt that is likely driving it. According to data collected by the FDIC and published by MagnifyMoney, “Americans paid banks $113 billion in credit card interest in 2018, up 12% from the $101 billion in interest paid in 2017, and up 49% over the last five years.” And as we’ve seen in the monthly Consumer Credit Report issued by the Federal Reserve, revolving consumer credit, which includes credit card balances, has only grown year to date. In other words, consumers are using credit card debt to fund their spending and rising interest payments will squeeze disposable income levels.
While increasing consumer debt is not exactly an uplifting thought, and certainly a headwind for the economy in the coming quarters, these development are a tailwind for Middle-Class Squeeze Thematic Leader Costco Wholesale (COST):
- Year to date, COST shares are up some 37%, and we are only now heading into the seasonally strongest time of the year for the company’s business. We should continue to hold COST shares, but we will also increase our stop loss to $240 from roughly $225.
Thematic Leader dates to watch
With investor attention turning to corporate earnings, here are the announced reporting dates for the Thematic Leaders:
- Netflix (NFLX) – July 17
- Chipotle Mexican Grill (CMG) – July 23
- Amazon (AMZN) – July 25
- AMN Healthcare (AMN) – August 6
- Dycom Industries (DY) – N/A
- Costco Wholesale (COST) – N/A
- Alibaba (BABA) – N/A
- Axon Enterprises (AAXN) – N/A
Not all of the Leaders have shared the reporting dates for their latest quarterly earnings, but no worries as I’ll be filling the calendar in as the missing ones announce them. And it goes without saying that as the June 2019 earning season continues, I’ll be sifting through the sea of reports looking for thematic data points to be had.
Safety & Security Thematic Leader Axon Enterprise Catches a TAZR Win
As I was putting this issue of Tematica Investing to bed, I saw that Safety & Security Thematic Leader Axon Enterprises (AAXN) announced a big win for its business — a significant order for its TASER Conducted Energy Weapons from agencies across the United States. These orders, which were landed during the first half of 2019, will ship in multiple phases in the coming quarters.
Why are we only hearing about this now?
Partly because Axon needed permission from the agencies make the announcement, and even with such permission granted, the company still needed further permission to name those agencies as customers. A full list of those announced orders can be found here.
Of course, this news is a positive for Axon, and it serves as a reminder that even though the headline story for Axon is the company’s ongoing transformation into a digital security company as it grows it body-camera and digital subscription storage business, the steadfast TAZR business remains a firearm alternative.
We’ve enjoyed a nice run in Axon shares since they were added to the Thematic Leader board, and year to date the shares are up more than 46%. I see no reason to abandon them just yet and our long-term price target of $90 remains intact. For now, our stop loss on the shares continues to sit at $51.
And for what it’s worth, as impressive as that year to date gain is for AAXN shares, it still trails behind Cleaner Living Leader Chipotle Mexican Grill (CMG), which as of last night’s close was up more than 76% year to date.