57thstresearchandnewsWe called this back on Sept. 16th of last year. Take a look right here www.57thstventures.com
Best Buy has now admitted that the Big Box Electronics format
is a thing of the past. The CEO wants to invest in a full service warranties and services model. Margins will continue to shrink and online retailers will continue to erode it’s market share.
Best Buys most recent report suggest that more prudent management thinking is needed in order to improve EPS growth in 2012.
The heavy discounting that Best Buy used during the holidays has reduced gross and operating margins.
Best Buy most recent EBIT margins were 6.1% vs 8% for Dollar Stores!!
That’s a big problem and it shows that Best Buy cannot compete on price with AMZN. Overhead costs make it a no brainer
Can Best Buy survive in the age of Amazon? Yes but they (CEO Brian Dunn must do the following)
Here are the most important changes that need to be made
1) Best Buy must close 20% to 25% of it’s 1100 stores
Benefit would be save capital expenses and overhead
2) Change product mix away from heavy reliance on TV’s (Googe TV is a dud) and more toward smartphone/tablet. Need more partnerships
3) Build more international stores via partnerships (e.g. Carphone in UK)
More research at http://www.57thstventures.comSearch for Best Buy Reseach
I
ndia’s recent announcement that it will allow foreign multibrand retailers to own 51% of joint ventures
will pave the way for EPS improvement for companies such as Walmart, Tesco and other large cap stocks.
Walmart is the winner total revenue for the retail conglomerate is $108.6 billion with international business producing 26 percent of its revenue or 28 Billion dollars.
Expect this more aggressive foray into the Indian Marketplace to add a couple of % points to EPS in the coming 4 quarters as Walmart already has an existing supply chain chain to “ramp up”
This is enormous as the Indian retail market generates about 470 Billion a year in sales.
This is expected to grow to $675 billion in 5 years as the new organized retail growth will add $85 billion to this.
Previously companies were permitted to establish only wholesale JV’s.
The potential is huge as India has 1.2 billion consumers that are potential customers.
Current Headwinds for Foreign Direct Investment in India
Overall foreign direct investment in India dropped 28% to 29.4 billion in the first half of the year.
The Indian GDP is also down from 9% last year to 7.4% this year.
Search the site for more research on Walmart or email comment below for information regarding this post.
Barriers to entry are step into the Indian Marketplace
The new openings come with some conditions including
– $100 million dollar minimum to set up a mutibrand retail operation and $50 million must be invested in back end operations such as
food processing and warehouses. This will benefit global suppliers and distributors with existing relationships in India (Read more about this on
www.57thstventures.com or order a full report from us by emailing me.
There also may be restrictions to only allow mutinationals to open stores with more that $1million people…more on this later.
Department Store stalwart Macy’s business is down between 15% and 20% in the all important womens division.
Major headwinds as we head into the all important Black Friday Holiday weekend include:
1) Stripes , Patterns , Tweeds are not working. Sweater Business is off 30% to plan
2) Better Knitwear is down 15% to plan and 22% vs. Last year
3) Outerwear as a class is not working and floor looks oversold as there is excess inventory all over floor. This excess inventory will compress margins. It’s early December as coats look horrible. Typically Macys does 50% of coat volume in December. They are currently well below plan.
Expect an announcement of very aggressive discounting as Black Friday looks bleak.
This doesnt bold well for dept store mid caps BONT and SMRT
We are bearish
Sign up for free research and testimonials at Macys and Department Store sluggish 4th Q
WMT made an splashy entry into the PBM market with new clinics about 6 years ago when it started offering generic perscriptions for $4.00.
So everybody thought that Walmart could use it’s business model and scale up with clinics to be a player in the PBM marketplace.
Walmart also moved into EHC (Electronic Health Record) and in-store clinics with very limited success.
Companies such as WMT and other companies are in a race to build more clinics before 2014 when President Obama’s health care overall will take affect and millions of americans will gain health-insurance coverage.
Right now Walmart lags the industry in the # of clinics
CVS – Caremark has 645 clinics
Walgreens has 347 clinics
Walmart has 141 clinics
So what does this mean for Walmarts bottom line? Today WMT announced that it’s revenue exceeded Wall Street expectations however
it’s gross margin and profit number missed. This is not concerning short term as Walmart attempts to gain back market share that it lost in the last 3 years. The only way to do this is to keep prices low and sacrifice margin.
The primary health care services strategy would act as a “traffic driver” for WMT and that would eventually drive bottom line when prices are increased.
Here’s why WALMART WILL NOT BE A PLAYER IN THE PRIMARY HEALTH CARE SERVICE MARKET
Respondent is responsible for managing the Midwest region for large Biotech firm. He previously worked at Pfizer for 13 years where he launched Viagra, Ziphromax and other $B drugs. He worked as a Region Manager managing hospitals , PBM relationships and over 200 sales representatives responsible for a million dollar book of business.
Participant – 21 years in Pharma and Biotech marketplace. Currently working at Sepracor and previously worked in sales management at Pfizer.
The respondent asked that he not be identified, and that his company not be identified.
What impact could Wal-mart potential entry as a PBM (Pharmacy Benefits manager) would have on the industry, especially the sale of
Pharmaceuticals, and competitive impact/reaction for Target and Walgreen’s and other drugstore retailers. (Impact on traffic, sales,
pricing, etc. for Wal-mart, vs. other drugstore retailers?)
Answer: Mark said “ What a provocative question regarding Wal-Mart entering the PBM arena.
The answer to that is a resounding NO.
