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Category: Articles
For those folks who think “Target (TGT) is fine just the way it is”
Some data first. From Marketing Charts.
US consumers are growing increasingly stingy with their money and are becoming more and more likely to base their retail purchase decisions on price, according to a study from The Gordman Group, which reports that Wal-Mart stands to benefit most from this phenomenon.
According to Retailer Daily, The Gordman Group’s Spring “Retail Trend Tracker Survey,” reveals that 90% of respondents say the economy has affected how much they spend, and 80% say the economy has affected where they shop. In the last three months, 45% of respondents have spent less, and 31% expect to spend less in the next three months. More than half, 59%, believe the economy is getting worse, and almost half, 49%, say the economy has affected them directly.
So what you say? It sounds like everyone will suffer. Read on….
Here is the blow to the folks who think “we don’t need any of Bill Ackman’s changes”
More than half of respondents (54%) in the study plan to spend a larger share of their budget at Wal-Mart (WMT) in 2009 than they did in 2008. The next-most-popular response to this question, internet stores, was only selected by 27% of respondents as a destination where they will spend more money this year. Only 25% of respondents say they will spend more money in 2009 at chief Wal-Mart rival Target, the Gordman Group found.
So, it is clear that there has been a fundamental shift in consumer behavior. In my recent conversation with AutoNation CEO Mike Jackson he said to me that he thought “the consumer is scarred and their behavior has been fundamentally altered, perhaps permanantly”. Jackson gets that and is changing his business to meet the new reality. Execs at Wal-Mart get it and are pounding their value message home to consumers. Even media whipping boy Sears Holdings (SHLD) gets it as they have been very aggressive proving to consumers their appliance prices are the best (and it is working).
Now, Target management has responded to Ackman saying:
For more than a decade, Target’s Board and management have been guided by our brand promise to our guests — to “Expect More. Pay Less.” — and this approach has produced outstanding results and a best-in-class retailer.
· Over the past 10 years, Target has grown its revenues at a compound annual rate of 11%, expanded its EBITDA margins by 200 basis points and grown EPS at a 14% average annual rate.
· Target has built a track record of disciplined management across all areas of its business including expense management, inventory control and use of capital.
· Target also has a history of returning cash to its shareholders through dividends (which have been paid every quarter since 1967, when we first went public) and a share repurchase program, all while maintaining a prudent capital structure as evidenced by its strong investment-grade credit rating, which we firmly believe is important to maintain.Target’s Board and management are working to address the challenges of a deeply recessionary economy and remain firmly committed to the values and strategies that have driven Target’s success for nearly 50 years. By working as a team, delivering outstanding value, offering continuous innovation and an exceptional guest experience, Target believes it will enhance its position as a leading, world-class retailer and emerge from the current economic environment an even stronger company. Target’s future success depends on its ability to continue adapting to changes in the environment while fulfilling its “Expect More. Pay Less.” brand promise with passion and discipline, and delivering outstanding value for its guests, team members, shareholders and communities.
OK….but all evidence for the past year now ought to tell everyone that the “Expect more.Pay Less” motto just ain’t getting through to folks. When I see the question “what are you doing NOW to address problems” and I hear “For the past 10 years……..” I hear nothing after that because I think there is no new plan. Whenever I read anything from Target I see a laundry list of reasons they think everything Ackman proposes and everyone Ackman nominates just isn’t right for the company. What don’t I ever read?
Anyone?
How about “this is what we are going to do to stop the sales free fall”. Why is that missing? As a consumer I am not seeing anything out of Target I have not seen for the past 5 years or more. It is old and stale and the competition is adapting.
Food. Ackman’s food argument is 100% true. People are heading to Wal-Mar for cheap staples. Target is know for chic fashion. People clearly do not want fashion right now as they hunker down. While they are in Wal-Mart for staples they are picking up other things and saving another trip. Target needs to become a place to go for staples or something. Anything other than trying to sell affordable work clothes to women now out of a job or worried about losing one.
If I were a Target shareholder, I would have a hard time not voting for the guy at least with a plan versus “the last decades plan is the plan for the next one”
The landscape has changed…
Disclosure (“none” means no position):Long WMT, AN, SHLD, none
From 2/1/2009
Summary
Rising energy prices, driven by instability in key producing regions such as the Middle East and increasing demand from developing countries, are affecting the global economy. What are the potential consequences of huge wealth transfers to oil-exporting states?
Are there any realistic alternative energy scenarios on the horizon?
Disclosure (“none” means no position):
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Madoff: "A Riot of Red flags"
I have resisted the whole Madoff thing as much as possible to this point but this is worth reading:
Disclosure (“none” means no position):
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The Headline or the Facts?
Same story different headline..
