More troubling signs at retailers as earnings fall 24% 

More troubling signs at retailers as earnings fall 24% 

As we wind up the most recent barrage of quarterly earnings, we are being left with a sour taste in our collective mouths thanks to retailers, particularly those focused on apparel. While some data points to those mall-based retailers, like The Gap being hard hit, other data suggests retailers are not matching consumer preferences either for the apparel they have or investing in their digital shopping platforms. While the former points to the fickleness of the consumer, or the tone-deaf ears of certain retailers, the latter indicate that not all retailers have accepted the growing importance of digital commerce that is a key tenant of our Digital Lifestyle investing theme.

Is it easier to blame the weather and other items in the short-term for a failed strategy? Sure it is, but the real drivers of falling retailer results will come out in the coming quarters. Those like Target, Walmart and Costco that have been investing in digital commerce are likely to thrive while those that haven’t will likely disappoint further as Amazon begins free one-day shipping for Prime customers. 

Clothing retailers like the Gap, Canada Goose and Abercrombie & Fitch are all experiencing troubling sales reports, the likes of which haven’t been seen since the Great Recession a decade ago, according to a report by CNBC.

Many companies are blaming the weather, slow traffic at malls, bad promotions and product blunders. With the industry as a whole struggling, the S&P 500 Retail ETX was down 2 percent on Friday (May 31), and has dropped almost 13 percent in May, which sets it up to be the worst period since November of 2008, when it lost 20.25 percent.

As a group, apparel retail earnings are down 24 percent, although earnings had been growing since Q3 of 2017. In Q1 of 2018, earnings gained 26 percent. In Q1 of 2008, earnings fell 40 percent.

“These are all mall-based retailers experiencing traffic issues,” Retail Metrics Founder Ken Perkins said. “The consumer is holding up … sentiment numbers have been really high.” The problem, he said, is that some companies aren’t investing in attracting customers to their stores and websites.

There are some bright spots. Target and Walmart both had good first quarters, and have been investing in apparel, with positive results.

“It’s not that people are buying fewer clothes,” CGP president Craig Johnson said. They’re going to different places, he said, and some older companies, like Chico’s and Talbots, which are “classic, women’s, missy retailers,” are victims of changing popular culture and taste.

“The demand for that product is a fraction of what it used to be a generation ago. Women aren’t dressing like that,” he said.

Another issue facing the industry is the threat of tariffs, which could worsen the outlook.

There’s the consideration of a 25 percent tax on clothing and footwear from China, and many companies haven’t factored in the effect this could have. There’s also the possibility of a 5 percent duty on Mexican imports on June 10, which would raise to 25 percent by October.

Source: Retail Clothing Sales Down 24 Percent |

Doubling Down on Digital Infrastructure Thematic Leader

Doubling Down on Digital Infrastructure Thematic Leader

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Adding two Middle-class Squeeze call option positions ahead of earnings this week

Adding two Middle-class Squeeze call option positions ahead of earnings this week

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More mall pain ahead as Gap and Banana Republic stores close by the dozens

More mall pain ahead as Gap and Banana Republic stores close by the dozens

More bad news for the mall as Gap (GPS), a key tenant across many a suburban mall, announced it will close 200 Gap and Banana Republic stores. These closings equate to 10% of the total number of Gap and Banana Republic locations and add to the growing vacancies at malls that spell trouble for mall-based REITs such as Simon Property Group (SPG) and GGP Inc. (GGP). Gap management blamed “creative missteps” at Gap and Banana Republic and we agree these businesses have lost their way with Rise & Fall of the Middle Class and Affordable Luxury consumer. Despite those issues, Gaps Old Navy business continues to thrive as its lower priced apparel appeals to the Cash-Strapped Consumer. With Amazon expanding its private label presence into apparel, we have to wonder what creative fixes  Gap intends to make to win back consumers and their wallets?

Gap (GPS), the parent company of all of those brands, said Wednesday that it plans to close about 200 “underperforming” Gap and Banana Republic locations.

