Weekly Issue: As Global Economy Slows, Investors Switch into Fear Mode

Weekly Issue: As Global Economy Slows, Investors Switch into Fear Mode


Key points inside this issue

  • The global economy continued to slow in August
  • Uncertainty has investors in Extreme Fear mode
  • Trade remains the focus of the stock market
  • Boosting our Disney (DIS) price target following D23’s Disney+ focus
  • Items to watch this week


The stock market has been a more volatile than usual over the last few weeks as investors:

  • Contend with the latest global economic data
  • Eye the yield curve
  • Question what the Fed will do next
  • Brace for the next round of trade talks

As if that wasn’t enough, we’ve also witnessed mixed June quarter retail earnings, which are now getting factored into second half of 2019 earnings-per-share expectations for the S&P 500. At the same time, the velocity of corporate buybacks has slowed, Washington is scrutinizing tech companies, and consumer confidence is waning. 

All in all, these issues weighing on investors minds have led to swings in the market based on the most recent headlines, and that can make for a challenging time in the market and for investors.


The global economy continued to slow in August

Last Thursday morning, we received the first meaningful piece of August economic data in the form of the IHS Markit Flash PMI data for the month, and in aggregate, it confirms the global economic slowdown. To date, the U.S. has been the best house on the slowing economic block, but Thursday’s data, which showed the domestic manufacturing sector contracting for the first time in a decade means the trade war and uncertain environment are weighing on the economy. 

During periods of uncertainty, whether we’re talking about companies or people, the natural instinct is to pull back, wait and assess the situation. For both people and companies, dialing back spending is an arguable course of action when faced with uncertainty, but from an economic perspective that translates into a headwind for growth. We’re seeing that headwind in the day’s Flash PMI data.

Aside from the headline, U.S. Flash Manufacturing PMI hit 49.9, marking a 119-month low; the index’s new orders component put in its weakest reading since 2009. Per the report, “Survey respondents often cited subdued corporate spending in response to softer business conditions and concerns about the global economic outlook.” 

But as we saw with the July Retail Sales report, consumers continue to spend, despite rising debt levels and banks are starting to report a pick-up in delinquency rates. The question that is coming to the forefront of investor minds is whether consumers will be able to spend and keep the economy chugging along during the all- important holiday shopping season that will soon be upon us? Given the continued increase in consumer debt levels and news that Citibank (C), JPMorgan Chase (JPM), Bank of America (BAC) and other banks are reporting rising credit card delinquency rates we could be starting to see the consumer spending breaking point. 

Looking at the August Flash PMI data for the eurozone, the slowdown continued as well, but the report also registered a “sizeable drop in confidence regarding the 12-month outlook” with sentiment down to its lowest level since May 2013. Digging into that report we find new order growth in Germany, the largest economy in the eurozone, falling to its weakest levels since early 2013. The August data for the region confirms current forecasts the region is likely to hit just 0.1%-0.2% Gross Domestic Product in the current quarter. Another round of weak data, and odds are we’ll soon see recession fears rising ahead of the European Central Banks upcoming mid-September monetary policy meeting.


Uncertainty has investors in Extreme Fear mode

If we were to step back and look at the data, what we are seeing is data that points to a continued slowdown with some bright spots. Granted those bright spots are also somewhat mixed and there are reasons to be concerned over the sustainability of those bright spots. Is it any wonder then that the CNN Money Fear & Greed Index has been firmly in “Extreme Fear” for the last week? In a word, no.

During periods of Extreme Fear, the jittery market is bound to overreact. Add in the fact that we are in one of the seasonally slowest times of the year for trading volumes means market reactions will be even more extreme one way or another. The danger for investors is to get caught up in the turbulence, and it can be rather easy to do, especially if one is looking to pile onto a money-making trade, be it a long or short one. This makes headline-grabbing, bold assertions increasingly digestible, like the one from hedge fund hired-gun Harry Markopolos on General Electric (GE) or rumormongering like the recent one that drove the recent pop in shares of Tesla Motors (TSLA).

Rumors and assertions are tricky things, and while some may turn out to be true, others may only have a whisper of truth, if any at all. In the case of Markopolos, he’s working with an unnamed hedge fund partner, and while it would be wrong to cast wide dispersion on the industry, the reality is it is hurting. In 2018, eVestment hedge fund performance data showed the overall hedge fund industry returned negative 5.08%. While the industry is in positive territory on a year-to-date basis this year, it still meaningfully lags the major market indexes.

