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Tae Kim 75
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Full time private investor. Formerly a fundamental investment analyst at several alternative asset management firms.
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  • Elizabeth Arden CEO Points To Weakness At Walmart

    Sometimes if you can connect-the-dots, it can give you a decent chance of predicting future results. Elizabeth Arden (NASDAQ:RDEN) reported a dismal quarter today. The company missed earnings and sales by a mile and also guided next quarter and the full year way below Wall Street estimates.

    The company in their press release said one of the key reasons the results were so poor was:

    " due to weakness at one of our largest North American mass retail customers, both in terms of retail sales performance and replenishment rate" (Source Link)

    The financial media later in the morning quickly worked their sources to find the identity of this un-named mass market retailer.

    Wal-Mart is the (unnamed) retailer that Elizabeth Arden says ordered much less inventory than expected -- @bobpisani $RDEN $WMT

    - Carl Quintanilla (@carlquintanilla) August 8, 2013

    CNBC's Carl Quintanilla confirmed to me (Source Link) that their reporter Bob Pisani did actual "shoe leather" journalistic reporting to confirm that it was Walmart (NYSE:WMT) that was the un-named retailer. Reuters also reported the retailer was Walmart (Source Link).

    Why is this a big deal? So what if Walmart ordered less Elizabeth Arden products? The nugget comes from what the CEO of Elizabeth Arden said on their earnings conference call this morning:

    Largest mass retailer account in the U.S. has experienced negative retail sales trends and even worse replenishment trends. The replenishment trends actually accelerated in the fourth quarter despite improvement in retail trends..

    This is not a unique situation to us or to our category. This is not a brand issue, not a fragrance category issue as we actually built market-share in this key account..we actually..successful in the remainder of our mass retailer accounts (Source Q4 2013 Elizabeth Arden Conference Call Link)

    The CEO is basically saying this large account, which we now know is Walmart, is under-performing all their other mass retailers and the poor business trends are "across-the-board". The poor order rates are not just their account or the fragrance category.

    If this CEO is accurate with his commentary, it is highly likely Walmart will report poor financial sales results and guidance when it reports next week on August 15th.

    Disclosure: I am short WMT.

    Tags: WMT
    Aug 09 10:48 AM | Link | Comment!
  • Morgan Stanley's Amazon.com EBook Analysis Is Seriously Flawed

    On January 6th, 2013 Morgan Stanley analyst Scott Devitt upgraded Amazon.com (NASDAQ:AMZN) to Overweight on the thesis the company would gain e-Commerce sales market-share and grow revenue by around 30% annually in the next 3 years (2013 +31.2% y/y, 2014 +30.3% y/y, 2015 +27.3% y/y).

    This bull thesis went out the window weeks later when Amazon.com reported Q4-2012 sales growth of only 22% y/y missing the average sell-side sales estimate by $1 billion with an epic 700bps ex-FX y/y sales deceleration from Q3-2012. The Morgan Stanley analyst quietly lower his sales estimate by 1/3 to around 20% y/y annual sales growth over the next 3 years after the report.

    Yesterday the same Morgan Stanley analyst came up with a new bull thesis. In a new sell-side note citing a U.S. consumer survey they did of 1108 owners of eReaders and tablets, Scott Devitt concluded the 2012 eBook market is 50% larger than they previous estimated.

    Using his assumptions of EBooks sold per hardware device tie-ratios, e-Reader/tablet hardware market growth, and market-share, his Amazon.com's eBook operating profit estimate ballooned higher 3 years out.

    Investors giddily bid up Amazon.com shares by +4.16% on Morgan Stanley's revised higher EBook market analysis. The problem is his methodology is seriously flawed.

    Morgan Stanley asked e-reader and tablet owners how many EBooks they bought per month. Then they multiplied the number by 12 and took a "finger in the air" 40% discount due to "annualizing" it and also guessing there probably is a lower International tie ratio.

    The end calculated results were 13.3 EBooks purchased per e-reader device and 6.4 EBooks purchased per tablet in the year of 2012. He then used these same ball-park tie ratios as a base case along with device growth to extrapolate EBook market-size and Amazon EBook revenue & profit over the next few years.

    If Morgan Stanley was going to annualize the EBook purchased per device number, why didn't they just ask how many EBooks each consumer bought in whole year of 2012 instead of per month? Wouldn't a consumer who actually bought 0.25 EBooks per month likely to say 1 instead of 0? Doesn't this introduce large rounding error issues? Isn't this a serious flaw?

    What's with the made-up 40% discount number which comes arbitrarily out of thin air?

    Why would tie ratios stay in the same range 13-14 Ebooks a year per e-reader device and 6-7 Ebooks a year per tablet device over the next 3 years? Wouldn't the tie ratio change as the market matures?

    Also the final tie ratios of 13.3 and 6.4 EBooks sold annually per each and every hardware device didn't pass the smell test to me either, so I did a survey of my readership.

    I actually asked the right question of how many EBooks they bought in the entire 2012 year instead of the errant per month method Morgan Stanley used. I got 85 responses for my survey. The 2012 EBooks bought per eReader device tie ratio came out to 4.8. The 2012 EBooks bought per tablet device tie ratio came out to 1.4.

    My reader base demographic is probably more affluent and more educated than the average American and E-reader/tablet owner. The tie ratios are LESS THAN HALF AND A FRACTION of Morgan Stanley's number, who used less accurate survey methodology.

    Morgan Stanley's assumptions and methodology garbage in = garbage out, just like Scott Devitt's original Amazon.com 30% annual sales growth bull thesis. Investors beware.

    Disclosure: I am short AMZN.