There are currently about 2,000 Gap and Banana Republic stores worldwide, according to public filings, so the closures would likely impact about 10% of them. Gap declined to specify how many of each brands’ stores will close or where the soon-to-be shuttered stores are located.

Both Gap and Banana Republic have seen declining sales in recent years and they’ve struggled to compete with so-called fast fashion retailers such as Forever 21 and H&M.

Speaking at a retail conference Wednesday, Gap CEO Art Peck described the sales downturns at Gap and Banana Republic as “significant and acute,” and admitted the company made “creative missteps” in its efforts to keep the brands competitive.

Source: Gap and Banana Republic stores closing by the dozens, new Athleta and Old Navy locations on the way – Sep. 6, 2017

Tematica’s Take on Trump’s Tax Proposal

Tematica’s Take on Trump’s Tax Proposal

This week a one page outline was released for President Trump’s tax plan, which includes slashing the corporate tax rate to 15 percent from 35 percent, reducing and simplifying individual tax rates and a “one-time” lower repatriation tax, (at a rate TBD) for the more than a trillion dollars in corporate cash being held outside the US. While policy proposals such as these tend to be fraught with negotiations and pushback that could ultimately alter the final outcome, it’s already being reported that House Speaker Paul Ryan on Wednesday said Trump’s plan is 80 percent aligned with House Republican proposals. That likely raises the probability of Trump’s plan getting more support than the first attempt at repealing and replacing the Affordable Car Act, but even so, it still doesn’t guarantee passage.

From our perspective, there are several questions left to be answered (the proposal was less than 200 words after all), including the eventual Congressional Budget Office scoring on the deficit potential, but directionally speaking investors should ask, “Who benefits?” There are thousands of companies across the S&P 500 and S&P 1500 as well as the Wilshire 5000, but individual investors are likely to look for a handful of stocks that could see a relatively outsized reduction in their tax burden should the corporate tax rate be reduced.

Said another way, which companies are likely to see a dramatic drop in their corporate tax rate even after some Washington haggling occurs?

Here are a few:

  • Aging of the Population candidate CVS Health (CVS), which derives nearly 100 percent of its sales inside the United State and had reported tax rates of 38-39 percent in 2015 and 2016;
  • Wealth management and online brokerage company Charles Schwab (SCHW), another Aging of the Population candidate, is also predominantly U.S. focused when it comes to its revenue stream and its 2015-2016 tax rate was 36.5-37.0 percent;
  • A third example is Southwest Airlines (LUV), which resonates with our Cash-strapped Consumer investing theme, which recorded corporate tax rates of 35.5-37.1 percent over the last few years.
  • While its reported corporate tax rate was lower than the above three companies, Connected Society company Verizon (VZ) would also see its bottom line vastly improved should the corporate tax rate fall meaningfully from the 31-34 percent rate it paid in 2015 and 2016.

In any of the above cases, a meaningful tax cut would allow a far greater percentage of the company’s operating profit to fall through to its net income line, which in turn would lead to a meaningful improvement in reported earnings per share. The lingering question is whether investors would see through that below the operating line improvement in earnings per share or fall into the trap of “faster earnings growth year over year means greater P/E multiple expansion?”

In our view, it rather resembles a cousin to investors paying stretched valuations for earnings growth that has been fueled by stock repurchase initiatives, especially if reported net income actually fell year over year.

Odds are there will be much back and forth in Washington over the coming weeks and months as even the White House has backed off Treasury Secretary Steven Mnuchin’s goal of passing tax reform by August, setting a new year-end target date in the process.

Getting back to House Speaker Ryan’s 80 percent comment, it means there is some 20 percent that would need to be reworked. One area that has been mentioned is the border adjustment feature, which has been viewed as one way to fund President Trump’s infrastructure program. That spending initiative, which is sorely needed per the latest report card from the American Society of Civil Engineers, would be a boon to companies ranging from Caterpillar (CAT) to Granite Construction (GVA) and other infrastructure related ones.