WSJ:
“New homes Sales, Prices Decline”
The median price of a new home dropped 12.2% to $201,400 in March from $229,300 in March 2008. The average price fell 10.3% to $258,000 from $287,600 a year earlier. In February 2009, the median price was $208,700 and the average was $255,100.
Foreclosures and a glut of unsold houses on the market have forced prices lower. At the end of March, there were an estimated 311,000 homes for sale. That’s down the 328,000 for sale at the end of February. But the ratio of houses for sale to houses sold remained high, at 10.7. It was 11.2 in February.
OR
Bloomberg:
“Sales of New Homes In March Better than Expected”
Purchases of new homes in the U.S. last month were higher than anticipated, providing further evidence the market may be stabilizing.
Sales decreased 0.6 percent to an annual pace of 356,000 after a 358,000 rate in February that was stronger than previously estimated, the Commerce Department said today in Washington. The median sales price decreased 12 percent from March 2008, while inventories of unsold homes fell to a seven- year low.
Bottom line? Housing is still falling and has not stabilized… not even close yet..
Why not? It should be going up this time of year…not down. When we get to the typical downtime, look out below..
Disclosure (“none” means no position):
Bill Ackman lays out his case. I for one (and hopefully Target (TGT) shareholders do to) hope he wins some board seats and shakes things up over there. They are sleepwalking through this recession and getting pounded by Wal-Mart (WMT).
Pershing Square Letter to Target Shareholders
Disclosure (“none” means no position):Long WMT, none
Well, we must give credit where it is due here. “Davidson” was ahead of the curve on this one. Read his prior criticism of Shiller here and here
From the WSJ:
Now another economist, Thomas Lawler, says Prof. Shiller’s chart is “bogus.” Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making “wild allegations.”
The clash is more than just a spat between two of America’s most prominent housing mavens. It could affect the debate about exactly where the U.S. is in its housing cycle. The squabble also illustrates the paucity of reliable information on house prices.
If they rely too heavily on house-price gauges, politicians may get a distorted view of the severity of the slump and support overly drastic measures, says Kenneth Rosen, a housing economist at the University of California, Berkeley. Mr. Lawler says the Shiller chart also appears to understate the long-run rate of increase in home prices.
No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others. The publicly recorded transaction prices, used to create indexes, often are distorted by incentives given to buyers that aren’t tallied in the price.
It continues:
For 1890 to 1934, Mr. Shiller used data from a trio of economists led by Leo Grebler. Because he found no index for 1934 through 1953, Mr. Shiller wrote, “I had my research assistants fill that gap by tabulating prices in for-sale-by-owner ads in old newspapers,” covering just five cities. For 1953 through 1975, Mr. Shiller used an index compiled by the U.S. Bureau of Labor Statistics, or BLS. An index from the regulator of Fannie Mae and Freddie Mac covers the period through 1986, after which Mr. Shiller uses the S&P/Case-Shiller index he created with another economist, Karl Case.
“In other words,” Mr. Lawler wrote in a recent edition of his daily housing-market newsletter, “the long-term chart is based on a concatenation of different time series of home prices which use different methodologies, have different samples, measure different things, and all in all are, well, different.”
Mr. Lawler, a former Fannie Mae economist who now is an independent consultant in Leesburg, Va., says the BLS data used by Mr. Shiller was based on a “very small sample” and so isn’t reliable. Mr. Shiller’s chart shows that home prices from 1940 through 2000 rose at an annual real, or inflation-adjusted, rate of 0.7%. Data from the Census Bureau, however, puts the real rate at 2.3% for that period. Part of the difference may be due to improvements in the quality of homes, Mr. Lawler says, but he doubts that accounts for the whole gap.
Youtube plotting of housing prices on a roller coaster:
What to think?
I’m not sure how much confidence we can have in the Shiller data since the inputs it uses are not from the same series. It is sort of like trying to draw historical conclusions on stock prices by using different indexes for different periods. It doesn’t work.
Because of that, drawing conclusions on Shiller because of events that happened in the 1940’s based in his data I think is flawed and prone to massive error. Now it may also be part truth that Case-Shiller is a self fulfilling prophecy. If the index is treated as gospel, and it says home prices must fall “x”, then they may actually do so as potential buyers sit on the sidelines waiting to catch the low. The death of buyers then causes sellers to lower prices to move inventory.
If that is true then the problem is two fold. Incomplete data being used to make predictions and a publics blind acceptance of those outcome sin part causing them.
I think a healthy debate on the accuracy of the historical price points used in necessary.
Disclosure (“none” means no position):
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Sears Makes Progress on Credit Facility
Hat Tip to reader Chris for finding this…This is a sort of update on a post from March.
From the Daily Herald:
Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) are coordinating talks with underwriters to roll over at least 65 percent of the company’s credit line to June 22, 2012, said the people, who declined to be identified because terms aren’t set.
JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo made commitments to extend Sears’s revolver, one person said. The company is unlikely to extend its debt by the proposed $2.6 billion, or the full amount, according to the person, who said Sears might be able to get $2 billion.
Sears (SHLD), acquired by Edward Lampert-led Kmart Holding Corp. for $12.3 billion in 2005, plans to replace the existing five- year bank line due March 2010 “at a capacity more in line with our historical borrowing practices,” the retailer said in its annual report dated March 16.
If lenders approve the proposal, Hoffman Estates, Illinois- based Sears would join more than 75 companies that have amended credit terms this year at higher interest rates as banks increase borrowing costs.
Higher Interest Rate
The company is proposing to pay lenders that extend the loan an interest rate four percentage points more than the London interbank offered rate, the people said. That compares with the 87.5 basis-point spread the company currently pays, according to data compiled by Bloomberg. One basis point is 0.01 percentage point.
Kimberly Freely, a Sears spokeswoman, declined to comment on the negotiations, as did Wells Fargo’s Susan Stanley, Louise Hennessy of Bank of America and Tasha Pelio, a JPMorgan spokeswoman. Danielle Romero-Apsilos, a Citigroup spokeswoman, didn’t immediately return a message left at her office.
The extended revolving line would have a 100 basis-point fee on the unused portion of the loan, which would drop to 75 basis points if at least 50 percent of the facility is drawn, the people said. Sears’s current facility fee is 17.5 basis points, Bloomberg data show.
Sears borrowed $435 million from the $4 billion revolver and had $968 million of letters of credit outstanding under the facility as of Jan. 31, according to the annual filing. The company presented its proposal to roll over a portion of its credit line to individual lenders two weeks ago and held talks with banks this week, according to one person.
So, will Sears get it facility? Yes. Will it cost much more? Yes. Is it surprising or stunning that it does? No. Can we finally put the “Sears will have a liquidity crisis on 2009” refrain to bed? I hope so….
Disclosure (“none” means no position):Long SHLD, WFC, none
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More Cold Water for Housing
Please do yourself a favor. When presented with housing data, ignore anything that compares consecutive months figures, it has little meaning as there are huge seasonal reason for variations.
What you must compare to get the real picture is month to month over the previous year. With that being said (bold emphasis mine):
IRVINE, Calif. – April 16, 2009 – RealtyTrac® (http://www.realtytrac.com/), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q1 2009, which shows that foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 803,489 properties in the first quarter, a 9 percent increase from the previous quarter and an increase of nearly 24 percent from Q1 2008. One in every 159 U.S. housing units received a foreclosure filing during the quarter.
Foreclosure filings were reported on 341,180 properties in March, a 17 percent increase from the previous month and a 46 percent increase from March 2008. The March and Q1 2009 totals were the highest monthly and quarterly totals since RealtyTrac began issuing its report in January 2005 despite a decrease in bank repossessions (REOs), which were down 13 percent from the fourth quarter of 2008 and 3 percent from February totals.“In the month of March we saw a record level of foreclosure activity — the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record. Since much of this activity was in new foreclosure actions, it suggests that many lenders and servicers were holding off on executing foreclosures due to industry moratoria and legislative delays,” said James J. Saccacio, chief executive officer of RealtyTrac. “It’s also likely that the drop in REO activity can be attributed to these processing delays, rather than to any of the foreclosure prevention programs currently in place. It’s very likely that we’ll see the number of REOs increase again now that most of the moratoria have been lifted.
“On a positive note, it appears that demand is up in some of the harder-hit areas, particularly on bank-owned REO properties that first time homebuyers and investors see as bargains,” Saccacio continued. “But it’s unlikely that this increased demand will be enough to offset the growing number of foreclosures in the pipeline, accelerated by rising unemployment rates.”
Here is the Q1 foreclosure Map:
Yes I know that 60% of all foreclosures are in 5 states. I also know that a great deal of US economic activity comes from those areas, not good. Let’s also not forget that in many of those 6 states there was a foreclosure moratorium that only ended in April which skewed Q1’s results. It also means we ought to see an onslaught of activity in April that causes Q2 to really scare people.
Bottom line is that there is no stopping the housing free-fall yet. It may be slowing somewhat, but that is it.
Yes I also have seen the stories about “bidding wars” in some areas for homes. Here is the thing about that. These “bidding wars” are for select homes that are selling for 50% less than they sold for just a few years ago. This is not good. It also goes to the point that if we have to search for the occasional bidding war, it means there are not very many of them and if that is true, we have not seen the bottom in housing yet.
Remember, we have a year’s worth of new homes sitting on the market, empty. The scattered “bidding war” for a home with a 1/2 off sale doesn’t do anything to make me believe this slide has ended or will end anytime soon. now, it will slow the slide, but it will not stop it….not yet..