The bottom line is that in a market environment that is teaming with uncertainty on several sides, it is even more important that investors continue to focus on the data rather than be led astray by rumors and conjecture. Whether it is digging into a company’s financial filings; cross referencing conference call transcripts across a company’s competitors, customers and suppliers; or wading deep into the economic data, now more than ever it is important to do the homework rather than simply piling onto an idea that could simply be one person talking his or her trade book.  In our case, we’ll continue to assess and revisit the tailwinds that powers each of our investing themes each week through Thematic Signals and our Thematic Reading as well as our Thematic Signals podcast. 

Along the way, we may find something that helps put some of those potentially over-the- top assertions into perspective. One such example is found in the work by Bronte Capital that took Markopolos’ assertion that GE’s industrial margins near 15% are “too good to be true” to task by comparing them with similar margins at Honeywell (HON), Emerson Electric (EMR) and others. Once again, digging into the data adds that layer of context and perspective that is both helpful and insightful to investors.

In my experience, making a trade without doing the homework first and getting conviction on the thesis rarely yields the hopium expected. If the homework checks out, it offers confidence and conviction in the position. Periodically checking the data to determine if that thesis remains on track can either keep one’s conviction running high or alert to a potential issue. Not doing the homework leaves one vulnerable to a change they might not even known was coming.


Trade remains the focus on the stock market

As we approached the end of last week, the stock market was poised to move higher week over week, but as we saw it finished up on a very different note given all of Friday’s news. That news spanned from China threatening countermeasures on tariffs set to be instilled on Sept. 1, to the Fed being ready to extend the current recovery even though it remains upbeat about the domestic economy, to President Trump “ordering” U.S. companies to look for “alternative to China” and then raising tariffs on China after the market close. 

There was little question, we were once again seeing U.S.-China trade tensions escalate, raising questions as to what it could mean for the next round of trade talks. In other words, as we headed into one of the last summer weekends, U.S.-China trade uncertainty continued. While the market absorbed China’s escalation and Fed Chair Powell’s “at the ready when needed” comment, it was Trump’s latest trade salvo that reversed the market’s direction for the week leading all the major stock indices to finish down for the week. Trump said he would raise existing duties on $250 billion in Chinese products to 30% from 25% on October 1 and increase the 10% tariff on another $300 billion of Chinese goods set to take effect on September 1 to 15%.

The trade drama at the G-7 meeting continued over the weekend, and it appeared the market was going to start this week off with more than a whimper given that last night US stock market futures were down more than 1%. However, like any good drama that has a number of twists, this morning President Trump shared that China wants to make a trade deal, which served to walk back last week’s jump in trade tensions. 

My stance on the trade war has been a combination of hope, patience and details. Hope for a trade deal, patience realizing it would take time to come together and that the details of any trade agreement matter. Despite the purported trade related developments today, my stance remains unchanged. 


Boosting our Disney price target following D23’s Disney+ focus

While many were watching the political and trade events unfold at the G-7 meeting over the weekend, there was another gathering of note – D23 2019 at which Walt Disney (DIS) shared quite a bit about its upcoming Disney+ service that is set to launch on November 12. As I’ve said before, that service not only grows Disney’s exposure to our Digital Lifestyle investing theme, it’s also going to change how Wall Street values both DIS shares as well as those for Netflix (NFLX)

On its own Disney+ will cost users $6.99 a month, or $69.99 for a full year, but together with ESPN+ and ad-supported Hulu the bundle will run customers $12.99 per month, which is on par with the standard plan offered by Netflix that allows for two screens to be watching at the same time. The starter price for Disney+ allows for up to support for four simultaneous streams with 4K included. That’s quite a difference, and one that runs the risk of eating into Netflix’s business, particularly at the margin as Middle-class Squeeze consumers tally up how much they are spending on all of their streaming video and music as well as other subscription services

During D23 Disney showcased a plethora of Disney+ exclusive content ranging from its Star Wars to Marvel universes. On the Marvel front, Disney+ will include seven live action programs that are expected to tie into the active Marvel Cinematic Universe (MCU) that span existing characters and introduce new ones as well. While some may be missing the original Marvel streaming content that was found on Netflix, the upcoming Marvel content on Disney+ will continue the interlocking nature of the box office films that culminated in this summer’s blockbuster Avengers: Endgame. 

