Macys (M) 4th quarter earnings estimate of $1.61 in doubt

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

Does Walmart (WMT) want to be lowest cost primary health care services and PBM company?

WMT PBM RESEARCH NOTE

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

Retail Sales fell short in October 2011 but don’t worry

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 rate to increase 3.5% to 4.5%

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 %

WMT has a longer term China growth problem

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

www.57thstventures.com

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

Tablets and Smartphones sales uptick shows no sign of slowing down

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.
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Macys a standout among Dept Stores

Macys recently indicated it would add 4% more seasonal workers for it’s Fall 1, Fall 2 and Holiday season.
Major suppliers on sweaters and other women’s clothing have indicated that most department stores are still struggling. The aspirational market is suffering while the luxury market (Saks)
are performing well.
Watch out for more hefty promotions to drive customer traffic. 25% – 40% off most items will eat into all important gross margins. Buy Macy’s but dump other big box retail Dept stores.
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E-Commerce will soon be #1 revenue driver for some discount and luxury retailers

Recent 2011 quarterly announcements show that Abecrombie and Fitch derived 11% of total revenue from online sales.

Gap got 9% of total sales online  and global retailer powerhouse H&M made $1b in sales online.

What does this mean for the broader discount, dept store and luxury retailers going forward?  It means that stores that haven’t made significant

capital investment in their .com businesses will be at a major competitive advantage starting Fall 2 and holiday season 2011.

Our estimates show us that the IPAD and more robust GPS (Shoppertrak, Foresquare) technologies will enable businesses to generate additional 5% –  10% sales online. This will lower operating margins as less square footage in stores will be the norm.

Additionally the all important gross margin will improve given the lost cost marketing campaigns that can

be done instead of costly broadcast and print campaigns.    The retail sector that will benefit the most will be discounters (Dollar, WMT, TGT, KOHLS and dept. stores (M, JCP and SHLD).

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WMT will end it’s negative same store sales comp by Fall 2 season.

Walmart recently announced that many competitors (TGT, Dollar Stores) are now trying to make them in pricing.

This puts Walmart at a major disadvantage as the (1) # the locations and  (2) price differential are it’s most competitive advantages.

Traffic, product mix and assortment are better at Walmart however apparel is still a major drag on earnings.

Will Back to School give walmart a much needed boost?  We think that electronics and grocery, wellness will be the catalyst.

We predict that walmart will have a positive +1 Same Store Comps driven by groceries and elctronics by the Fall 2 (October – November ) of 2011.

For more updates please check our blog Walmart WMT

 

Consumers pulling back as U.S. savings rate at 5.45% Bad News for TGT

Big Box Retail news not good for TGT. Fears of a double dip and cyclicality are taking hold as TGT has major headwinds heading into Fall 1 and Fall 2 season.  WMT is still terrible in apparel and discretionary items and it will show right now and back to school in their results. Search our blog for more news on Target