GameStop (GME) 2Q16 Earnings Call Notes

GME has diversified into digital, mobile, and collectibles as physical gaming has declined

“If we sit here and reflect as we think about the decline in physical gaming of almost 40% from its peak in 2008 and 2016, our strategy of diversification has paid off… our new growth businesses of digital, mobile and collectibles make GME a very compelling investment for the future as we grow 3% to 5% annually to 2019 as we projected at our Investor Day.” Paul Raines – Chief Executive Officer


Collectibles is a large, fragmented market that presents a growth opportunity

“it’s over $100 billion business. It’s North America. The piece that we’re focused on which is really sort of movies TV, video game, pop culture licensees, is around $11 billion… it’s highly fragmented. There’s no single player that has more than probably 10% or so share in this category. And its split up a bunch of various kinds of players from mass merch especially to retail to online, a lot of one man shops and so on.” Rob Lloyd – Chief Financial Officer


GME closed nine game store and acquired five hundred tech and mobile stores this quarter

“we closed a net of nine video game stores and now have 3,945 in the US and 2,009 internationally. We acquired 507 AT&T branded stores and opened a net of five Technology Brand stores, now have 1,566.” Rob Lloyd – Chief Financial Officer


Tech and mobile segment utilizes GameStop’s core competencies

“Technology Brands has been a deliberate focus on behalf of our leadership team to diversify GameStop’s revenues… Since its inception in October of 2013, Technology Brands has successfully leveraged GameStop’s core competencies in real estate expertise, multiunit management, buy, sell, trade and capital deployment to create one of the largest consumer technology specialty retail chains in America.” Jason Ellis – Senior Vice President of Technology Brands


As publisher, retailer, and digital partner, GME saw high margins on its first video game

“Playing the role of publisher, exclusive physical retailer and digital profit partner, GameStop is also proving a business model where it can invest smartly in new IPs and enjoy higher margins on the sale of these titles. Our pro forma gross margin for Song of the Deep is 63%. Game Trust has a strong lineup of games in development with innovative developers… These and future unannounced partnerships will continue to establish Game Trust as a leading disrupter in the $1 billion plus independent game market.” Tony Bartel – Chief Operating Officer

Foot Locker (FL) 2Q16 Earnings Call Notes

Both Average selling price and units up for footwear

Maintaining the trend of recent quarters, both average selling prices and units were up in footwear during the quarter, while in apparel, ASPs were up and units were down reflecting our ongoing shift to more premium apparel assortments. Lauren B. Peters – EVP and CFO


FL is the top sneaker retailer, as evidenced by vendor relation dynamics

We believe we are the leading retailer of premium sneakers; period. Not just a specific category of sneakers; sneakers, full stop… Our vendors know that our banners provide the perfect battleground spread out to win market share… And that’s why the leading brands continue to be highly motivated to collaborate with us on these exclusives and strong allocations. Richard A. Johnson – President and CEO


Women’s sneakers is a long-term opportunity

Finally, the women’s business remains a tremendous long-term opportunity. As I’ve said, we are excited to bring SIX:02 to New York City in a few days, with another key shop opening in our Times Square location towards the end of the year. And if you’re not in New York or near any of our other SIX:02 stores, you can see the exciting progress we are making at Richard A. Johnson – President and CEO


Despite the closing of anchor stores, FL traffic is still up and likely to stay strong according to CEO Richard A. Johnson

Sure. Our U.S. traffic was up in the quarter, Matt, and the closing of anchor stores has been going on for a while. We believe there’s only a couple of places in the mall that people will line up for products. One of them is a Foot Locker family store and one of them is the Apple Store…They interact with us digitally on their way to the mall, they in the mall will take a photo of the sneaker on their foot, and they’ll tweet it out or they will send it out to their group of friends and we get the responses back. So the anchors closing is a change certainly in the makeup of the malls, but our consumer is still driven to the malls as a place for social interaction with their friends. So we are confident that regardless of anchor positioning, we should continue to drive traffic into the malls.