The original programming will be dribbled out over the coming quarters, but at launch Disney+ is expected to contain approximately 7,000 episodes of television series and 400 to 500 movies. According to Disney CEO Bob Iger, almost every single movie in the Disney catalog will eventually be available on the service. That is expected to pale in comparison to the sheer volume of content found on Netflix, which according to Ampere Analysis will be roughly eight times bigger than Disney+’s launch lineup. That may help explain the initial price point for Disney+ but what the service has going for it is it will be the only place one can find some of the biggest franchises in entertainment. That’s very much a page out of the Disney park playbook, and the odds are certainly high that Disney will leverage the content found on Disney+ across its merchandising and park businesses. It was also revealed that Disney and Target (TGT) will partner to open Disney shops inside Target locations, which should only add to the Disney merchandizing business. 

The looming question is to what degree will Disney+ attract subscribers? A far better sense will be had once the service goes live, but that hasn’t stopped Wall Street for putting forth expectations. Wedbush expects Disney to add between 10 million and 15 million subscribers to its service each year until they reach around 45 million. For context, that compares to roughly 60 million Netflix US subscribers and other firms are calling for a faster sign-up rate at Disney+ given the combination of cost and content. 

  • With details surrounding Disney+ becoming clearer, we are boosting our price target on Walt Disney (DIS) shares to $150 from $125. As subscriber data for Disney+ is shared, we’ll continue to refine our price target. 


What to watch this week

On the corporate earnings front this week, the parade of retail earnings will continue with J.Jill (JILL), Chico’s FAS (CHS), Tiffany & Co. (TIF), Best Buy (BBY), Ulta Beauty (ULTA), and Dollar Tree (DLTR) on tap to report, among others. In each of those reports, I’ll be looking for signals relating to our Living the Life, Digital Lifestyle, Aging of the Population, and Middle-class Squeeze investing themes. 

Beyond that cohort, we also have Sanderson Farms (SAFM) reporting and it will be interesting to see what it says about the growing prevalence of meat alternatives that are part of our Cleaner Living investing theme. . Yesterday, Cleaner Living Index company Beyond Meat (BYND) announced it will start testing plant-based fried chicken with YUM Brand’s (YUM) KFC in Atlanta beginning today, August 27. In keeping with that theme, we’ll be comparing and contrasting results at Campbell Soup (CPG) and Hain Celestial (HAIN) given the shifting preference among consumers for healthier foods and snacks. 

Also this week, specialty contractor and one-time Digital Infrastructure Thematic Leader Dycom Industries (DY) will issue its quarterly results and guidance, both of which should offer a view on 5G network buildout for its key customers that include AT&T (T) and Verizon (VZ). Given that Nokia (NOK) shares on the Select List, this will be a report worth digging into.   

While the number of economic data release last week were relatively light, they did pack quite a punch and that continued today with the July Durable Orders Report. While its headline figure showed a better than expected increase, excluding transportation, aircraft and defense to focus on core capital goods the data revealed a 0.4% increase in July, which followed the 0.9% increase in June. Sucking some of the air out of that improvement, core capital goods shipments in July dropped 0.7%, which will weigh on September quarter GDP forecasts. Over the coming days, we’ll get several other pieces of economic July data including trade inventories and Personal Income & Spending reports. 

Coming off a better-than-expected July Retail Sales report, we expect investors will be closely watching the July Personal Income & Spending report to gauge the degree to which consumers can be counted on to power the economy in the second half of the year. In addition to the usual monthly economic data, this week will also bring us the second GDP estimate for the June quarter. As focused as some might be on that revision, we here at Tematica far more focused on what the continued slowdown in the current quarter means for the market and investors. 

