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Elizabeth Montgomery
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I am a former sell-side equity research analyst with +12 years experience covering apparel and footwear brands, specialty retailers, and consumer goods companies. I worked at Cowen, Robbie Stephens, Lazard and Longbow Research. I'm now a stay-at-home mom, but I continue to follow and trade... More
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  • BBW: Early Signs Of Progress With Turnaround; Adding To Position

    BBW shares sold off roughly 4% yesterday after the company reported Q4 results. I'm taking advantage of this sell-off to add to my existing position and believe there's significant upside in the stock over the next few years.

    First, let me state that I KNOW the company has been a train-wreck. Specifically,

    · Since the beginning of 2005, BBW has reported only 7 quarters of comp-store sales gains (meaning 23 quarters of comp declines)

    · Revenue has fallen from a peak of $475 MM in 2001 to $380 MM in the just-reported 2012

    · Sales per square foot (not surprisingly) have fallen from a peak of $615 in 2005 to $350 in 2012

    · The EBT margin has fallen from a peak of 12.3% in 2005 to -12.7% in 2012

    · BBW hasn't made a profit on earnings before tax since 2008 and cash flow has cratered

    Clearly, operating performance has been a disaster since the economy tanked in 2008. The stock has also been a disaster: from a peak share price of over $36 in January 2005, BBW shares are now $4.90. The stock has retraced 65% since 1/1/2008, far under-performing the still pathetic 3.5% return of the SP500 (pre-dividend) over the same period.

    However, there are some really positive changes happening at BBW that nobody seems to be paying attention to. In short:

    New store format generating significant comp gains: BBW has opened 6 stores under a new, updated design and these stores have been and continue to comp up over 30% vs. prior year sales. Though I haven't shopped in a new format store yet, I have called a few of them and asked what is new and updated about the store. Each time I was told that the new design features more technology and graphics-including an X-ray machine that the kids can put their animal under (when they're done making it) that then projects all the gadgets/features that they put into the animal on a big screen and prints out an X-ray that the kid can take home. With only 6 stores sporting this new design, but plans to remodel 20-25 stores in 2013 and an additional 30-35 in 2014, I believe BBW can drive a steady improvement in comp-store sales-the first step to restore sales productivity and profitability.

    Right-sizing the footprint = getting rid of unprofitable stores: Hindsight is always 20-20, of course, but BBW mgmt admits that they simply over-expanded the store base, particularly in light of the 2008 economic crisis and collapse in consumer spending. After closing 22 stores in 2011 and 2012, BBW plans to close another 35 under-performing doors in 2013 and at least an additional 25-30 in 2014, with a target of operating 225-250 stores in North America (down from the 291 in operation at 2012 year-end). With the top 200 stores in the company averaging a +20% unit-level EBITDA, these closures of under-performing stores should drive a really meaningful improvement in profitability.

    New, more effective marketing strategy: BBW also has a new marketing strategy, which, as the Mom of a five year old, I personally attest is effective. Previously, BBW's marketing targeted the Mom with a message about product and promotion. The company's newer marketing targets the child with a focus on the experience ("you get to make your own friend") and product ("and these are the little friends you can make"). While this new TV marketing strategy wasn't used in all markets, it was used in the NYC area-which is how I came to learn that Rudolph actually has a reindeer girlfriend whose name is Clarice. ("Mommy, Rudolph has a girlfriend name Clarice and you can make her at Build-a-Bear today!") My guess is that this type of a marketing strategy is going to be far more effective at driving more frequent store visits.

    Something can be done about European operations: BBW acquired its former franchisee in the UK in April 2006, when the 11 stores then operating became company-owned. Since 2006, the company-owned store base in Europe has expanded to 58 stores, with Europe now generating roughly 20% of total company revenue. The European business has been extremely challenging for the past two years and BBW mgmt has publicly stated that BBW doesn't plan to open more stores there until the economy stabilizes and store performance improves. However, given BBW's focus on closing under-performing doors in the US, I would not be surprised to see a significant reduction in the number of doors in UK/Europe which have also been a serious drag on comps (ie, US comps in 4Q-12 were +1.5% but European comps were -11.4%).

    New CEO, new perspective, new ideas: BBW founder and CEO Maxine Clark announced in late January that she plans to step-down and retire as soon as the Board finds a CEO to replace her. Given the potential for the company (and the possible upside in the share price if the turnaround succeeds), I think a very capable CEO can be found. I expect the stock to react very favorably to the appointment of the new CEO, which is likely to serve as the first catalyst.