In its current form, Treasury Secretary Steven Mnuchin has said the border adjustment tax doesn’t work, but as Washington gets ready to haggle over Trump’s tax plan it could mean the border adjustment tax gets rethought as well. If so, we could see investor concern over rising costs for apparel companies that source heavily outside the US as well as those outside the US that derive a meaningful portion of revenue and profits from sales inside the U.S. Examples of the former would include Gap (GPS) and Michael Kors (KORS), while the latter would be companies lie Diageo (DEO) and Unilver plc (UL).

As the back and forth gets underway in Washington,  investors should continue to search for companies that could benefit from lower corporate taxes and do their due diligence on the underlying business. Given our thematic investing strategy, we’d argue that as investors do that they should factor in the various tailwinds associated with our more than 15 investing themes into their thinking.

Looking at the bigger picture, the release of this one-page, sub-200 word outline understandably gave the market pause if only due to the brevity of the proposal, as we close in on the administration’s 100th day. The market rose dramatically post-election because investors believed that the new administration would usher in a more business-friendly regime that would stimulate the economy. The market’s weakness Wednesday was likely along the line of, “That’s it? Nearly 100 days in and that’s all you have for us?” This is one more area in which the market got ahead of itself based on hopes with reality being a bit less encouraging. In time, the administration may very well put together a comprehsive plan that is compelling to Congress, but with less than 200 words and only 7 numbers nearly 100 days in, the market is left scratching its head.

Don’t underestimate Amazon move into apparel and what it means for brick & mortar retail business

Don’t underestimate Amazon move into apparel and what it means for brick & mortar retail business

The brick & mortar business of retailers is already feeling the pain of consumers shifting the how and where they shop to digital (Internet and mobile) commerce. We’ve already seen the share shifts in monthly same-store-sales metrics reported by ChannelAdvisor.  Amazon’s pending move into apparel as either a distribution partner, with its own branded apparel or both will pressure brick & mortar retail business even more in the coming months.


A Goldman Sachs report says brick-and-mortar apparel stores may lose some ground to Amazon, noting that the e-commerce giant has grown by leaps and bounds recently and will likely continue to grow, Yahoo Finance reports.The report estimates that apparel and accessories represent $10 billion in sales for Amazon, accounting for 20% of the online apparel and accessories market. Macy’s is behind it with just $5.2 billion in sales.Amazon’s success is due to a few things: many brands sell on its site, or to Amazon’s buyers. More will in the future as well, as companies like Gap have said they’d consider working with the online retail behemoth. Others should follow suit, “because they need to migrate to where consumer traffic is,” Goldman said.

Source: Report: Amazon’s Strides In Apparel Could Be Serious Threat To Brick-And-Mortar Stores – Consumerist

Latest UPS Pulse of the Online Shopper study confirms the accelerated shift that has Gap and other retailers questioning their business models 

Latest UPS Pulse of the Online Shopper study confirms the accelerated shift that has Gap and other retailers questioning their business models 

Given the data junkies that we are, we are always looking for confirming data points and this one while a bit self serving certainly confirms the accelerated shift toward digital commerce. We define digital commerce to include both online and mobile shopping. Given the growing install base of connected devices, collapsing time to customer from Amazon and others, and consumer psychographics, we see this acceleration only picking up speed. Pretty much, tracking as expected for our Connected Society investing theme. As this happens, we’ll also see benefits ripple through to our Cashless Consumption investing theme.

According to the fifth annual UPS Pulse of the Online Shopper study, 51% of all purchases made by respondents were made online. This is up from 48% in 2015 and the first time in the study’s five-year history that figure went above 50%. The study is based on a comScore survey of more than 5,000 U.S. online shoppers.Considering this result, it is not too surprising that 17% of consumers plan to shop less in store, shifting time to their electronic devices. The use of smartphones is up 10 percentage points to 77% during the past two years, and respondents report a better mobile experience with satisfaction up eight percentage points to 73% since 2015.

Source: UPS: Online shoppers shift purchase habits | Chain Store Age