With the East Coast still recovering from the havoc unleashed by winter storm Jonas, The Motley Fool is braving the snowy roads and sidewalks to bring you this week's Industry Focus: Consumer Goods.
Analysts Sean O'Reilly and Vincent Shen talk about their own storm experiences and how millions of East Coast residents rushing to stock up on essentials could bolster results for many retailers. They also cover the good news from Coach (NYSE:TPR)-- its stock has gained over 10% since the company reported upbeat results, ending a multi-year streak of declining quarterly sales.
A full transcript follows the video.
This podcast was recorded on Jan. 26, 2016.
Sean O'Reilly: A blizzard can't stop us from talking consumer goods on this CG edition of Industry Focus.
Greetings Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Tuesday January 26, 2016 and joining me after an hour-long commute from DC to Alexandria is a true snow warrior, Mr. Vincent Shen. Vince, did you enjoy your blizzard experience?
Vincent Shen: I did.
O'Reilly: I suspect you did what everybody on the East Coast did which was 70 million East Coast residents all united in watching Netflix for 48 hours straight. I got my sister-in-law started on Mad Men. It was awesome!
Shen: Oh, you did? I did watch some Netflix, but I also ventured out too, like Saturday night took a walk.
O'Reilly: Was it a magical winter wonderland?
Shen: Yeah, it was really coming down at that point. It was just nice to walk around. There was very few people on the street, a few other--
O'Reilly: Did you walk down the middle of the street like everybody was doing?
Shen: Yeah, of course. A few other brave souls just wandering around seeing what it was like. A lot of snow, and I think Baltimore, DC, New York all got over 20 inches.
O'Reilly: Baltimore got 29.
Shen: Yeah, I think they were actually particularly hard hit.
O'Reilly: I was in the office pool here and I called for 30 inches because I thought that's what they were talking about for here, but it drifted a little bit north and Baltimore got the 30 inches. I think towns a little further out, like an hour out, like Winchester, Virginia they got a ton of snow.
Shen: Yes. I believe the highest snow fall came for a really small town in West Virginia.
O'Reilly: As is going to happen occasionally.
Shen: It was something like 42 inches, so even more than we got.
O'Reilly: Cool. I don't know, half the office is still empty. The roads are still crazy here.
O'Reilly: First and foremost, I wanted to touch on a fun Airbnb story. Somebody built an igloo in New York and tried to rent it out in Airbnb.
Shen: Yeah, so in the spirit of this storm that we had, winter storm Jonas, that's what people were referring to at as. We just thought this was a really fun story to share where there was a gentleman in Greenpoint in Brooklyn, so right across the river from my old neighborhood, actually, in New York. Enough snow for him to build an igloo, obviously, came out pretty well.
O'Reilly: Did he put a bed in it?
Shen: I'm not sure, actually, but as a joke he put it on Airbnb for $200.
O'Reilly: Maybe a futon. $200 a night?
Shen: A pretty rich rate. It was more of a prank, obviously, but Airbnb ended up taking it down even though they do have igloos.
O'Reilly: In Iceland I'm sure they do.
Shen: They have igloos as one of their categories in terms of the different properties, so it's not unheard of.
O'Reilly: No, I'm sure you can go to Northern Europe. There's hotels that are build out of ice.
Shen: Technically, they shut it down because of ...
O'Reilly: Structural concerns.
Shen: I just thought it was really funny and it gives you an idea if you look at the pictures online, which are plenty, of how much snow came down.
O'Reilly: I appreciate the hustle of that man. Anyway, before we dive in actually the big story for our listeners today is Coach actually, basically, reported first sales growth quarter in like ten quarters or something crazy.
Shen: Pretty strong, and especially considering we've had previous episodes talking about how weak retail has been, especially for apparel and things like that. For them to bounce back like this, we'll get to that, but it's good to see.
O'Reilly: Yeah. Before we did that I want to talk about, I saw an interesting story this morning and it pertains to Whole Foods (NASDAQ:WFM) but it applies to literally every retailer out there. I'm sure you went shopping right before the blizzard. I went shopping before the blizzard. I bought four gallons of water just on the off case that ... I'm such an idiot. Anyway.
Shen: Yeah, keeping in mind that you live in a high rise apartment building.
O'Reilly: You don't know. Anyway, I've got a baby to think about.
Shen: Of course.
O'Reilly: Basically, everybody's stockpiling food and supplies and you hear about this every time a hurricane comes and all this stuff. Bottom line, is this big business for stores? Does it matter?