Disclosure (“none” means no position):
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Baupost Group Letters 1995-2001
Hat Tip: Noise Free Investing (please visit link)
Disclosure (“none” means no position):
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Inside: How LTCM Blew Up
Thanks to reader Eric for emailing me this. It is long > 1hr. but worth every second and given today’s events, I think everyone ought to watch it. This is Eric Rosenfeld who was a trader and principal in the Long-Term Capital Management hedge fund, a landmark Wall Street disaster.
Prior to LTCM, Rosenfeld was an instructor at Harvard University. About one year after LTCM’s rescue, in 1999, he joined John Meriwether as a partner in JWM Partners LLC, which started operations with about $250 million under management. He left JWM Partners to join Paloma Partners, a Greenwich fund-of-funds.
Disclosure (“none” means no position):
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Friday’s Links
DEBT, Ackman, Adam Warner, GE
– WOW, is just about the only thing you can say
– Quoted in ESPN …that is cool
– Shareholder outrage at MSNBC
Disclosure (“none” means no position):
Had a great conversation with CEO Mike Jackson and COO Mike Maroone from AutoNation (AN) after earnigs were released this morning.
Some notes:
– Q1 was the bottom for auto sales
– Expects an annual run rate of 11 million units by end of 2009
– The 900 to 1200 dealership closures that are currently estimated for 2009 is “substantially below” what they feel the eventual reality will be.
– Regarding Closures:
- Counting rooftops is not a totally accurate assessment of the effect of closures. For instance, the Bill Heard closings, while only 30 dealerships, had a fundamental change in the markets in which they did business because of the huge volume of business they did in them. Those dealers left standing in those markets are now seeing significant operating improvements (share and margin).
– Domestic metro market are those in which “rationalization” will occur
– Rural markets are “fine”
– Domestic share now at 30% and AutoNation now plans to lower that through the GM (GM) and Chrysler restructuring. Those dealerships that AN owns will then be transferred to other uses (Import, Luxury)
– Debt Covenants:
- Leverage ratio down to 2.35 vs covenants of 3.0 (better than Q4)
- “The deeper we get into this, the stronger we get”, looking forward to the rest of the year, if one were to say they are very comfortable with their covenant situation that would be an “extremely, extremely credible statement”.
- $400 million in capacity in credit lines and cash on hand makes for “colossal liquidity”
– Service down only 6% and has proven very resilient.
– GM’s announced 9 week shutdown is fantastic move as it means they are serious about getting rid of excess inventory
– Auto loan securitization will be TALF dependent through 2009
Here is Jackson’s CNBC appearnance this morning:
Disclosure (“none” means no position):Long AN, none
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AutoNation’s Poweful Quarter
If there was any doubt AutoNation (AN) is pulling away from the pack as the premier auto dealer today, this quarter, in this environment ought to put any doubt to rest. These results surpassed even my most optimistic scenarios.
Highlights:
- AutoNation reports 1st Quarter 2009 EPS from continuing operations of $0.27 or ($0.23 on an adjusted basis) vs. analyst consensus of $0.16 — AutoNation beats consensus by $0.11 or $0.07.)
- AutoNation improved adjusted EPS for continuing operations, by 90% compared to 4th quarter 2008. ($0.12 reported in fourth quarter 2008)
- AutoNation continues to show margin improvement. As we moved to 3.6 percent in Q1 ’09 from 2.3 percent in 4th Q ’08. Industry lending operating margins.
- At the end of Q1 ’09 our liquidity is strong with approximately $400 million of cash and revolver available.
- AutoNation new vehicle sales decline 43% compared to industry declines of 46%, according to CNW.
- AutoNation reduces debt $1.25 billion since January 1, 2008.
- AutoNation reduced debt of approximately $500 million in 1st Quarter.
- New Vehicle inventory down 20,000 units YOY and down 11,000 units from 4th Quarter 2008.
- Used vehicle inventory stood at 36 days, down 4 days YOY.
- Mr. Jackson has visited with the Automotive Task Force on three occasions – diligent and transparent.
- 1st quarter revenue of $2.5 billion.
- U.S. SAAR in 1st quarter at 9.5 million new vehicle units, a 30 year low, even lower than the 10.3 reported in Q4 2008. (note 2008 1st Q SAAR was 15.2)
- Regarding the Chrysler situation….given our low level of exposure (4% of sales), we would remain within our financial covenants even in the event they go out of business.
- We take President Obama at his word, that he will support GM.
I have not dug into the detials and the 8-K has not been filed yet. But, key points are debt reduction, market share gains and inventory reduction.
More coming up after my conversation with CEO Mike Jackson later this morning
Disclosure (“none” means no position):Long AN
He makes some great pointsTranscript:
Henry Groppe: IEA to blame for $100 oil spike
Disclosure (“none” means no position):