Bulging Debt May Spell Trouble for Energy, Telecom and Retail
While many companies have shrewdly taken advantage of rock-bottom interest rates over the last decade, bulging debt in industries like retail, energy and telecommunications is a burden that investors may need to worry about.
Many retailers, for example, have been struggling with competition from online giants like Amazon and Walmart. The debt of major companies like Neiman Marcus, PetSmart and Sears is already rated as speculative (also known as high-yeld or junk). And Diane Vazza, head of global fixed-income research at Standard & Poor’s, said many debt-laden retailers have already suffered credit downgrades this year. These include Sears, Payless and Guitar Center Holdings.
Once a company’s debt is downgraded to speculative from investment grade, it may find the footing more slippery. Companies that fall into speculative grade ratings (B- or lower in the S.&P. ratings system) tend to accelerate toward even lower ratings, Ms. Vazza said.
The risk to investors — and the interest the companies must pay for new borrowing — rises, adding to cash flow stress. When the stress is great enough, companies can fail.
Asides
Is Telsa in Trouble?
Tesla is just months from a total collapse, says hedge-fund manager
Unless Elon Musk “pulls a rabbit out of his hat,” Tesla will be bankrupt within four months, says John Thompson of Vilas Capital Management.
“Companies eventually have to make a profit, and I don’t ever see that happening here,” he told MarketWatch. “This is one of the worst income statements I’ve ever seen and between the story and the financials, the financials will win out in this case.”
Thompson manages $25 million and his Tesla TSLA, -2.85% short is the fund’s biggest position. To be fair, he’s been betting big against Tesla for years, which, of course, means he’s endured some brutal stretches.
Last April, for instance, the stock hit a record high around the $300 mark, and Musk was right there to troll the Tesla bears.
From that point, the stock continued to break new ground, eventually topping out at $389.61. But despite Tesla’s strong performance in 2017, Thompson’s fund still managed to churn out a 65% gain for the year.
Now, Tesla’s back to where it was when Musk fired off his “Shortville” tweet, and Thompson is confident his bet is about to pay off nicely.
In fact, Thompson says if his prediction comes true, his fund could surge by another 50%. With that in mind, he says he’s investing $500,000 of his own money.
“Tesla, without any doubt, is on the verge of bankruptcy,” he told clients in an email over the weekend. He explained that funding will be hard to come by in the face of problems in delivering the Model 3, declining demand for the Model S and X, extreme valuation and a likely downgrade of its credit rating by Moody’s from B- to CCC.
“As a reality check, Tesla is worth twice as much as Ford [estimate of the enterprise value of both companies], yet Ford F, +0.99% made 6 million cars last year at a $7.6 billion profit while Tesla made 100,000 cars at a $2 billion loss,” Thompson said. “Further, Ford has $12 billion in cash held for ‘a rainy day’ while Tesla will likely run out of money in the next 3 months. I’ve never seen anything so absurd in my career.”
Tesla declined to comment on Thompson’s views.
Industry Amazon Threatens
These are eight industries that have been threatened by Amazon’s increasing domination:
Food delivery businesses
Blue Apron’s disastrous IPO reveals how big of an impact Amazon’s entrance in a new industry can have on competitors.
The company went public in June. When Amazon filed a trademark application for “prepared food kits” on July 6, Blue Apron’s stock sank 11%.
Amazon’s success has continued to plague Blue Apron. In January, the company’s shares fell more than 6% after One Click Retail’s 2017 Grocery Report showed that Amazon had made impressive gains in the US grocery market.
Shoe stores
As customers shop for shoes directly from Amazon, analysts saycompanies like Foot Locker and Finish Line are in danger. In August 2017, UBS analyst Michael Binetti downgraded both companies, saying it is “almost certain” that sneaker retailers will lose market share to Amazon.
“The disruption that has characterized the retail industry recently is not going away,” Foot Locker’s CEO Richard Johnson said in a call with investors in February. “Consumers want experiences, they want cool products, and they want it all — fast.”
Foot Locker plans to close approximately 110 stores this year after closing 147 stores globally in 2017.
Grocery stores
Amazon bought Whole Foods in August 2017, which dealt a massive blow to US grocery stores as it forced its way into the brick-and-mortar market and threatened to drive prices down.
The retailer is already the largest seller of groceries online. It’s estimated to have 18% of the US online grocery market, which is double the second-place share held by Walmart.
By having access to brick-and-mortar locations, the company is able to expand its reach across the US and use these stores as distribution centers for online orders. And, Amazon is building out its own brick-and-mortar concept, with the first Amazon Go store opening in Seattle in January.
Consumer staples
The future of batteries may be online — and that’s bad news for companies like Energizer.
While online sales of batteries only make up roughly 5% of total battery sales today, UBS said in a note that it expects that figure to rise to 17% by 2025. With Amazon making up roughly 90% of online battery sales, often from its own private-label battery brand, this could create some major complications for Energizer.
Department stores
Macy’s and other department stores, such as JCPenney, are facing off against Amazon — and coming up short, with hundreds of closures in recent years.
