January 26, 2008 –
Long time, no blog. That's because I have spent the last couple of months quitting one job, looking for another and accepting a new position that I start on Monday. I will be working for a publicly held company this time around and it is one of my picks. I feel some sort of ethical obligation to end that pick sometime soon and to not make comments on that stock. Not sure. Opinions?
So, why did I quit my old job? When I started working for that company it was held by a private equity firm that manages around 10B in capital. The CEO they installed was young, dynamic and extremely intelligent. However, the company was led to believe (by an outside consultant) that an expansion into direct sales would yield a huge influx of cash to the company within 2 years. She way oversold her expertise and the size of the business the new division would create. When her predications proved to be wildly inaccurate, the PE firm became wary of their investment and decided to get out while they could.
Enter PE firm #2, which also manages around 10-12B in capital. The top management team was stripped and a new CEO was installed. Within months of his arrival, he began making inaccurate statements to the press regarding the results of his new management. Some of his statements have since been formally retracted.
But more importantly, the changes he made to the structure and operation of the company defy logic. There were drastic reductions in personnel, circulation and new product investment. The company has been cut to the bare bones. The end result has been decreased sales and huge decreases in profitability. And it continues. The company eliminated 25% of its employees shortly after I left the company.
The changes that most affected my area were changes to product line philosophy. The new CEO seems to believe that new product and new lines are not necessary. He believes that the company has a core of around 100 sku's that should be able to sustain the business. All you need to do is promote those items. Some of those items have been in the line for more than 10 years. Anyone who needs them or wants them has had ample opportunity to purchase them. The continued sales on those items are repeat customers who now give those items as gifts to others. There is no growth in the customer base. There is a lot more to say about this issue and maybe that will be the next blog post.
What can be learned from this? Sometimes, management teams installed by PE firms are more interested in making significant changes that show dramatically on the balance sheet without much concern for the long term health of the company. The shallow changes may help the PE firm see improved returns when they sell off the company but it almost takes an insider or at least an industry insider to see the damage done. Anyone can cut 50% of the employees and 80% of product investment and claim to have improved the bottom line. But beware of what cutting customer service and product development will bring in the long term. In this case, it has brought less customer traffic, less profitable catalogs, less compelling merchandise and I believe it will bring the demise of a company that has been in business for over 50 years.
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November 05, 2007 –
In a comment to my last blog entry, fransgeraedts asked this question: “If this christmas season is going to be bad, because the american consumer finally has maxed out his credit, would that change any of your picks? Would it change your general strategy? Are there any pick you would add?”
My reply was running so long I decided to turn it into a blog entry. Thanks for the question fransgeraedts, and away we go:
I have to say that none of my picks would change.
When I started here I wanted to see if I could predict a stocks performance based mainly on the quality of their merchandising. Having worked for various retailers over the last 15+ years (including one that is now bankrupt) I fully understand that there are other factors at play in the success of a retailer. But the critical analysis of merchandising efforts represents what little bit of expertise I can add to the CAPS community.
I explained in an earlier posting that I was going to try and base 75% of my picks solely on merchandising efforts. The information that I am adding to the aggregate intelligence of CAPS may not be in line with other players at all. Even if I know that this Christmas season is going to be horrible, I would not let that influence my picks. It is my contention that a properly merchandised line will perform better than a poorly merchandised one even if consumer spending hits rock bottom. I always assume a highly competitive retail environment and try to predict which lines stand the best chance in the war for discretionary income.
But there are some economic factors included in the way I evaluate a line. A product line must respond to how consumers are spending now. Simply offering well-designed items is not enough. For example, in tight economic times all of the following items perform better for general retailers: small items, moderately priced items, simple designs, bright colors, separates, accessories, etc. When times are tough your product line better be “cheap and cheerful.”
I am not predicting the overall health of a retailer but rather judging the potential of their upcoming product lines. My assumption is that among all the other CAPS players there are experts in analysis of consumer spending, economic trends and all the other factors affecting retailers. CAPS is able to produce an aggregate of all those opinions along with mine and that aggregate should be a better indication of a stocks performance than any individual analysis.
