Motley Fool Analyst Sean O'Reilly shares the top five stories seen in the consumer goods industry this past year.
Public gaffes, supply chain challenges, the elusive "cool factor," government regulations, and a revolving door at the CEO's office; consumer goods is a challenging industry sure to serve up some interesting stories as companies struggle to offer the right product to the right consumer at the right time.
A full transcript follows the video.
Nathan Hamilton: We're talking the top five consumer goods stories of 2014. This is Industry Focus.
Well hello Fools, I'm Nathan Hamilton. This is the tech -- or, sorry, the consumer goods -- edition of Industry Focus. I'm joined by not a tech analyst, a consumer goods analyst, Sean O'Reilly.
Sean O'Reilly: I hope we're not talking about tech right now! I don't know very much.
Hamilton: Yes, we're talking all Apple (NASDAQ: AAPL). We're going to talk cloud computing, SaaS, all that stuff.
O'Reilly: Oh, shoot. AI ... yes.
Hamilton: Deeply technical, semiconductors, we'll get into that.
O'Reilly: I have seen the Terminator movies, so I can do that.
Hamilton: Sure. Tech investing is very similar.
Hamilton: I guess a topic you know quite a bit more about; the consumer goods industry.
O'Reilly: Right. What I did for our viewers; 2014 is winding down. I just wanted to count down the top five -- there are obviously investment lessons in them -- but also entertaining consumer goods investing stories of 2014.
We're actually going to start at the top. We're going to go pretty good to awesome, hilarious stuff.
Number five are the teen retailers continuing to struggle. I'm in my late 20s. When I was in high school, middle school, all that stuff, the Abercrombies (NYSE:ANF), the Urban Outfitters (NASDAQ:URBN), all this stuff, these were the must-have items that were just killing it. The stores were gangbusters. They're just not doing well these days.
The CEO of Abercrombie and Fitch just stepped down, you've got Urban Outfitters ...
Hamilton: He had some pretty interesting comments throughout this last year, too.
O'Reilly: Yes! We can't go into it too much, but ...
O'Reilly: Kind of awkward.
You've got Urban Outfitters. They've got other brands -- thank god for their shareholders -- like the Anthropologie stores and Free People. Those brands are doing really well because they're new, they're fresh, they're interesting.
But their age-old brand of Urban Outfitters, that's not doing well. They have negative comps. We're seeing this secular shift away from what was working so well 10 or 15 years ago, away from the mainstream "cool" vintage stuff that is just not working anymore.
Hamilton: You mentioned the cool factor, which is obviously present in retail all the time. Comps for Abercrombie, -10% in the most recent quarter.
Hamilton: Is it a matter of, these companies have lost the coolness factor altogether? I know Abercrombie is going toward less logo themes on their clothing. What's really behind it? What's driving these? Why is Anthropologie ...?
O'Reilly: This is the lesson that I wanted our listeners to take from this. They're subject to the whims of fashion, just like everybody else. You might have thought 10-15 years ago that Abercrombie clothes, they're going to be cool forever like Levi jeans. Well, jeans aren't doing so hot now anyway.
It's really, really important for investors, if you buy into these brands, to keep in mind that you can't predict what people are going to want to buy next year, fashionably. You need to be really, really sure of the product before you step up and actually own it and just stick it under your mattress and forget about it.
Hamilton: Kind of a side note, but it'll be interesting to see what happens with Zara. Amancio Ortega, one of the richest guys out there, has built an empire on fashion.
Hamilton: I guess it's a hit store now.
O'Reilly: He can do it; mere mortals like us, we don't know. Especially you and I, we don't know what's going to happen with fashion.
Hamilton: Another retailer, another fashion company out there ...
O'Reilly: This has just been entertaining.
O'Reilly: The stock's at a buck. Of course we're talking about American Apparel (NYSEMKT: APP). Hopefully nobody listening to this has owned shares in the company. That CEO, man, whew!
Hamilton: What did he say? To help our listeners out a little bit, what's going on there? Why was he ousted?
O'Reilly: Just tons of gaffes, and they've had all these supply chain ... there are all these issues, so he finally stepped down.
He came out the other day and -- keep in mind, before he was ousted his salary was $800,000 -- he says he's down to his last $100,000; which, if you're used to making $800 grand a year is bad. Like, "Okay, I've got a month and a half's worth of my income left."
He's saying he's sleeping on his friend's couch in New York City. It's just like, "What's going on here?"
Hamilton: It's odd when you look at it, because that's almost a $200 million market cap company, that he founded.
Hamilton: Now he's sleeping on a couch.
O'Reilly: Yes. It can happen to anybody.
The company, a couple of days ago they said they're talking to buyout offers, but they're not doing well. Part of the issue is they tried to -- and for a while it was kind of working -- American Apparel was clothes that were made here in the United States. They had their location in L.A. there, and all that. It's really hard to make a buck, making anything in America still, especially clothing.
We'll see if they get bought out, but just looking through time at the American Apparel stores this past year was just like, "Oh, my gosh ..."
Anyway, number three -- I'm sure you're all atwitter -- is JCPenney (NYSE:JCP); are they back from the dead?
Hamilton: Are they truly?
O'Reilly: I don't know, man!
Hamilton: They're just trying to make it through the holiday season.
O'Reilly: I was a believer but now I'm not, and that's kind of what everybody else is doing. You'll remember that last fall, so this is a year and a couple of months ago now, they had that $700 or $800 million stock offering because some of their suppliers were balking. They were like, "Are you sure you have the money to pay us if we send you merchandise?"
So they raised working capital by selling stock. That was of course bad for the current shareholders at the time, but then it bounced back. They had a good Christmas last year.