Amazon eyes up to 3,000 cashierless stores by 2021

Amazon eyes up to 3,000 cashierless stores by 2021

If you’ve been in a checkout line – either one with a cashier or a self-checkout one – you’ve probably experienced the hassle of waiting in line, sometimes for what may seem like forever if coupons, checkbooks and the like are being fished for. One of the successful strategies employed by Amazon is its ability to reduce if not eliminate transaction friction.  Through the use of cameras, sensors and payment technologies, Amazon has taken the notion of self-checkout to the next level with its cashierless stores. Some will fret this will cost jobs, and while that may rattle certain unions it will foster job creation of another kind. If successful, this could also take a bite out of not just small format grocery and convenience stores but potentially quick service restaurants as well.

Currently, there are roughly 155,000 convenience stores in the U.S., with 122,500 of them combined with gas stations, according to industry group NACS. This means the purported 3,000 figure for Amazon would be relatively small on a relative basis, and that has me wondering if Amazon’s longer-term strategy is to make the underlying technology available to other retail settings, grocery and convenience included. That would follow the same development pattern as Amazon Web Services. Just saying…

 

Amazon.com Inc. is considering a plan to open as many as 3,000 new AmazonGo cashierless stores in the next few years, according to people familiar with matter, an aggressive and costly expansion that would threaten convenience chains like 7-Eleven Inc., quick-service sandwich shops like Subway and Panera Bread, and mom-and-pop pizzerias and taco trucks.

Chief Executive Officer Jeff Bezos sees eliminating meal-time logjams in busy cities as the best way for Amazon to reinvent the brick-and-mortar shopping experience, where most spending still occurs. But he’s still experimenting with the best format: a convenience store that sells fresh prepared foods as well as a limited grocery selection similar to 7-Eleven franchises, or a place to simply pick up a quick bite to eat for people in a rush, similar to the U.K.-based chain Pret a Manger, one of the people said.

Shoppers use a smartphone app to enter the store. Once they scan their phones at a turnstile, they can grab what they want from a range of salads, sandwiches, drinks and snacks — and then walk out without stopping at a cash register. Sensors and computer-vision technology detect what shoppers take and bills them automatically, eliminating checkout lines.

The challenge to Amazon’s plan is the high cost of opening each location. The original AmazonGo in downtown Seattle required more than $1 million in hardware alone, according to a person familiar with the matter. Narrowing the focus to prepared food-to-go would reduce the upfront cost of opening each store, because it would require fewer cameras and sensors. Prepared foods also have wider profit margins than groceries, which would help decrease the time it takes for the stores to become profitable.

Source: Amazon Said to Plan Up to 3,000 Cashierless Stores by 2021 – Bloomberg

Costco continued to gain share in May

Costco continued to gain share in May

 

KEY POINT FROM THIS ALERT:

  • Our price target on shares of Costco Wholesale (COST) remains $220.

Late last night, Costco Wholesale (COST) once again delivered simply outstanding overall sales and comparable sales this time for the month of May. This continues the multi-month streak of not only mid to upper single digit year over year comparisons but ones that clearly standout relative to overall brick & mortar retail. We continue to see Costco winning consumer wallet share as consumers look to stretch their disposable dollars. With gas prices and other costs poised to creep higher as companies contend with rising input and freight costs, we see Costco extremely well positioned for what lies ahead.

Now for the nitty-gritty on the May sales data…

Net sales of $11.02 billion for the retail month of May rose 14.1% compared to  $9.66 billion last year. Helping achieve that robust results were the 950 warehouse locations exiting May 2018 vs. 732 at the end of May 2017 – a 2.7% increase year over year that also bodes very well for a continued rise in the high margin membership fee revenue. In terms of the geographic, year over year comparison for the four week period, Costco’s

  • US sales rose 11.7% (8.7% excluding gas and foreign exchange)
  • Canada, up 13.0% (5.4% excluding gas and foreign exchange)
  • Other International, 9.4% (7.4% excluding gas and foreign exchange)
  • Total Costco, up 11.7% (8.0% excluding gas and foreign exchange)

And while it remains a small piece of Costco’s overall revenue mix, its E-commerce business grew 34.4% during May 2018 vs. the year-ago month (33.3% excluding foreign currency).

Reviewing all of the above in full, Costco is reaping the benefits of having properly positioned itself with consumers, especially Cash-strapped Consumers, and is in the process of reaping those benefits as it expands its footprint.

We’ll continue to enjoy the ride.

  • Our price target on shares of Costco Wholesale (COST) remains $220.