Richard A. Johnson – President and CEO


Fashion is beginning to override performance in sneakers

“the facts are that most of the basketball shoes that we sell never see a basketball court, most of the running shoes that we sell never see the roads or the trails of the track to run in, they just look really good and they are part of the sneaker culture that we really support” Richard A. Johnson

Ross Stores (ROST) 2Q16 Earnings Call Notes

The market is full of excess inventory and the fourth quarter will be very promotional

the market is full of excess inventory now. There’s a tremendous amount of availability in the market more than there normally would be. So in terms of excess from now through fall, I don’t think there will be any inventory issue. In terms of how promotional they get, I mean, I still believe that even with less inventory, there’s so many uncertain factors out there, the macroeconomic environment, political environment, even though stores are positioned perhaps with less inventory than they have last year, that doesn’t necessarily mean that, that sales will materialize…the fourth quarter will be highly promotional and then, I guess, that will determine the additional excess supply that could be there beyond what we’re seeing in the marketplace today. Barbara Rentler – CEO


Despite labor headwinds in retail, ROST still finding ways to cut costs

Clearly, labor costs will be an expense headwind for us and frankly, the whole retail industry. We entered this year in 2016 and we’ve taken minimum wages up across the chain and the impact of those adjustments are reflected in our full-year guidance, which is currently a 7% to 10% increase. So we’ve done a good job organizationally finding efficiencies throughout the business. Michael Hartshorn – Group’s SVP and CFO
However, there is a limit to how much in wage increases ROST can abosrb

So those are things that we’re looking at and as part of our budget and longer-term planning process, we’ll look for ways to offset some of those minimum wage increases. It will get harder over time. I think we’ve done a good job so far as Michael Hartshorn said in absorbing those wage rate increases in the last couple of years. But that’s probably a limit to how much we can absorb. Michael O’Sullivan – President and COO


Midewest region has performed well since ROST entered it 5 years ago

In terms of the new region, the Midwest, we entered the Midwest 4 or 5 years ago now. And I would say, we’re very pleased with how it’s going. I mean, you all have heard on these calls over the last couple of years, certainly over the last 1.5 years, the Midwest has been one of our top-performing regions. So we’re very good about the business we’re building there. Michael O’Sullivan – President and COO


No real change in message or marketing despite the election year and the highly competitive market

Our marketing strategy and message has been fairly consistent over the year. The message is pretty straightforward that we offer the best values in apparel and home fashions. That’s still the strategy. It’s still the message, so no significant changes. Michael O’Sullivan – President and COO

The Gap (GPS) 2Q16 Earnings Call Notes

Old Navy brand has performed well

“I think the return to improved performance that we’ve seen at Old Navy is validation. It’s validation that we can, once again, move the brand to a market share gaining position, validation of the operating model that has allowed us to respond quite quickly and improve the business quite quickly, validation in the fact that we have a solid team in place, and frankly, validation of the value proposition that our consumer sees in Old Navy.” Arthur Peck – CEO


Banana Republic brand has not performed well

Let me move to a brand-by-brand conversation for Q2 and I want to start with Banana Republic. Clearly, nowhere close to the performance that the brand is capable of, nor what we expect and want to hold it accountable for.