    Now, I don't think a turnaround at BBW is going to be a teddy bear's picnic in the park by any means. First, in Q1-13 the company faces a tough comparison to a marketing promotion held with McDonalds in Q1 last year, which will switch to 4Q this year, and which will make already tough store traffic trends even tougher. However, I think that can be offset by the benefit of an earlier Easter holiday this year, and by the launch of a new, first ever make-your-own "My Little Pony" product launch post-Easter. Second, while BBW has done a good job controlling expenses over the past year, it's always challenging to bring down corporate overhead costs, which BBW will need to achieve to drive higher profitability on the smaller store and revenue base once the store closures are completed. Finally, longer-term, I think BBW will need to expand the product assortment within its units to include more ancillary items associated with the animals-something that would likely drive more frequent and regular store traffic, which I think the next CEO is likely to focus on once taking over.

    At $4.90, BBW shares are trading at an extremely beat-up valuation of 2.2 trailing 12-month EV/EBITDA with $2.60 per share in cash and no debt, and with a share repurchase authorization that amounts to 8% of the float. Given this valuation and signs of early traction on the turnaround with the new store design and improved marketing, I see limited downside. Instead, I think BBW shares could double or triple over the next two years for patient investors who can stay in the stock to watch the turnaround play out and profitability and cash flow improve.

    Disclosure: I am long BBW.

    Tags: BBW
    Feb 15 12:21 PM | Link | Comment!
  • KORS: Solid 3Q Results Prove Long Growth Runway Ahead

    I'm really encouraged by Michael Kors excellent 3Q-13 results reported this morning for the Holiday period ending December 29, 2012. While there's no doubt in my mind that expectations are going to remain very high for the stock given the current valuation (closing yesterday at 37x this year's average sell-side analyst's estimate and 28x next year's estimate), I think there's still a tremendous amount of runway in terms of growth for the company ahead.

    A few quick thoughts from the results and the conference call:

    Taking market share: 3Q (Holiday quarter) comps in the company's life-style stores rose 41% vs. 38% LY, with traffic and conversion remaining similar to prior quarters (ie, traffic probably up around 20% and conversion also higher). In the wholesale channel, KORS did not see a deceleration in sales throughout the quarter and the company's promotions and markdowns to its department store partners actually decreased this year vs last year. This shows the strength of the Michael Kors brand and of the company's products--and further supports the thesis that Michael Kors (among others) is directly taking market share from Coach.

    Bringing e-commerce in-house: I'm encouraged that KORS has definite plans to bring its e-commerce operation (currently operated by Neiman Marcus) in-house. Not only should this improve the customers experience of the brand while on the web, but I think that the e-commerce site can (eventually) be a big benefit to margins and exceed management's current targets of e-commerce generating at least 10% of North American retail revenue longer-term. While management didn't want to get into specifics about the cost of bringing e-commerce in-house, they did say that it was factored into guidance for SG&A (as in, don't expect leverage any-time soon given ongoing investments in e-commerce and the start-up Japan business) and it is a very scale-able business which certainly shouldn't be a drag on margins or earnings after one year (in my opinion). US and Canada e-commerce will be in-house and operational with a new site and platform by February 2014, with Europe to follow within a 6-8 month period, and Japan and China down the road. Finally, since 40% of the e-commerce site web traffic is driven by international viewers that the company currently can't ship to, bringing e-commerce in-house and developing these capabilities creates many more opportunities for market share gains down the road.

    Leading the charge into new international markets: I'm really encouraged that they announced a new JV partnership with MK Panama Holdings to begin to open Michael Kors lifestyle retail stores in Central America, Latin America and the Caribbean. While they are currently thinking there is the potential for 40 stores in these markets, I believe this could prove conservative. We've been hearing a lot of discussion across the luxury space about the growing importance of Brazilian tourists to the business throughout Europe and in the travel retail channel. With a population of 193 MM, a median population age of 30 years, and the benefit of an investment surge ahead of Brazil's hosting of the 2016 Summer Olympics, I think Brazil will be the next new major emerging market targeted by retailers (following China).

    Continued "conservative" guidance: KORS modestly raised guidance for its 4Q and continued to target comps in the low-to-mid 20% range, with the potential to flow product to exceed this if consumer demand remains strong. While the company cycles a 36% comp in 4Q from the prior year, I think this continued focus on maintaining consistency in comps and not bloating inventory to continue to drive unsustainable 40% comp gains on top of 40% and 80% from the prior year is strategic and shows management's long-term focus on growing the business.