    Tags: AMZN
    Feb 14 7:31 PM | Link | 13 Comments
  • Crystal Clear Waters: SodaStream (SODA) Rollout Growth Story

    Proven Track Record of Blowing out Street Estimates the Last 4 Quarters

    1 
    Source: Motley Fool (Link), Yahoo Finance

    U.S. Store Rollout up More Than Triple-Digits Year-over-year to 9550 stores

    5 
    6 
    Source: Ad Age full article link

     

    2
    3

    1100 new Target stores, 1140 new Staples stores, 240 new Costco stores all rolled-out in the past month. The CEO was quoted on CNBC with Herb Greenberg that Walmart “is coming”. The CEO also said at J.P. Morgan conference on 11/30/11 “retailers like Trader Joes and Whole Foods.. You will start seeing things like that in the next year or so”

    U.S. Store Growth led to Triple-Digit Sales Growth in Past and Likely the Future with Recent Store Add Acceleration of +45% q/q 
    4

    New Un-penetrated Countries Will Drive Years of Future Growth 
    SodaStream household penetration in Sweden is over 25% with several European countries in the range of 17-25%. Household penetration in the U.S. is negligible. The company just launched in Japan (press release link) in October 2011 and announced it will launch in Brazil in Q1 2012 (press release link). Changes in the corporate presentation also strong imply an upcoming launch in India (my analysis link).

    CEO quote from J.P. Morgan conference 11/30/11 on U.S. business trends: “bottom-line sales are triple digit growth in the U.S. Consumables are going through the roof. So we are very excited about the prospects of a strong holiday and strong long-term growth in the U.S.”

    It’s a Great Product that Saves You a Ton of Money 
    I use my SodaStream to make me sparkling water and soda about 3 times a day. If you drink sparkling water, buying a Sodastream is a no-brainer. Read my article (link) on how you can get an amazing 16.6 cents per seltzer liter. It also helps save the environment with less plastic bottles wasted (link), costs less (link), and is better for you nutritionally (link).

    The following are some reviews on the Sodastream model I own – the Genesis. You can read all 46 customer reviews here: (Bed Bath Beyond link)

    9

    7 
    8

    Consumables Growth is Strong and Average Spend per U.S. Consumer Bodes Well for Future 
    11 
    U.S. consumable growth is stunning (look above at CO2 refills y/y etc.). The CEO said on 11/30/11 that average spending per U.S. consumer is $65/year much higher than world-wide average of $34/year, which bodes well for the future as the U.S. is only 30% of SodaStream’s revenue and growing at triple-digit annual rates.

    Awesome Business Model and Barriers of Entry 
    Not only does SodaStream make money up-front selling soda-makers, the awesome part of the business model is the 80% gross margins (DB analyst estimate) it gets from CO2 refill exchange canister business.

    Along with the 9550 stores in the U.S. that sell SodaStream sodamakers, 50% of them (4785 stores) participate in the CO2 refill exchange business. Stores love this as it drives repeat customer traffic. This distribution network is a huge barrier of entry for competitors as stores are unlikely to offer a second CO2 re-fill brand at their customer service desks. Moreover SodaStream has 5 million CO2 re-fill cylinders in circulation manufactured at $10 a piece, which represents a significant capital investment. The CO2 re-fill valve is also patented.

    In developed markets where there is well-financed competition such as Sweden, SodaStream still dominates at over 80% market-share due to its brand, first-mover advantage, and distribution network.

    Europe Revenue Risk 
    12
    I believe the developed European market macro risk is over-stated. The developed markets in Europe (look above) are primarily 75%+ consumable revenue streams for SodaStream. Even if the macro situation worsens, it is high unlikely a family will cut down on $15 consumable CO2 re-fill every few months when in fact SodaStream saves them a ton of money vs. buying bottles. It’s a stretch to say any family will stop drinking sparkling water and go back to tap water to save that $15.

    Europe growth has been overall strong, but even if it goes down to flat or single-digits, the triple digit growth in the U.S (already 30% of revenue) and new markets such as Japan and Brazil still give the company years of 20%+ growth runway.

    Valuation and Short Interest 
    Most of Wall Street estimates for 2012 EPS are around $2.00 in USD earnings (Note Yahoo Finance estimates are in euros). Using the $2 number, the stock at today’s close of $29.85 is trading at 12.8Xs 2012 EPS ex-cash growing sales at 39% y/y in the last quarter.

    Using the latest Nasdaq 11/15/11 short-sale data (link), short interest has increased 12% in the previous 2 weeks to 7,478,030 shares. That means roughly 54% of the float is short. High short interest to float numbers such as this have preceded massive short covering squeezes of 50-70% upward stock price moves in as little as 4 weeks (Examples: OCZ and BKS in the past 2 months).

    Long-term annual targets 
    13

    Summary 
    I believe SodaStream is the best “early innings” rollout growth story in the market. They make a great product that saves people money and is a proven household penetration winner world-wide. 

    The company has blown out Wall Street estimates the last 4 quarters, accelerated U.S. store distribution 100%+ y/y +45% q/q, launched in Japan in October, and will launch in Brazil in Q1 2012. For all these reasons including the CEO repeatedly being quoted on Bloomberg, CNBC, and at Wall Street conferences about being “very excited about the strong holiday” I believe it’s highly likely SodaStream will post strong Q4 results.

    Moreover the company will likely give strong 2012 guidance of at least 20% revenue growth and EPS growth of 25% as the CEO repeats those long-term annual growth targets on a monthly basis and in corporate presentations everywhere he goes.

    Research Links 
    1. Official company Powerpoint presentation September 2011 (link
    2. J.P. Morgan conference 11/30/11 Powerpoint presentation (link
    3. My metrics financial model spreadsheet (link)

    Tags: SODA
    Dec 01 12:50 AM | Link | Comment!
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