 

 

 

American brands are heading where the middle class is growing

American brands are heading where the middle class is growing

Plain and simple, we are seeing more American retail and brand companies from Starbucks to Walmart tie their growth prospects to the rising middle class in Asia, and China in particular. We here at Tematica are not surprised given prospects for discretionary spending to be had compared to here in the US where debt service is taking a greater and greater bite out of disposable income for consumers that are undersaving as they live longer.

Pretty much a no brainer as we see the cross roads of our Cash-strapped Consumer, Aging of the Population and Rise of the New Middle Class investing themes. What we’re seeing is a Harvard Business case study in the making.

 

American retailers are heading east: They’re opening the doors to brick-and-mortar stores in China, while listing on China’s dueling marketplaces — Tencent and JD.com. Walmart, for example, brought a small-format supermarket to the city of Shenzhen as the popularity of “small retail” grows in China.

And, like many retailers in China, Walmart’s small-store rollout comes with a digital payments option. Shoppers can pay for items using a program within Tencent’s WeChat while shopping.

Walmart is hardly alone in its brick-and-mortar and eCommerce efforts. Brands from L Brands — which counts Victoria’s Secret in its portfolio — and Ralph Lauren, as well as Starbucks, are bullish on China. Here are their executives on how they plan to build their brands in the country.

Source: American Brands Are Bullish On China | PYMNTS.com

Calvin Klein partners with Amazon for  tech-savvy pop-ups and Amazon Fashion

Calvin Klein partners with Amazon for  tech-savvy pop-ups and Amazon Fashion

 

Earlier this week we shared that Lord & Taylor partnered with Walmart, and just a few days later Calvin Klein shared a new relationship with Amazon as part of its Amazon Fashion efforts. We expect to see the lines become increasingly drawn over the coming weeks as months as retailers and branded apparel companies look to leverage these two digital commerce platforms. As they increasingly embrace this aspect of our Connected Society investing theme, we continue to have a bearish view on brick & mortar retail and the REITs that invest in them.

Calvin Klein is teaming up with Amazon Fashion to open pop-ups and sell some items only on Amazon this holiday season.The two companies have launched Calvin Klein X Amazon Fashion, a holiday retail experience that includes pop-ups in New York City’s SoHo area and Santa Monica, Calif., as well as an online brand store on Amazon.com.

The pop-ups will sell Calvin Klein Underwear products, including men’s and women’s underwear and loungewear offerings. The online site will also offer an expanded selection of Calvin Klein jean products. The stores and site will include some new, exclusive styles that will not be available in any other channels.Visitors to the pop-up shops can purchase in store, or they can scan a bar code in the Amazon App to have their items delivered to their home. The fitting rooms will contain Amazon Echo devices, which will allow shoppers to ask Alexa various product questions as well as control the lighting and play music of their choice.

Source: Calvin Klein opens tech-savvy pop-ups with Amazon |Chain Store Age

Lord & Taylor teams with Walmart to drive digital commerce sales

Lord & Taylor teams with Walmart to drive digital commerce sales

It’s starting to accelerate, the shift to digital commerce from brick & mortar that is part of our Connected Society investing theme, and it’s giving way to some interesting partnerships and business models. In this case, it’s Walmart, traditionally a retailer that meshes with our Cash-Strapped Consumer investing theme, partnering with Lord & Taylor, a retailer that spans our Rise & Fall of the Middle Class and Affordable Luxury themes. Both are looking to leverage the other to drive traffic and sales, but the new business model resembles the “store within a store” model being utilized by Macy’s and Dick’s Sporting Goods.

Given that Lord & Taylor will keep its own e-commerce platforms, it seems this linkage with Walmart.com is more a test-bed for Lord & Taylor, while Walmart hopes to court other retailers and branded apparel as it looks to position itself firmly against Amazon.

One way or another, odds are this is just the beginning for these kinds of linkages and tie-ups.

 

Walmart and Hudson’s Bay-owned department store Lord & Taylor just announced an interesting partnership — Lord & Taylor will start selling its catalog of high-end fashion merchandise on Walmart.com this Spring.Of

Lord & Taylor will have its own “flagship store” on Walmart.com — which essentially will be a section on Walmart’s website dedicated to goods sold by Lord & Taylor.