Shen: You actually brought up a really good point when we were coming down to the studio. This is something that came up as well for me personally last night. We went to our nearby Giant in our neighborhood and there were very little fresh produce, no eggs whatsoever.
O'Reilly: It looked like the Apocalypse.
Shen: Very little milk, the bread aisle was ravaged, essentially.
O'Reilly: In order to check out you had to go through the Thunder Dome.
Shen: Gina had asked me, "This one week essentially boon in sale all over the Northeast, huge population center, does that end up having an impact for a company like Kroger, Whole Foods Market, things along those lines?" I started to look into it, but I realized it's such a short term blip on the radar. Sure, it was a big storm, 20 plus inches.
O'Reilly: Right. They definitely sell things they wouldn't normally buy. I don't usually buy four jugs of water.
Shen: Exactly, so there's definitely a lift, and you could even argue that stores that sell salt for sidewalks and shovels would benefit. It's such a small blip, it's seasonal.
O'Reilly: It is not a consistent cash flow thing.
Shen: Snow is going to fall every year, so it's not something that I would consider to be even close to the basis for like, "Oh, wow. I want to buy Whole Foods."
O'Reilly: It might even be playing catch up because I remember a month ago, it was basically when Macy's and Nordstrom were reporting and they were like, "Yeah. Our quarters have stunk so far because it's been really warm."
O'Reilly: One of the highest margin things they sell is winter coats, because you got to have one and they can charge full price. People were putting it off. We had several 50, 60 degree days in December here. I rode my bike a couple of weeks ago for the heck of it.
Shen: You bring up a really good point. On the one hand, the retailers have argued that the extended warm weather during the winter hurt them. In this case, with all the snow falling, suddenly people have this stark realization like, "Okay."
O'Reilly: I have to think that a few winter coats were sold last week before the storm arrived.
Shen: Yeah, exactly. Will that help some of the apparel retailers bounce back a little bit for when they report this first quarter of the year? We'll see what happens.
O'Reilly: ... maybe.
Shen: Again, it's going to be probably more of a minimal effect more than anything else, but it's interesting to think about and how there's economics to these blizzards.
O'Reilly: Yeah. I'll never forget, and then we'll move on, this is like ten years ago and CNBC did this special on the age of Walmart. I don't know if our listeners are aware but Walmart, they basically have supercomputers like Deep Blue type crazy, awesome computers. They have all this data on what sells when and all this stuff. They gave this example of how people right before a hurricane in Florida and the Carolinas and stuff they are 26% more likely to buy strawberry Pop Tarts with an impending hurricane than they are at any other time. Right before the hurricane hits Walmarts down there stock their shelves with about 20, 30% extra strawberry Pop Tarts.
Shen: Maybe put it right front and center for when people walk in.
O'Reilly: What in the human brain says, "Hurricane. Strawberry Pop Tart?"
Shen: Days at home, breakfast. I don't know.
O'Reilly: Yeah, I don't know. Non-perishable for a certain period of time. Okay. Before we move on to talking about designer handbag sales I wanted to point our listeners to a little something we Industry Focus contributors put together in the spirit of the new year. It is our financial New Years resolutions. Just go to resolutions.fool.com to check it out. Again, that is resolutions.fool.com. Vince, what was your resolution? Paying for your wedding?
Shen: Yes, exactly. Part of that. I'd love for our listeners to check out some of the pieces that our Industry Focus contributors wrote.
O'Reilly: We came up with some good stuff.
Shen: To give you a preview, though, for mine it basically had to do, we were planning for our wedding costs and it just blew up in this bigger picture conversation in terms of how we should invest and how we should start planning for our future. It ended up being at times a painful conversation or just stressful with all the wedding planning as well to keep in mind, but overall we're way better off having had that conversation.
O'Reilly: Gina doesn't want you to spend an entire year's salary on this thing does she?
O'Reilly: Gina's a very smart girl.
Shen: Thankfully. A lot of people do spend more than they can afford. Some people take on wedding debt just to have that special day. It's definitely something you should be thinking about if you're making huge financial decisions like that because sometimes these weddings cost as much as a down payment on a house.
O'Reilly: Crazy. Cool. All right. Without further ado Coach, which it's like the perennial value stock. Since I started at the Fool in late 2013 it's always been like, "Wow. Coach is really cheap." Perennial, just beaten up. It's like, "It's a great brand. It's still earning money even though it's a little bit less." Chinese growth, I'm sure, was talked about. They finally showed some sales growth, so what's going on?
