eBay buy it now?

Ebay (EBAY) is a global e-commerce and payments platform operating the EBAY marketplace and Paypal electronic payment system. Through the use of mobile EBAY has positioned itself as a facilitator inbetween the online and offline retail world. Mobile is a game changer for e-commerce providers, instead of users buying on desktop they can now buy online when they are browsing in shops. EBAY helps facilitate this trend through applications such as Redlaser where users can scan and compare prices and Milo where EBAY stores can maintain real time inventory letting users know where they can find and buy available product. EBAY is expecting to transact around $10 billion on mobile devices, over 10% of revenues.

We won’t compete with you
My initial impression was that EBAY had been left behind by the online juggernaut that is Amazon. Amazon has dominated the online space, with its own shipping and inventory it has been able to more closely control the customer experience and put pressure on traditional retailers. Amazon alienated large retailers by releasing a price check app before Christmas last year, a consumer using the app with certain conditions could find the similar item on Amazon at a 5% lower guaranteed price.

Amazon has been undercutting retailers other ways, the FT had a great article exposing Amazon’s pricing algorithms. Basically Amazon has been data mining retailer’s sales on their site and using the information to undercut their prices. EBAYs rallying call to retailers is, we will not compete with you. This is a lot easier for EBAY when EBAY does not carry its own inventory. Retailers have finally woken up to the fact that EBAY can help facilitate transactions while Amazon is a direct competitor.

My favourite item of all time ghost in a box

 

Buy it now
The large retailers have opened storefronts on EBAY increasing the number of fixed priced items to around 70% of listings, EBAY is no longer just a flea market. EBAY has also improved the customer experience with nearly half of the items sold offering free shipping. Due to these initiatives EBAY marketplaces is posting its strongest organic growth since 2006 of 15%.

Paypal don’t leave home without it
The other trend EBAY is tapped into are electronic payments. Paypal recently inked a deal with Discover Financial Services, it was a fantastic deal allowing EBAY to leverage into their relationships with 7 million merchant locations across the US with the international opportunity yet to come. It would have taken years for EBAY to ink similar deals with individual retailers. Because of this merchant growth EBAY now accounts for only 1/3 of Paypal's transaction volume. Given the Paypal's decreasing reliance on EBAY marketplaces it is possible that we may see the division spun off in a few years time unlocking shareholder value.

Not sold yet, sell your life on EBAY?
Remember the man who sold his life on EBAY a few years ago? There was a nice little write up in WA today, after the auction four years later he is now living on an island he bought. As Ian Ushers mentions "the journey here was a little random. I just happened to be reading an article on the cheapest places in the world to live, and Panama came up." Since selling his life (house, job, cars and friends) he has accomplished 93 out of his 100 goal bucket list. Apart from French one of his goals was to join the “mile high club.” Disney was interested enough to obtain an option to produce a movie about the tale. There is no other internet site that can help someone sell their life and move onto the next great opportunity!

Jason

Disclosure: Decisive is long EBAY

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

"You could feel you are having a fat day, you can still wear accessories," Michael kors

What a comment, the fashion insights by Michael Kors help explain why his company Michael Kors (KORS) stock is up 90% year to date. KORS listed late last year and is a well-known accessible luxury brand in America. The company was established in 1981 but really took off in 2004 when the face of the brand Michael Kors appeared on project runway. It was only in 2007 that KORS opened and began to roll out company owned stores.

Accessories are an investor’s best friend

We like accessory businesses as unlike apparel they sell well across borders, are great gifts and tend to sell at similar prices around the world. Michael agrees stating that accessories are a great business because “they have no size, no age.” As mentioned before Michael believes “You could feel you are having a fat day, you can still wear accessories.” In KORS latest quarterly result accessories, footwear, watches, jewelry, eyewear and related products grew to 79% of KORS product mix.

Since its December 2011 listing KORS has trounced analyst estimates and recently gave fiscal 2013 guidance for 20% comparable store sales (SSS), there are no other retailers out there giving this sort of guidance.

Earnings History	Dec-11	Mar-12	Jun-12
EPS Est	0.09	0.16	0.2
EPS Actual	0.2	0.22	0.34
Difference	0.11	0.06	0.14
Surprise %	122.20%	37.50%	70.00%

Source Yahoo Finance

In a difficult environment KORS SSS have been best in class for retailers

Source: KORS 10K


Even more impressive were comments the CEO, John Idol made in regards to SSS on the last quarterly call. “When we look back at the stores that are one-year-old, two years old, five years old, there is almost very, very minor differentiation in terms of comp store performance in legacy stores versus new stores which really is a testament to first and foremost the brand.” This is an amazing comment suggesting plenty of growth potential if the old stores are growing as fast the new ones.