For Walmart, this partnership is a way to drive traffic from customers looking for high-end items that otherwise may not be shopping on Walmart.com.

And for Lord & Taylor, the deal is also about traffic — department stores are struggling, and opening a store on Walmart.com will give them a bunch of new eyeballs (and potential shoppers) they otherwise wouldn’t have gotten. It’s almost like the modern-day version of renting retail space on 5th Avenue in NYC. Lord & Taylor will keep their existing e-commerce site at lordandtaylor.com, so this new store is really just to attract new customers that wouldn’t otherwise shop with them online.

 

Source: Lord & Taylor will start selling on Walmart.com | TechCrunch

Boosting our AMZN price target as Amazon crushes expectations

Boosting our AMZN price target as Amazon crushes expectations

KEY POINTS FROM THIS UPDATE ON AMAZON (AMZN):

  • We are boosting our price target on Amazon (AMZN) shares to $1,250 from $1,150, which keeps our Buy rating intact.
  • Last night Amazon crushed 3Q 2017 expectations and offered an upbeat take on the current quarter.
  • Culling through the quarterly results, Amazon’s key differentiator – Amazon Web Services – continues to ride the cloud adoption wave and fund its expanding services and geographic footprint.
  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.

 

Last night thematic investing poster child Amazon (AMZN) reported 3Q 2017 results that easily topped expectations and sent the shares soaring in after-market trading. Quickly reviewing the results, which have already been amply covered by the financial media but bear repeating as they set the tone for our conversation – Amazon delivered EPS of $0.52 vs. the consensus expectation of -$0.01 with revenue for the quarter coming in at $43.74 billion topping the expected $42.14 billion. Even backing out the $1.3 billion in revenue derived from Whole Foods, Amazon’s digital retail and Amazon Web Services (AWS) outpaced expectations. The clear driver of the upside was AWS as well as the 59% increase in its subscription services business that includes digital music, digital video, audiobooks, e-books.

As investors know, context and perspective are key and in this case, Amazon’s 3Q 2017 revenue tied its 4Q 2016 revenue, which included the 2016 holiday shopping season. Once again, the bulk of the company’s operating earnings were furnished by AWS, which we continue to see as the company’s key differentiator compared to other retailers and one of its platforms alongside its digital voice assistant Alexa that is helping it weave itself even deeper into consumer’s lives.

In Amazon tradition, the company issued rather wide guidance with revenue for the current quarter between $56-$60.5 billion, which is in line with consensus expectations and equates to a year over year increase of 28%-38%. In terms of operating income for the current quarter, Amazon shared its current view that is should fall in the range of $300 million to $1.65 billion and that compares to the $1.64 billion Wall Street was expecting and $1.3 billion earned in the year-ago quarter. Given the litany of 2017 holiday shopping forecasts that call for an acceleration in digital shopping growth rates, it’s rather likely that Amazon’s top line guidance will prove conservative… yet again.

 

Boosting our AMZN price target to $1,250

Heading into last night’s earnings report, our price target for AMZN shares was $1,150. Today, given several factors, including the accelerating pace of digital commerce, continued revenue growth and margin expansion at AWS and the burgeoning subscription revenue business, we are boosting our price target to $1,250. As we do this we are seeing other investment banks up their price targets and some that have been less enthusiastic on AMZN shares finally come around and upgrade the rating to a Buy or some equivalent. As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.

 

Culling through AMZN’s 3Q 2017 results

Digging into 3Q 2017 earnings report, Amazon rattled off more than 30 highlights which in sum point to its expanding footprint and effectively recapped a number of product and service announcements during the quarter. The real meat came in culling through the company’s income and business segment information for the quarter. In that, we see the real power behind AWS as it supplied nearly all of the company’s operating income in the quarter and just 10.5% of the quarter’s revenue. Again, we see this as the key differentiator that allows Amazon to fund its retail expansion efforts and better yet the business is on an $18 billion run rate exiting 3Q 2017, up from $13 billion coming out of 3Q 2016 and $16 billion for 2Q 2017. What this tells us is AWS continues to win share as more companies embrace the cloud, and as that occurs AWS’s margins continue to scale higher enabling Amazon to expand its geographic and service footprint.