    In short, I think the Holiday results and consistent focus on the long-term growth story should further investor's confidence that the Michael Kors brand and company are not a fad but a legitimate long-term growth story on the global luxury goods scene. I won't be adding to my position today on the move up (which I think could be some short covering based on some concerns that I heard ahead of the call), but I will be eagerly watching the Michael Kors collection runway show tomorrow morning at 10 AM EST. Staying long and looking for lots of growth ahead.

    Disclosure: I am long KORS.

    Tags: KORS
    Feb 12 11:23 AM | Link | Comment!
  • KORS Vs COH: Two Very Different Bags

    I've been hearing some chatter that Michael Kors (NYSE:KORS) could report disappointing Q3 results tomorrow morning. I think these concerns are based on Coach's disappointing Holiday results and Coach management's comments that the handbag category slowed and became extremely promotional heading into Christmas. However, I don't think we can extrapolate Coach's Holiday performance to Michael Kors for a couple of reasons.

    First, these brands have radically different market shares in North America. Coach has an acknowledged 30% share of the $10.5 billion handbag market in North America (but I think this share is probably a bit higher, personally). Michael Kors, on the other hand, I estimate at 13% share. At some point, it's just tough to grow your market share (unless you are buying it through promotions at lower margins). So, given Coach's massive market share, I think Coach was likely hit much harder by aggressive promotions than Micheal Kors.

    Secondly, I don't believe that Coach's disappointing North American comps of -2% vs. +8.8% last year should really be attributed to weak traffic or aggressive promotions in the category-but rather to a simple loss of market share caused by blend of problems that are hard to separate, but come down to some combination of merchandising mis-steps given a lack of brand focus (directly stemming from the brand's current massive market share), furthered by the inherent challenges of growing a brand that already has such significant market share (a real Catch-22). Specifically, Coach has grown its logo business way too big and has been slow to refocus on leather. Nothing I see at Michael Kors leads me to believe that any of these merchandising/brand positioning issues are occurring (and, I admit, it's easier to avoid them given the brand's significantly smaller size).

    Finally, Coach's implosion after its 2Q earnings report on 1/23/2013 (with the stock down 19% since the earnings conference call), has less to do with the 2Q results which, while disappointing relative to sell-side analysts expectations, are still impressive with strong margins and very healthy strong cash flow generation. Instead, the plunge reflects COH's extremely murky outlook going forward.

    With Coach management's admission that the brand has lost market share in the US for the first time ever, and with a sweeping new plan to transform the brand from a high-quality handbag brand into a "global lifestyle brand', investors are left somewhat scratching their heads on a range of issues.

    First, how will COH maintain it's sky-high (and likely unsustainable) EBIT margins (which were 32.6% in FY12) while growing the inherently lower gross-margin categories of footwear and ready-to-wear?

    And, probably more confusingly, who (or what) is the lifestyle of the "Coach woman"? Is she a younger woman living it up in the city and focused on of-the-moment style and design? Is she a suburban soccer mom who wants enduring product that's not of-the-moment but classic and durable? What would she wear around town? Would she look like she just stepped out of an Anthropologie store, or instead, that she just breezed out of Saks Fifth Avenue and was whisked uptown in a black chauffered Mercedes? Or does she leave the parking lot of her local Macy's in a mini-van? The answer, of course, is that with 30% market share, the Coach woman is all of these. But how do you create a "lifestyle brand" that represents a full 360-degree head-to-toe point-of-view about how the Coach shopper lives, when they all live so differently and aspire to so very different things? (Not just, "Hey, I'd really like to own a really nice fashionable hand-bag that will last a long-time.")

    How do you appeal across a full-range of products and complete lifestyle imagery to so wide a demographic? Well, it's not easy to answer, and Coach management didn't have an answer on the conference call. Therefore, while we'll all stay tuned to see, there's a huge lack of visibility ahead. In contrast, the aspiration of the Micheal Kors consumer is easy to see and has always been conveyed through a specific lifestyle image-a slim, blond 35 year-old with a modern, luxurious fashion style (complete with leather, fur and lots of bling), stepping off of a recently landed private jet in some exotic locale. That's a pretty narrowly-defined image all right, but it's very clearly an already complete lifestyle brand.

    KORS is heading into its Q3-2013 earnings report tomorrow with a sky-high valuation-trading at 37x sell-side analysts EPS estimates for this year and 28x the average EPS estimate for next year. A valuation like this certainly creates the potential for a sell-off if the company doesn't beat expectations and raise its earnings guidance. But, if we do get a pullback, I will be adding to my KORS position as I think the go-forward brand visibility and earnings prospects over the next 12-18 months are radically different for the two brands, as will be the upside to each companies shares.

    Disclosure: I am long KORS.

    Tags: KORS, COH
    Feb 11 3:50 PM | Link | Comment!
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