Comps are starting to slow again, though. They're up a little bit but their sales at their peak -- before the recession and all that, four or five years ago, sales like $17-18 billion a year -- they're trying to get over $13 right now. They're back on positive comps growth, but they're clocking at 2-3% comparable sales growth.
Hamilton: That's off the small base.
O'Reilly: And that's off the small base, and that's the problem. If they're going to get anywhere close to back to where they were, they need to clock a 5-10% gain for a couple quarters in a row before they can say, "Yes, we're good to go."
We'll have to see. I'm in the camp that JCPenney is going to have to close -- they have about 1,000 stores, just 1,080 or 1,070 or something. In January last year they announced they were going to close 30-40.
I think they need to close every unprofitable store, like 200-300. Then they'll probably be OK, because the stores in major urban areas -- they just opened one up actually. Their first new store in a year is in Brooklyn. That's probably doing really well. It's in the middle of Brooklyn. But stores in the middle of nowhere, it's just not ... anyway.
Hamilton: It's been a turnstile with CEOs for them.
O'Reilly: Yes. They just had their new CEO, the veteran supply chain guy from Home Depot (NYSE: HD). He'll definitely at least streamline that part of the operation, but Mike Ullman obviously had to come back out of retirement and save the retailer that he led for so long, and he just stepped down, so we'll see.
Hamilton: I guess for our second story, a company with less CEO turnover; Jeff Bezos and Amazon (NASDAQ:AMZN). We're talking drones. He came out on "60 Minutes," somewhat shocked a lot of people saying, "Your five-pound or less package ..."
O'Reilly: People thought he was screwing with us!
Hamilton: "... is going to be delivered by drone helicopter, and drop it nicely on your doorstep."
Hamilton: What's going on there? Is this a legitimate technology that can be implemented?
O'Reilly: We talked a little bit about this in our tech show, and obviously Amazon itself is a quasi-tech/quasi-consumer goods company.
The FAA, the federal government of the United States, is not being super friendly to commercial drone use. They had that debacle at a regional airport in New York. Somebody flew a drone ... anyway.
They've given licenses to test commercial drones to about five or six entities, but they're like Virginia Tech and one of the schools in the Dakotas, or something like that. These are more research-type organizations that have tons of land to work with.
They didn't even give the license to Google (NASDAQ: GOOG) (NASDAQ: GOOGL), they didn't give it to Amazon. A couple weeks ago Amazon said to the United States, "If you guys don't play ball, we'll just keep using our Cambridge, England testing facility for drones and we're going to start delivering stuff."
Hamilton: I love that move, by the way.
O'Reilly: Yes. They're just like, "Yeah, let's do it in London. We don't care."
Hamilton: Yes, a big "Screw you, let's go here."
O'Reilly: Yes. That's the one thing they could do. That's actually their only card to play, because it's the federal government. What are you going to do to get them to ...? They run the show, so that's their only card is just being like, "Oh yeah? We'll leave, go to a better party."
We'll see, this time next year, if we can get our -- I don't know, Starbucks (NASDAQ: SBUX) -- delivered by drones or something.
It's a really interesting story. I don't know how it would work, even here, because we're a couple of miles from Reagan International Airport. Are the drones not allowed anywhere near this thing? I don't know.
I understand where the federal government was coming from, but Jeff Bezos clearly wants to deliver things with drones, and this time last year we would not have thought this was even remotely possible.
Hamilton: Looking at it, our number one investment story in consumer goods of 2014 -- a little bit of a drum roll ...
O'Reilly: It's been very painful for all concerned, but of course the story is Radio Shack (NYSE:RSHCQ).
Hamilton: Radio Shack, another near-bankrupt retailer.
O'Reilly: The situation is so bad that their debt holders will not let them close stores because they want more collateral -- because the stores would have inventory, and that has value. It's really just rough there.
Hamilton: Sorry to interrupt, but is this another story like JCPenney where they're getting the working capital to hopefully make it through the holidays? Are these legitimate concerns for the company?
O'Reilly: Time has passed them by. It's far worse than JCPenney. JCPenney is talking about being cash flow positive this coming year, and Radio Shack ... they're out of money now. If they did a stock offering, I don't think any investment bank would underwrite it. At least JCPenney had investment banks to underwrite the offerings.
The best thing they can hope for is ... it's been a year actually, now that I think about it, since they started doing this, but there's talk of them partnering with organizations to get inventions to market.
Let's say you invent, I don't know, a bird that dips into water cups or something; just something that's kind of fun, (unclear) or whatever; getting that stuff quickly to market. They have a partner with that.
Hopefully they would become more like a -- I don't want to say a Brookstone, because they're not doing so hot either -- but something to give them some kind of an edge other than just selling batteries and little robot cars and all that stuff.
It's just been a slow, slow circle down the drain. It's like, "Okay, what are we going to do, guys?"
I don't know. They're going to have to wind up in Chapter 11 at the very least, I think. The only people that own this, I think, are day traders right now. It just goes up a couple of pennies a day.
Hamilton: Pretty volatile stuff.
Hamilton: Great. Appreciate your insights.
O'Reilly: You bet.
Hamilton: Telling our investors a little bit about 2014.
O'Reilly: I look forward to the five crazy stories we'll talk about a year from now!
Hamilton: Well, you can look forward to the next show. Thanks for listening, Fools!
Nathan Hamilton owns shares of Amazon.com, Apple, and Google (A shares). Sean O'Reilly owns shares of J.C. Penney Company,. The Motley Fool recommends Amazon.com, Apple, Google (A shares), Google (C shares), Home Depot, Starbucks, and Urban Outfitters. The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.