To be fair, the North American retail business rose 35% year over year fueled in part by the ongoing shift to digital commerce that we increasingly talk about as Amazon’s service offering expands (more on that shortly) and a successful Prime Day 2017. This kept the North American business as the company’s largest, but these ongoing investments in warehouses, new services, and video content once again weighted on segment profits. Contrary to expectations, the North American segment was profitable during the quarter, but its operating margin did slip to 0.4% in 3Q 2017 vs. from roughly 1.4% in the year-ago quarter. Again, not unexpected given the number of investments Amazon continues to make so it can continue to expand its product and service offering, catering to customer wants, but better than expected. In the current stock market environment that is meaningful.

Turning to the International retail facing business, revenue rose 29% year over year to $13.7 billion, a hair shy of the $14 billion achieved in 4Q 2016 as it too benefitted from Prime Day 2017 as well as the debut of Prime in India last year. During the earnings call Amazon shared that in India, it had more Prime members join in India than in any other country in the first 12 months. Despite the amazing growth in the International business, there is no other way to say it other than this segment continues to be a drag on Amazon’s overall profit picture as its operating loss widened both sequentially and year over year. It’s being fueled by the same expansion efforts as Amazon looks to solidify its footprint outside the US by replicating the growing number of Prime services it has in the U.S. We see this as Amazon doing what it does – playing the long game, and while we will be patient with this business we will be sure to monitor its ongoing progress.

 

Amazon to unleash even more creative destruction

Above it was mentioned that Amazon continues to expand its footprint and in addition to its in sum stellar 3Q 2017 results, it was reported that Amazon is positioning to unleash its creative destruction forces on the pharmaceutical industry. Yesterday, the St. Louis Post-Dispatch reported: “Amazon has become a licensed pharmaceutical wholesaler in 12 states, with a pending application in a thirteenth.” Because , Amazon would also need to be licensed as a pharmacy in each state to which it shipped drugs we see this as signs that Amazon is making a move, with the next question being will it build its own capabilities or will it look to acquire a building block company like it did with Whole Foods and grocery? We’ll continue to watch this for what it means not only for Amazon’s balance sheet but more importantly its revenue and profit stream.

It was also quietly announced this week that “Amazon will soon allow customers in some areas to place orders for takeout food with local restaurants from inside the Amazon app.”

 

Off-price retailers – another thorn in the side of department stores

Off-price retailers – another thorn in the side of department stores

A new report from Moody’s reinforces the negativity surrounding department stores like Macy’s (M), JC Penny (JCP) and Nordstrom (JWN). Unlike most that focus on the shift to digital commerce that is part of our Connected Society theme, Moody’s adds a perspective that meshes extremely well with our Cash-Strapped Consumer and Rise & Fall of the Middle Class investing themes — consumers embracing off-price retailers such as TJ Maxx, Marshalls, and HomeGoods all of which are part of TJX Companies (TJX) as well as Ross Stores (ROST).

One interesting observation is the expanding footprint of these off-price retailers beyond apparel and into home products, which offers additional challenges to Macy’s and other department stores that have home products and furnishings. This move also means additional challenges for Pottery Barn (owned by William-Sonoma (WSM)), privately held Crate and Barrell and Bed Bath & Beyond (BBBY).

Off-price retailers will remain among the top performers in the U.S. retail industry during the next 12 to 18 months.

That’s according to a new report from Moody’s Investors Service. The outlook is not as positive for department stores, which will continue to struggle as they seek to level the playing field with both off-price and online vendors.

Moody’s expects operating income in the off-price sector to grow 6.9% in 2017 and 5.4% in 2018. Department stores will see operating income decline 9.3% this year and 2.7% in 2018.

“Off-price retailers continue to outperform other sectors of the U.S. retail industry largely because they offer the kind of lower-cost, higher-value products and shopping experience many consumers are looking for,” said Moody’s analyst, Christina Boni. “Off-price stores are far outstripping department stores, which in contrast are still struggling with outmoded formats and supply chains that can’t keep pace with customer demand.”

Despite their lack of e-commerce penetration, off-price retailers have succeeded where department stores have foundered due to their focus on delivering major label brands at significant discounts to value-hungry consumers, Moody’s said. Off-price vendors also outperform the broader universe of U.S. apparel-focused retailers.