Perhaps I am approaching this differently than some but if I were to try and weigh every factor affecting a retailer I would be treating CAPS as an investment simulator. I don’t think is the intent. The beauty of CAPS to me is that all participants add their own view and their own bias and it is the aggregate intelligence that CAPS produces that offers a more complete view of stocks than is traditionally possible.
Let me oversimplify what I am saying. Pretend there are only two equally rated players on CAPS: a player who closely follows the economy/consumer spending/etc. and me. EconomyExpert and I look at two stocks: Saks and Nordstrom. EconomyExpert foresees a horrible 4th quarter and expects slow consumer spending. He rates both stocks as thumbs down. I look at the stocks and know that Saks has a strong merchandise plan for the quarter while Nordstrom’s line is flip-flopping all over the place. I give Saks a thumbs up and Nordstrom a thumbs down.
My contention is that even in a horrible 4th quarter Saks will be hurt less than Nordstrom because the few available dollars spent in the 4th quarter will more likely go to Saks because their merchandising efforts were stronger. The aggregate information created by EconomyExpert and me will reflect this. If I were to adjust my picks to thumbs down because of predictions of a slow 4th quarter, EconomyExpert and I would be posting the same information and the beauty of the aggregated intelligence would be lost.
Because of my competitive nature, it is difficult to largely ignore poor economic indicators when I know that my picks are generating a score. I’m hoping that the power of merchandising is strong enough that occasionally I will pick a winner or two. I’m also assuming that good design and well-edited product lines lead a company to eventual success. I’m quite sure there will be missteps along the way but I’m not really here just for the scores. I’m here to add a different perspective to the aggregate and to see how closely tied merchandising efforts are to the success or failure of a company’s stock. [more]
October 12, 2007 –
In my world the tulips are just past their prime and the azaleas are in full bloom. In my world it’s spring. 2009.
I work about 18 months in advance of what is on the shelves, in the catalogs and being clicked on internet sites. By the end of October, the development of all my Christmas merchandise for 2008 should be complete. I’ll put my merchandising cap back on in January and make some final adjustments based on 4th quarter sales but the bulk of the decisions have been made.
Waiting for sales results is a difficult chore for product developers and merchandisers. With lead times for production getting longer (particularly in China) a lot of assortment decisions have to be made blindly- or at least with an eye patch. Our goal is to place orders for 4th quarter merchandise from China before Chinese New Year. That way we lock in production time with the factories. Elsewhere the timelines are more forgiving. Our vendors in other parts of Asia and in Eastern Europe can wait until March/April.
But it is easy to grow impatient so we expend that nervous energy analyzing the first couple of weeks of sales from ever angle imaginable. Placement on the page, placement on the shelf, square inches in the catalog, placement on the web, feature shots, photography quality, number of clicks to product info page- it goes on and on. Our impatience manifests itself in efforts that some might call navel gazing but the information is pretty reliable. I just spend more time with my friend Excel than I would like.
When I came to CAPS, I grabbed 25 picks in an hour or so because I pretty much know where their merchandise will be 6 months from now. They’re planning just as much in advance as we are. We share vendors and vendors share information. One of the on-going problems for Williams-Sonoma Inc. is that their plans are much discussed and copied all over Asia. It’s very easy for the Targets of the world to respond. It would be easy for Wal-Mart to respond if they were so inclined (but they don’t seem to be.) The worlds of home furnishings and fashion are much less secure than technical gadgetry.
So, I made my picks with knowledge that it would be at least 3-6 months before any of my predictions could be judged for accuracy. For some it will take even longer. But now that I can watch my numbers on CAPS take nose dives, I’m growing impatient for the sales results for those merchandise assortments, even though they’re just loading onto container ships right about now. [more]
October 10, 2007 –
In the interest of full disclosure, I am a product development and merchandising director for a large privately held retail company. In this game, I am going to concentrate on stocks of retailers and manufacturers of consumer goods. I am basing at least 75% of my picks solely on my impressions of their merchandising efforts. I am playing this game as a test of my ability to gauge the market for each retailer, their merchandising strategies, their product development abilities and in some cases the members of their product management teams. The remainder of my picks are based on branding, niche market trends, management issues, liquidity and market sales trends. [more]
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