Now THIS Is A Massive Bifurcation
Most people admittedly don't look at Macy's sales trends in this rather simplistic way. But sometimes simplifying things is all it takes to see the truth. Specifically, we're looking at Macy's sales comps compared to Retail Sales as reported by the government -- and the historical correlation is rather spot-on. Macy's is a bit more volatile, as it should be, but much tighter than we think most people would otherwise suspect. That is, until now. Macy's -- the bellwhether name in the group -- started to trend down in 2Q of last year while the rest of retail picked up. Not major -- but enough to notice. But year-to-date in 2016 that comparison completely blew out. We'd love to hear Terry Lundgren address this one. Maybe they'll give the 'ol "we don't sell what people increasingly want to buy" answer. We give 'em credit for owning up. But it does nothing to persuade us from shorting the stock.
IS THIS FOSSIL PETRIFIED?
It's been a while since we've wanted to get behind a story this badly. Fossil is THE dominant player in the designer watch business. It's historically had very high, and (what we thought) were sustainable margins, with industry-leading ROIC and ROE. Management has always been easy to back -- as it's almost invariably made the right calls. But the past two years have simply been a slow-motion horror show. Consider this…
In 2014 FOSL earned $7.10, with consensus expectations for 2016 above $9.00. Well...those two years have come and (almost) gone, and now the company is guiding toward a number as low as $1.80. That's an 80% cut in earnings expectations -- and roughly an 80% drop in the stock. In other words, it hasn't gotten any cheaper along the way. We'll see how it trades today, as we're likely to give up a few multiple points.
Analytically, this is the kind of name we LOVE standing behind on a major whiff like this. But our main concern is that the company does not appear to know what it wants to be. We don't agree with the shift to wearables (a fitBit/iwatch competitor), as it's a 'me too' category with low barriers to entry, that's attracting new competitors that use it as a loss leader for other parts of the business.
And then to hear management say "Our biggest objective in all of this technology stuff is really to disrupt the watch business."… What? Did they really say that? That's like saying [Our core business is designer watches, but we're entering this low margin category with the sole purpose of disrupting the very business that pays for us to turn the lights on every morning].
Are we taking that out of context? We really hope so, because that's how it sounded.
But in the end, as long management gets its head screwed on straight, which we have a funny feeling its shareholders will make happen, the question comes down to what this watch franchise is worth. It was worth over $10bn 2 years ago. Did over $8bn in enterprise value justifiably vanish forever? If you're going to make the argument that no future generations will ever wear a watch with an hour and a minute hand, then yes, it is gone forever. But we don't buy that extremely weak argument for a minute.
Are we anxious about this? Yes. We hate retail turnarounds. They're painful. But our gut on this is that it's not as broken as the stock price suggests.
FOSL is officially on our Vetting Bench -- Long Side.
RH - RH appointing Eri Chaya, Karen Boone, and Demonty Price as Co-Presidents
(http://ir.restorationhardware.com/phoenix.zhtml?c=79100&p=irol-newsArticle&ID=2167223)
SPLS, ODP - Staples and Office Depot merger agreement terminated -- SPLS initiates cost-cutting plan, will close at least 50 N.A. doors and explore strategic alternatives for Euro operations
(http://www.businesswire.com/news/home/20160510007030/en/)
UA - Stephen Curry became the NBA's first unanimous Most Valuable Player on Tuesday, Under Armour unveiled a new MVP shoe.
WMT - Wal-Mart will sue Visa for right to require PIN # for more secure debit transactions --company pinching pennies as it invests to fend off growing online competition
(http://www.wsj.com/articles/wal-mart-sues-visa-over-chip-enabled-debit-card-transactions-1462906677)
SQBG - Sequential brands acquiring GAIAM Yoga brands for $146mm
AMZN - Amazon announces Video Direct, a self-service video streaming platform to be included in Prime package -- also introduced AVD Stars program, which will give content creators a share of $1mm/month bonus pool