While apparel sales make up the bulk of their sales, off-price retailers have been increasing their product mix in the higher-growth and less competitive home products category. Moody’s estimates that home product sales at off-price stores grew 9.9% in 2016, compared with 7.8% for the off-price sectors overall growth.

Source: Moody’s: No letup in sight to off-price growth |Chain Store Age

Another headache for retailers, US credit card delinquencies on the rise 

Another headache for retailers, US credit card delinquencies on the rise 

We’ve talked a quite a bit about rising consumer debt levels despite stagnant wage growth over the last several months. Now we’re starting to see the fallout when consumers rack up too much debt and they can’t make their monthly payments – rising delinquency rates. In our view, this makes an already challenging situation for Cash-Strapped Consumers even more so and poses an additional risk to already struggling retailers. Keep in mind, we’re already seeing rising sub-prime auto loan defaults. Taken together, this paints an ominous picture for the upcoming holiday shopping season and is a reason to think Deloitte’s retail holiday sales forecast of up 4%-4.5% year over year could be overly optimistic.

 

According to a news report in The Wall Street Journal, Capital One, Synchrony and Alliance Data Systems have all seen the rate of delinquencies among credit card holders increase as a percentage of their overall loans during the last few months. The three companies, noted the Wall Street Journal, provide credit cards to consumers with less-than-stellar credit histories. Synchrony and Alliance Data are focused on the store-branded, private label credit card market.

The Wall Street Journal stated that Capital One is seeing loans that are more than 30 days delinquent increase to 4 percent of overall loans in August. In April, that rate was at 3.5 percent, noted the report. For Synchrony, the rate increased to 4.5 percent from 4.1 percent in the same time period and 5.3 percent from 4.7 percent for Alliance Data. The Wall Street Journal said the levels are among the highest the credit card market has seen in some years. For Alliance Data, the rate is at the highest since Feb. 2011.

Source: US Credit Card Delinquencies On The Rise | PYMNTS.com

Initial observations of the Amazon-Whole Foods marraige

Initial observations of the Amazon-Whole Foods marraige

With the official closing of the Amazon (AMZN) acquisition of Whole Foods Market (WFM) yesterday, I made a point of visiting two locations near me outside of Washington, D.C. The traffic in the store was greater than usual for a Monday, as were the length of the lines at the checkout counters. There were a number of prices that were better as has been reported, and there was a pop-up stand for Amazon Echo devices.

What was missing, however, were the appropriate Amazon’s private label brands that are slated to hit shelves at Whole Foods locations, as well as the lockers that will allow for both delivery of items as well as returns.

I say appropriate items because Amazon has quietly expanded the scope of its private label products from food (Happy Belly, Mama Bear and Wickedly Prime) and supplements (Amazon Elements) to fashion, electronics, household items, cosmetics, lingerie, and furniture to name a several. Conversations with the store managers confirmed Amazon private label products will be turning over in the store “over time” where appropriate. That hasn’t slowed Amazon from including Whole Foods’ private label brand, 365 Everyday Value, on its website although based on some basic searching 365 Everyday Value has yet to be offered under Amazon Fresh.

Like many large acquisitions, integration and the targeted synergies come over time, and I are still in the very early days of these two companies being under one roof. I expect the rollout of Amazon private label products to be had at the 470 Whole Foods locations in the U.S. and the U.K. over the coming quarters with added benefits coming (Amazon Fresh, Amazon meal kits and the instillation of Amazon Prime as the new membership rewards program).

As the combined entity flexes its product and logistical offering, I suspect before too long the conversation will shift from “death of the mall” to “death of the grocery store.” One of the “secret weapons” that Amazon has over its grocery and other competitors that range from Kroger (KR) to Wal-Mart (WMT) is the high margin Amazon Web Services, which continues to be embraced by corporate America as it increasingly migrates to the cloud.

One thing I am pondering is based on the number of Whole Foods locations, will Amazon look to make other grocery acquisitions in a bid to reach key markets that have a high concentration of Amazon Prime customers? If so, this could quickly turn the conversation from “the death of the mall” to the “death of the grocery store.”

 

  • We continue to rate Amazon (AMZN) shares a Buy with a $1,150 price target.

Source: Whole Foods prices cheaper with Amazon – Business Insider