Shen: Big picture context here, Coach has been struggling for the past couple of years now. Overall I'd say it was a combination of too much promotional selling.
O'Reilly: Just say Michael Kors, Vince. Just say it.
Shen: Definitely more competition from the likes of Michael Kors or Kate Spade, you're absolutely right. They got really big into doing these sales. I think it hurt their brand image a little bit.
O'Reilly: It takes away the luster of it, for sure.
Shen: Exactly. For this most recent quarter that they reported, their fiscal 2016 second quarter ended December 26, so includes pretty much the most important period in terms of the holiday shopping season. This was their first, I believe after nine or ten, you said, quarters where declining year-over-year revenue finally they were able to buck that trend, break that streak. Net sales were actually up 7% year-over-year in constant currency, 4% if you include the effects because of their international business, of course. Their adjusted earnings per share were about 68 cents, which were down slightly year-over-year, but beat most Wall Street estimates.
Overall the company, like I said, is going through that transition where management right now is really focused on cutting their under-performing stores. They're reducing some of that.
O'Reilly: Yet another retailer closing locations?
Shen: They're improving their product quality, just trying to focus on longer term, restoring that brand reputation. That cost money, so as a result during this quarter we saw their SG&A expenses go up a little bit. They're also integrating their Stuart Weitzman acquisition, which they made early last year, I think.
O'Reilly: Was that big?
Shen: Close to $600 million, so not huge.
O'Reilly: That's bigger than I was expecting.
Shen: In terms of it's contribution, they mentioned that they're very, very encouraged by initial results from that segment. I think boots, for example, did really well despite the warm weather. The big trend right now you see boots on a lot of people. Stuart Weitzman's just a pretty small portion, about 7.5% of their top line, but, like I said, management is very, very encouraged by the results that they've seen. Breaking down in terms of the geographic segments you'll see big differences. In one case their North American stores continue to post losses. The comparable store sales are down 4%, but you mentioned China, particularly mainland China did really well for them. I think sales were up double digits.
O'Reilly: You know Beijing has the world's largest Coach store.
Shen: Oh, really?
O'Reilly: It is the world's largest Coach store. I saw it. It is in Beijing. There's a reason for that.
Shen: I can't say I'm surprised. International sales overall for the company revenue was 9% year-over-year in constant currency. Then for mainland China it was very strong, but there's some weakness still in Macau and Hong Kong.
O'Reilly: I'm not surprised, but it's kind of wild that it's hitting Coach now because you obviously saw Wynn and Las Vegas Sands saying, "Yeah, things are going rough over there right now."
Shen: I hadn't thought about that situation. When we've covered it previously it's always been focused on the gaming side.
O'Reilly: Right. It affects the entertainment side.
Shen: Yeah, absolutely, and the shopping side, of course. Hong Kong has some world class shopping. I'm sure that's not helping. Other than China, in terms of the international segment, Europe and Japan also saw pretty strong results, double digit numbers, in terms of improvements. This company, their shares were up, last I checked about half an hour ago, up over 9% today on top of the positive momentum from these earnings. The stock fell about 13% in 2015 which, honestly, mirrored a lot of other retailers.
It's down over 50% from it's peaks in 2012. Obviously, management is focused on that recovery process, and it's a good sign to see here not only in terms of integrating that acquisition, but just overall their international business. I think management also mentioned that for North America they're hoping to see comps turn positive by the end of this fiscal year, so definitely a nice a change to see after nine, ten quarters of down revenue.
O'Reilly: You obviously read the press release, you know the stock. Do you buy it right now? Not the stock per se, but do you buy what management's saying? Does it make you somewhat bullish?
Shen: Yeah. I have gone into a few stores and, obviously, this is just my personal experience but I feel like, in terms of the styles and their offerings now, it's definitely going a little bit more in terms of their traditional. Coach, traditionally, was know for really fine leather products. I think for a period they had offerings that were very heavily branded, started moving away from that because most fashion trends moved away from that and now they're restoring that customer traffic and sales. I think what management's doing now is important, it's necessary.
O'Reilly: Cool. All right. Thank you for your thoughts, Vince.
Shen: Thank you, Sean.
O'Reilly: If you're a loyal listener and have questions or comments we would love to hear from you. Just email us at firstname.lastname@example.org. Again, that's email@example.com. As always, people on this program may have interest in the stocks that they talk about and The Motley Fool may have formal recommendations for or against those stocks so don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening and Fool on!