Source: KORS 10K

Considering KORS retail rollout only commenced in fiscal 2007 this somewhat explains the strong across the boards comps. KORS with a 600 store roll out target is still underpenetrated compared to its peers. KORS is still predominately North American with 90% of sales coming from the region. 70% of the global luxury market is outside of the Americas suggesting a much higher target than their 600 store rollout. As mentioned on the call management is targeting 70 new stores this financial year. Coach (COH) their largest competitor has over 800 stores with 500 in North America. Note KORS 600 retail owned store target does not include China. This leads us onto our major concern.

Fashion Faux Pas?

Company management and major shareholders Sportswear Holdings own the exclusive rights to operate KORS in China terminating in 2041 and not the company itself. Though KORS will receive licensing revenue and has the first purchase right of refusal. COH had a similar structure in China buying back the license once operations were profitable. Regardless the structure is disappointing with KORS shareholders likely to pay up in the future to buy back the license from insiders, never a good look.

Key person risk is minimised with Michael agreeing to a lifetime non-compete agreement and if that was not enough an employment contract for life. Michael also has a 6.5% shareholding in the company. I always enjoy listening to his commentary.

"It's an unbelievably tight race for hideous today."

Michael Kors comments on Valerie Mayen and Ivy Higa's elements-inspired gowns (season 8)

Conclusion

In our opinion KORS has one of the best growth profiles in the retail industry. KORS combination of high SSS and a near tripling of its retail stores (not including China) is unique in the retail sector. It trades on a high but appropriate multiple given the business momentum and brand recognition.

Jason

www.decisiveassetmanagement.com

Disclosure: Decisive is long KORS stock

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs

 

Worlds 'dumbest bank' now the safest?

According to the Global Finance Magazine ranking the world’s safest bank is KfW a German government owned development bank. This is the same bank that was famous for transferring US$427 million to Lehman brothers on the Monday Lehman filed for bankruptcy. I think I prefer the locals opinion, back in 2008 Germanys largest circulation newspaper Bild labelled KfW “Germany’s Dumbest Bank”. As everyone scrambled to get their money out KfW was transferring money in!

KfW effectively entered into a swap with Lehman, sending over Euros with the expectation of receiving the equivalent in dollars but the deal ended up  being one sided due to Lehmans bankruptcy as no dollars swapped back.

According to the Frankfurter Allgemeine newspaper, this all occurred even though capital markets experts at the bank met through the weekend to discuss the fallout of a potential Lehman bankruptcy. The transfer still went through that Monday.

Surprisingly the rest of the top ten banks are in Europe, the report is based on credit ratings and analysis of assets. The inclusion of credit ratings as a consideration worries me. At least some Australian banks make the list positioned starting at 18 through to 21. I’m with the Bild on this one I’ll stick with the locals opinion!

Here’s the full 2012 list, which is compiled using credit ratings and assets:

1. KfW – (Germany)

2. Bank Nederlandse Gemeenten (BNG) – (Netherlands)

3. Zürcher Kantonalbank- (Switzerland)

4. Landwirtschaftliche Rentenbank- (Germany)

5. Landeskreditbank Baden-Württemberg – Förderbank (L-Bank) – (Germany)

6. Caisse des Dépôts et Consignations (CDC) – (France)

7. Nederlandse Waterschapsbank – (Netherlands)

8. NRW.Bank – (Germany)

9. Banque et Caisse d’Épargne de l’État – (Luxembourg)

10. Rabobank Group – (Netherlands)

11. TD Bank Group – (Canada)

12. Bank of Nova Scotia- (Canada)

13. DBS Bank – (Singapore)

14. Oversea-Chinese Banking Corp – (Singapore)

15. United Overseas Bank – (Singapore)

16. Caisse centrale Desjardins – (Canada)

17. Royal Bank of Canada – (Canada)

18. National Australia Bank – (Australia)

19. Commonwealth Bank of Australia – (Australia)

20. Westpac Banking Corporation – (Australia)

21. Australia and New Zealand Banking Group – (Australia)

22. Kiwibank – (New Zealand)

23. HSBC Holdings – (United Kingdom)

24. Nordea – (Sweden)

25. Bank of Montreal – (Canada)

26. Canadian Imperial Bank of Commerce – (Canada)

27. Svenska Handelsbanken – (Sweden)

28. China Development Bank -(China)

29. Bank of New York Mellon Corp – (United States)

30. Agricultural Development Bank of China – (China)

31. National Bank of Abu Dhabi – (United Arab Emirates)

32. CoBank ACB – (United States)

33. Pohjola Bank – (Finland)

34. National Bank of Kuwait -(Kuwait)

35. DZ Bank – (Germany)

36. Banque Fédérative du Crédit Mutuel (BFCM) – (France)

37. U.S. Bancorp - (United States)

38. National Bank of Canada – (Canada)

39. Northern Trust Corp – (United States)

40. Qatar National Bank – (Qatar)

41. Samba Financial Group – (Saudi Arabia)

42. BancoEstado – (Chile)

43. La Banque Postale – (France)

44. Bank of Taiwan – (Taiwan)

45. Shizuoka Bank – (Japan)

46. Banco de Chile – (Chile)

47. BNP Paribas – (France)

48. Wells Fargo – (United States)

49. Standard Chartered – (United Kingdom)

50. SEB – (Sweden)

Source http://www.gfmag.com/tools/best-banks/11930-worlds-50-safest-banks-2012.html

Jason

www.decisiveassetmanagement.com

Disclosure: Decisive owns no bank stocks

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs

Upsize to the Golden Arches

Arcos Dorados (ARCO) translated into English is the golden arches, an appropriate name for the master McDonalds (MCD) franchisee in Latin America. ARCO is MCD largest worldwide franchisee with over 5% of overall MCD sales. ARCO has the right to operate and sub franchise MCD restaurants in 20 countries in Latin America. According to the United Nations Economic Commission for Latin America and the Caribbean, the Territories represented a market of approximately 575.9 million people in 2010. As of June 2012 ARCO has 1,858 restaurants in Latin America
 

Source: ARCO 10Q

ARCO has been extremely volatile since listing last year, buffeted by political uncertainty and currency depreciation in Latin America. The IPO was interesting as while private equity left for the exit, the CEO Woods Staton, who has been running various McDonald's operations in Latin America for more than 20 years, bought 2 million shares in the offering at the IPO price of $17 (shares are now trading in the $14 level). He is a controlling shareholder and must hold 51% of the voting rights as required by the master franchisee agreements with MCD.

Do you want fries with that?

The opportunity for ARCO in Latin America is enormous. For example Australia with a population of 22 million has 852 MCD restaurants vs Brazil with a population of 196 million with 677 restaurants as of June 2012. That was just Brazil as mentioned before Latin America has a population of 575 million, comparable same store sales (see chart below) reflect this growth trend. Investors should expect low double digit comparable sales going forward combined with a store rollout in the mid to high single digits should lead to 15% revenue growth. This looks very attractive compared to MCD mid single digit revenue growth and exposure to Europe.

Note      NOLAD consists of Mexico, Panama and Costa Rica,
               SLAD consists Argentina, Venezula, Colombia, Chile, Peru, Ecuador and Urugauy

Why did MCD sell?

MCD sold the rights to reduce the volatility of Latin American currencies ie devaluation and take the funding of the rollout off its balance sheet. As part of the agreement MCD receives monthly royalties 5% of gross sales, payable in USD with ARCO taking the currency risk. MCD took an an impairment charge of $1.7 billion in 2007, substantially all of which was noncash when the operations were sold to Staton and private equity. The current market capitalisation is $3 billion, this is low considering property, plant and equipment is at $1bn stated at cost net of accumulated depreciation on the balance sheet. Property costs include costs of land and building for both company-operated and franchise restaurants while equipment costs primarily relate to company-operated restaurants. As of December 31, 2011, ARCO owned the land for 509 of 1,840 restaurants and the buildings for all but 12 of the restaurants.

What about the calories?

ARCO has the master franchise rights until 2027 with a further 10 year option. The risk is ARCO fails to uphold their end of the agreement. The key points are that the CEO Woods Stanton must control 51% of voting stock and ARCO must commit to annual capex, store roll out targets and operate at least 50% of the restaurants (currently operates 74%.) If the CEO passes away MCD has the right to acquire shares or our interests in one or more Territories upon the death or permanent incapacity of the CEO or a material breach of the MFAs. The big risk is if the franchise agreement does not roll over in 2037 (10 year option from 2027) ARCO will cease operating MCD restaurants and would retain only real estate and infrastructure and be prohibited from engaging in other businesses such as Burger King, KFC for a 2 year period.