The team and I are relentlessly focused on continuing to make improvement in the business and under the covers, there are some proof points that the work that we’re doing is the right work… So, we have urgency and we have a lot more work to do. Arthur Peck – CEO


Which demonstrates the strength of discount retail and weakness of higher-end retail

So, number one on my mind is a consumer environment and let me tease it apart. There’s obviously some strength out there in different parts of retail. In apparel specifically, the environment remains challenging, and quite frankly, it remains most challenging in the higher end of the market. And just to remind everybody we have a very robust value portfolio with our outlet channels and the Old Navy business. Arthur Peck – CEO


Innovation— like stretch and stain resistance— is a focus for GPS

We’re pushing stretch across, — really in men’s, our two key bottoms fabrications in terms of denim and twill and both shorts and long bottoms. And really testing where else we can go with it, because we believe that it’s actually really revolutionizing in many respects…So, that’s a step. We have nanotechnology in pants in Banana that we have basically not marketed at all, which is highly stain-resistant. If you pour a cup of coffee on the pants, it beads up and runs off and we find that he has responded to that. Arthur Peck – CEO


GPS believes it is well-positioned to ride a resurgence in denim

“We’re obviously extraordinarily well-positioned in the denim business across all our businesses. Banana has a great denim business now as well and it’s front of store. I’m not ready to say — I’m always hopeful about denim and it’s been in a trough for a long time.” Arthur Peck – CEO

Target (TGT) 2Q16 Earnings Call Notes

Shift to digital remains a retail trend to which Target continues to adapt

“Digital sales grew more than 60% in the second quarter on top of 30% growth last year… In the second quarter, we launched a brand new fully adapted site, which means we now provide a seamless experience across all platforms from desktop to tablets to smartphones. This is increasingly important because for many guests, a single purchase journey crosses over two or more of these digital devices.” Brian Cornell – Chairman and Chief Executive Officer


Target is making strides in use of distribution centers (DCs) and relations with vendors

“In the past, an unacceptable number of vendor shipments were received by our DCs either too early or too late. This variability drove a lot of extra workload in the DCs while reducing our reliability downstream. As a result this year, we have been collaborating with our vendors to increase the percent of shipments that arrive on the correct date and we have already seen meaningful progress. The percent of shipments that arrive on time has more than doubled and we expect to see additional improvement as we roll out new processes to additional vendors over time.” John Mulligan – Chief Operating Officer


And is utilizing existing store locations to improve supply chain

“Our flexible fulfillment initiatives, including store pickup and ship-from-store are one way we are reinvesting store labor savings to serve guests in new ways. At the end of 2015, more than 460 stores were shipping items directly to guest homes and we are planning to double our capacity this year by expanding this capability to more than 500 additional stores.” John Mulligan – Chief Operating Officer


Consumer caution has led to challenging environment for retail over the last year

“I think we have seen this environment persist now for well over a year. It’s a very cautious consumer. And if we look at the overall trends within retail, we have certainly seen on a rolling 12-month basis a slowdown in retail sales growth, but that’s not an excuse for us. We are going to make sure we are leveraging our strategic levers…So it’s competitive, but it’s always competitive and we got make sure that we are leveraging our assets and our strategy to continue to drive performance in the back half of the year.” Brian Cornell – Chairman and Chief Executive Officer


CEO vigorously rebuffs claims of stinginess regarding CAPEX

“food and perishable and consumable categories will play a very important role in driving traffic to our stores…John is doing to make sure and we are investing and improving our in-store pickup processes and experience. That’s an investment we are making, an investment we are making for the holiday season. We are continuing to invest in our digital assets. So there is no hesitancy at all from this management team nor the Board in making the right investments in our long-term success.” Brian Cornell – Chairman and Chief Executive Officer

SK Additions:

Brian Cornell

Negative trends in electronics and grocery

“As we analyze the drivers to our second quarter performance, we have identified some company-specific challenges we are actively addressing. This includes meaningful pressure on electronics, where we saw a double-digit decline in comp sales this quarter, accounting for approximately 70 basis points of overall comp decline. Notably, about a third of this pressure was driven by Apple products, which are down more than 20% in the quarter. We are focused on reversing these trends and we are collaborating with Apple and other vendor partners to evolve our assortment and accelerate innovation to deliver stronger sales. In grocery, despite improvements in assortments, quality, freshness, presentation and in-stocks, we were disappointed with our sales performance as we saw a small comp sales decline in the second quarter.