“Internet retailers (led by Amazon) have added $27.8 billion to their apparel revenue since 2005, while dept stores have lost $29.6 billion,” Morgan Stanley analysts wrote in a 2016 note.“This share loss appears at risk of accelerating given 1) Amazon’s bigger push into fashion, and 2) consumer willingness/acceptance to shop fashion through Amazon.”
Launching the Prime Wardrobe service in June 2017 was “another nail into the department store coffin,” Wells Fargo analyst Ike Boruchow wrote in a note to clients.
Upscale retailers
Nordstrom is another traditional retailer getting hit hard by Amazon’s online dominance.
“Amazon knows more about the consumer than they do,” CNBC’s Jim Cramer wrote after Nordstrom reported another disappointing quarter in May 2017. “They — the best out there — are still doing guesswork, with one brick-and-mortar hand tied behind their backs.”
And in October, Scott Galloway, a professor of marketing at NYU Stern School of Business who correctly predicted the company would buy Whole Foods, said Amazon could buy Nordstrom next.
Book stores
The Barnes & Noble versus Amazon battle has been going on for years. However, the discrepancy between the two has been especially grim recently.
Barnes & Noble reported in March that comparable salesdecreased 5.8% in the most recent quarter. The biggest culprit: lower traffic, as fewer people visit stores.
Healthcare companies
Amazon’s latest venture with Warren Buffett’s Berkshire Hathaway and JPMorgan Chase & Co, announced in January, threatens to have a big impact on the US healthcare market.
The announcement sent ripples through the healthcare market; the share price at CVS and Walgreens dropped 4.5% to 6% in premarket trading, and UnitedHealth dropped 6.2%, Reuters reported.
http://www.businessinsider.com/trump-says-amazon-is-killing-businesses-2018-3#upscale-retailers-6
Sydney Real Estate Slump
Sydney house prices fall for the first year since 2012
Cracks are showing in the Sydney property market, with prices now falling for the first time over a 12-month period since the boom began.
The harbour city recorded a 0.5 per cent drop in housing prices in the year to February, CoreLogic data released on Thursday shows. This figure includes apartments and houses.
The median property value now stands at $880,743, after the first 12-month decline since 2012.
Over the three months to February, Sydney prices dropped 2.4 per cent. This was the weakest result in the country.
Melbourne also showed continued signs of a slowing housing market, with prices up a solid 6.9 per cent over the year but down 0.4 per cent for the last three months. Its median dwelling price is now $723,334.
The monthly falls in Sydney and Melbourne in February, of 0.6 per cent and 0.1 per cent respectively, were more moderate than price falls seen in January.
Sydney houses prices declined 2 per cent on an annual basis, while apartments still increased 3 per cent.
CoreLogic head of research Tim Lawless said the overall softening in the market was becoming “more evident” with interest rate increases on the horizon.
“With high levels of household debt and dwelling values now starting to fall as well as tighter credit policies and a prospect of higher mortgage rates down the track, it is reasonable to expect that borrowers will be taking a more cautious approach to taking on debt,” he said.
“Overall the housing market has continued to see soft conditions resulting in some slippage in housing values.”
A Successful Retail IPO
Expanding Margins and Direct-To-Consumer Sales are driving success at Canada Goose
Who would have thought coats would be so profitable?
Canada Goose (NYSE:GOOS) has had an amazing post-IPO run. Shares of the luxury coat maker have been on a tear since their March IPO. The company filed a dual listing on the NYSE and Toronto Stock Exchange, which was priced at $12.78 ($17 Canadian). Since its IPO, shares of Canada Goose have advanced about 150%, trading hands at the time of this writing at $32 per share.
Through the first six months of fiscal year 2018 (the months of April-September 2017), Canada Goose expanded its top line by 40% over the prior-year period. Because Canada Goose’s product, coats, are heavily affected by seasonality, the second and third quarters of its fiscal year are particularly important as they comprise nearly 80% of the company’s annual revenue haul. In the recently reported second quarter, the company grew revenue by 35% (including currency effects) and EPS by 75% over the prior-year period.
Direct-to-consumer is a strong driver of returns
Canada Goose has room for growth. When it filed for its IPO, the company disclosed its brand awareness was only 16% in the United States, as compared to 76% in Canada, which portends more sales as American consumers become more familiar with the company. Although brand recognition is increasing, it’s likely to still have further room for growth as Canada Goose relies more on word-of-mouth advertising than on splashy, nationwide campaigns.
The second driver for Canada Goose is the company’s push to increase sales from its direct-to-consumer (DTC) channel. In fact, a major reason for the IPO was to secure cash to grow the direct-to-consumer channel, most notably building out the company’s single-brand “flagship” stores. Canada Goose appeared to be working on both brand recognition and DTC growth by building a store in Boston and a store in Chicago, to complement its existing New York location.
On one front, Canada Goose is succeeding: Revenue attributable to DTC increased by 322% year-over-year through the first two quarters of fiscal year 2018. During this time the company expanded gross margins by 4 percentage points, to 50.4%, as higher-margin direct-to-consumer revenue is growing faster than wholesale.
https://www.fool.com/investing/2018/01/27/this-little-known-company-was-the-best-retail-ipo.aspx
The Search For Value 