Conclusion

This second quarter result was the first decent quarter ARCO management have put together since the IPO. ARCO is a volatile stock, much riskier than MCD due to currency risk. Investing is all relative, foreign currency risk used to be just a Latin American problem but now seems to exist everywhere in the world. At least with ARCO you are getting paid for this volatility with high rewards on offer given the growth potential. Investors do not need fries with this order, from these levels the golden arches should provide a juicy standalone return.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long ARCO

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Elizabeth Arden is a belieber

What is a belieber? The definition on urban dictionary is one who is an obsessive fan of Justin Bieber, as the site explains ‘once I saw his face, I was a belieber’. I am not making this stuff up, his fans are fanatical. Elizabeth Arden (RDEN) is one these fans, purchasing the rights to Justin Biebers fragrance range in June from Give back brands. According to NPD (a market research firm), his debut fragrance ‘Someday’ was ranked the #1 women's fragrance launch of the year 2011. His next fragrance ‘Girlfriend’ has just launched and by all reports off to a terrific start.

RDEN is more famous for its fragrance brands than skin care (see chart below). RDEN dominates the music fragrance market with Taylor Swift, Mariah Carey, Britney Spears and Hilary Duff. The transaction also resulted in the purchase of Nicki Minaj’s (famous hip hop singer) fragrance which will debut this fall in the US.

Source: Elizabeth Arden 10K

RDEN is predominately a North American business with 63% of overall sales from the region. RDEN’s skin care category is dominant in North America with low penetration overseas. RDEN is not in Japan, Germany or France, 3 of the top 5 markets in the world. RDEN has invested in itself these past few months to make the brand more modern with new product and marketing initiatives in North America with plans to roll out the changes internationally.

One thing to like about RDEN is the lack of coverage. This is a great analyst list no big banks here with a market capitalisation of $1.3 billion it is undercovered.

Firm
BMO Capital Markets
Buckingham Research
Oppenheimer & Co.
CJS Securities
RBC Capital Markets
Stephens
SunTrust Robinson Humphrey
Telsey Advisory Group

Source: http://corporate.elizabetharden.com/analyst-coverage.php

RDEN guided to earnings of $2.55 to $2.70 per share topping analysts views of $2.38, importantly this guidance was given assuming a poor economic environment. No other beauty/fragrance companies are executing and upgrading earnings in this environment with these results I’m a belieber.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long RDEN

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Cash is King?

In the financial world cash is king though Visa (V), Mastercard (MA) and Ebay (EBAY) through its paypal division would tend to disagree. These three stocks are the beneficiaries of the shift away from cash and cheques towards card based and electronic payments. These shifts have occurred due to the increase in ecommerce, convenience, improvements in security and loyalty features helped along by the introduction of mobile wallets and smart phones.

According to The Nilson Report, credit and debit payments accounted for 46% of personal

consumption in the United States in 2010 up from 38% in 2005 (see chart below). This trend is less established overseas, for example in India 90% of consumer payments are made in cash and even in developed economies such as Japan 80% of payments are made in cash. The move to electronic payment is a global trend though exposure to Chinese spend is more difficult. Much like the internet China’s payment network is its own market with UnionPay being China’s only registered payment network. Launched only ten years ago UnionPay is now the world’s third largest payments network.

Source Nilson Report

V and MA are basically the middleman, they process payments between the merchants and the financial institutions. V and MA authorise, process and settle transactions. Importantly they do not issue cards or extend credit to consumers. They derive revenues by taking a cut of payment volumes.

EBAY is becoming better known for its payment services paypal which is now 40% of overall revenue. Last year PayPal processed more than $100 billion of payments online though this is a drop in the ocean compared to V’s worldwide transaction volume of $3.7 trillion. EBAY and the payment networks (V and MA) have a strange relationship as they are both competitors but also customers. Paypal essentially bypasses their networks in the same way paper checks are processed but paypal balances tend to be funded through V and MA cards making paypal one of their largest customers.

These companies will benefit from the opening up of small retailers to more card and electronic based services. There are approximately 8 million merchants in the United States that accept electronic payments. Based on data provided by the U.S. Department of Commerce and The Nilson Report there are another approximately 20 million small businesses that currently do not accept electronic payments. Newer technologies such as square and paypal here are enabling small businesses to accept cards with devices such as phones and ipads that do not require expensive point of sale systems. (See video below for more on how Paypal here works). V is a shareholder in Square, they believe Square to be more of an opportunity than a threat as Square gives them access to small business customers which were previously too hard to reach.

An opportunity for all is to provide real time offers and alerts to consumers. These companies have data on user’s current location and previous purchases. Instead of just transacting payments they can help retailers to get customers to transact by offering deals and marketing based on users past behaviour.

Conclusion

These companies benefit from a number of secular trends. The shift from cash/cheque to card, the opening up of smaller retailers to electronic payments and the ability to provide other value added services such as deals to consumers based on past purchasing behaviour. These trends are underpinned by the explosion in smart phones that allow users to shop anywhere online not just in front of the computer. For anyone who remembers those great MA ads these companies are showing that they are priceless.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long V and EBAY

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.