Though the PBM business model is run much like the Wal-Mart business model, i.e. brand secondary, cheaper generic (knock
off) alternatives primary, there are several issues which exist that would inhibit Wal-Mart’s ability to be successful in
this area:
1. Other than Wal-Mart employees, most of who are underinsured already, I can’t think of another employer group
eager to be represented by Wal-Mart as their PBM. The brand of Wal-Mart, and their reputation of how their employees are
treated, would not be a good “PR” fit with most employer groups and I would think they’d be a bit hesitant in
diluting their brand with that association.
2. Secondly, PBMs are extremely expensive to run and I can’t think of any competitive advantage they offer against more
veteran PBMs such as Medco and Caremark. For example, the cost eventually the customer sees in the tiered
copay system is absorbed in the current system by the employer, wholesaler and MCO (United, BCBS, ect).
The advantages these firms have are longstanding relationships with major employer groups that will be hard to
supplant. Wal-Mart won’t be able to offer anything different what current PBMs offer, lesser priced drugs (generics) as the
preferred agent with step edits in place to ensure that branded agents are tried only after generics fail.
Most Tier 1 drugs already have a copay that is nominal ($2-$5) Wal-Mart will be unable to offer anything over what that current
PBMs offer other than some sort of point of service discount since they run their own pharmacies. The problem with that
is Caremark and Medco already have lucrative deals in place with Walgreen’s, CVS and Target so I don’t see the business
opportunity for them, especially considering what their margin expectations will be from running the business.
Overall my guess is that, from a distance it appears to be potentially a good opportunity; however when they look at
operation cost and other variables, this will…nowhere. Merck Pharma found this out sometime ago, when it purchased
Medco for 7.2 billion, lost a ton of cash, then divested itself from it. The reasons were not entirely the same; however the
cost was the major issue there as well.
For more in depth analysis and reports contact us at www.57thstventures.com
Most Discount, Specialty, Dept Store and Luxury Retailers had a disappointing October 2011 sales month. 
Saks same store sales were 1.8% when 5.4% was expected
Nordstroms same store sales were 5.4% when 6.4% was expected
Macy’s same store sales were +2.2% when +3.6% was expected
J C Penney same store sales were -2.6% when +1% was expected
Question
Has the consumer retrenched before the all important holiday season when retailers earn 20% of total revenue
Answer = NO
Here are the reasons why investors should not be worried about the recent October sales results
(1) Retailers typically discount heavily and clearing out all “Back to School & Fall 1 merchandise” which hurts margins
(2) Warmer weather and a big snowstorm hurt store traffic which held back sales
Remember retailers have worked on controlling inventory levels which means that “inventory holding costs” won’t eat into earnings aka profitability.
We think luxury and select department stores (Macy’s) will EXCEED earnings because of localized selling and broad assortment for missy’s.
Food inflation is increasing this year.
This means that food manufacturers, grocers and big box retailers will have to find a way to “pass on” additional costs to cash strapped consumers.
Consumer preferences have changed for good as many households are still trading down to private label. Most grocers and food manufacturers are “sacrificing volumes for price increases”. So a consumer will now buy a smaller bottle of milk or cereal! Companies like Supervalu , Kroger and others have managed to pass along the 4% commodity price increase to consumers. It’s all about “speed & velocity” to move products. Right now the biggest sector that has to worry are the food manufacturers. Watch the gross margin # and inventory levels of WMT, TGT and other retailers who are dependent on “Everyday Low Prices”. Food Inflation to rise 3.5% to 4.5 %
The recent political changes in china that have led to a crackdown on Walmart (WMT) will have a longer term earnings problem for the world’s largest retailer. China is a $7.5 Billion business for walmart but there are significant headwinds.
Although Walmart is the second biggest retailer behind Sun-Art Retail Group it still has not been able to adopt the same lowest cost strategy
that has fueled it’s growth in the U.S.
The reasons are
The Chinese consumer does not want to compare “everday” low prices
Regulatory obstacles that oppose opening foreign businesses in large cities
Unionizing by some of the chinese workforce
What does this mean as WMT takes a longer term view into the Chinese market? It means that WMT must now adapt by opening up stores
in smaller cities (which will slow it’s overall revenue growth as it cannot amortize it’s cost over a larger store format).
It must also try and accelerate its e-commerce strategy. Check out our attached report note here for a view on WMT global e-commerce strategyWMT_E-COMMERCE_STRATEGY
Our long term view is that WMT need to accelerate the opening of Sam’s Clubs.
It also needs to figure out how to replicate it’s lowest priced strategy and articulate that to the Chinese consumer.
Our view longer term is Bearish
Don’t be fooled as the Back to School earnings reports showed that consumer traffic and sales were purely driven by discounts and markdowns.
How will this affect the all important gross margins for department stores and discounters.
Markdowns of 30% are getting to be the new normal and as raw material prices keep increasing (cotton etc) retailers cannot pass on price increases.
Consumer Confidence, Employment and stock market problems will affect DEPARTMENT STORES the most.
JCP will suffer the most. My guess is it’ll take more than the New CEO (EX Apple) to turn things around.
Amazons recent announcement of a low end tablet entrant bodes well for over all business and consumer durable good consumption.
U.S. Businesses are still spending on durable goods (defined as purchases lasting more than 3 years). Recent data showed that fell only 0.1% in August 2011 from July 2011. Given overall weak sentiment and the market news this bodes for everyone in the supply chain for the devices. Our picks are GOOG, APPL and AMZN.
We are very bearish on RIM and NOKIA.
Check out more news by searching blog or by checking website at free research reports
institutional and retail oriented investors.
57thstresearchandnews 