We over-indexed Apple products

” as we think about factors that we have to address to improve our traffic and overall sales performance to the back half of the year, we have to improve electronic performance. It was a significant drag, 70 basis points on our overall comp declines in the quarter. And Apple played a significant role there. So we over indexed with Apple products. Our guests come to us looking for those products. They are looking for the newness and the innovation and we are putting together plans with Apple and our merchandising teams to make sure we are ready to take advantage of that in the back half of the year.”

West coast markets doing better than east coast

” We have seen particular strength in many of our West Coast markets, very strong performance in California, driven by great performance in LA and San Francisco, but other parts of the West Coast. We have seen pockets of softness on the East Coast.”

There are winners and losers in tech

“So we have certainly seen pockets of strength, I mean there is certainly winners and losers within that space. We have seen continued performance with wearable technology, but it’s not overcoming the softness we have seen in mobile, in tablets and in some of the core items.”

Ross Stores (ROST) 4Q 2015 Earnings Call Notes

Ross Stores (ROST) CEO Barbara Rentler said annual sales rose albeit at a decelerating pace from the previous year

“Earnings per share for the fourth quarter grew 10% to $0.66 on net earnings that rose 6% to $264 million. Sales for the quarter increased 7% to $3.251 billion, with comparable store sales up 4% versus on top of last years 6% gain.”

The U.S. Midwest was the strongest geographical region

“The Midwest continues to be our strongest region that’s been true over the last eight quarters. California, our largest region also performed ahead of the same average. I think you also asked about Texas. Texas was relatively aligned with the chain on top of very strong comps last year, when it was one of our top performing regions.”

Ross Stores (ROST) CEO Barbara Rentler said they’ve been buying back their stock consistently for over 20 years

“We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record reflects our unwavering commitment to enhancing stockholder value and return.”

Ross Stores (ROST) CFO Michael Hartshorn said the average customer order size increased

“Our 4% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average baskets.”

The company is raising the starting salary for store employees

“Our guidance includes our plans to raise the minimum wage for eligible hourly associates to $10 per hour in the second quarter of 2016 up from the current $9 minimum. These wage adjustments will help keep us competitive in our hiring practices and enhance our ability to retain talented associates to provide the shopping experience our customers have come to expect.”

Ross Stores (ROST) CEO Barbara Rentler said she does she her competitors in the space being more promotional

“Well I think the increased promotional environment. I think what we saw in the fourth quarter especially in the department store sectors where we’re going to see as we continue through 2016.  But I think what it means to us in our business is that we need to continue to deliver great value.  So we have to make sure that we stay very liquid, so that we’re there and can maximize and closeout opportunities and those closeout opportunities then has to be at the right value.”

Ross Stores (ROST) CFO Michael Hartshorn reiterated their core customer’s treasure hunting mindset

“As we do research on the demographics of customers and what they are looking for, the new customers demographically look very similar. What all our customers have in common, no matter what the demographics is they are all looking for great values and great bargains. So in terms of making sure that we can attract more customers and retain customers, your main focus is having the best assortments we can, the best values we can offer.”

Ross Stores (ROST) CFO Michael Hartshorn said that their merchandise sourcing team is one of their key competitive advantages 

“We believe that fundamentally an enterprise of having the strongest buying team is a key competitive advantage and that applies to Ross and to dd’s. So, dd’s, we have invested in dd’s buying team over the last several years and we’ve build a very strong asset there.”

SK Additions:

Ross Stores’ (ROST) CEO Barbara Rentler on Q4 2015 Results

Doesn’t appear that the retail landscape will get any less competitive

“we continue to face our own challenging multi year sales and earnings comparison. And with the increasing uncertain and volatile macro economic climate, it doesn’t appear that the retail landscape will get any less competitive or promotional in 2016.”

Department stores ended with a bubble of inventory

“if you look at where the department stores ended in January, most of them ended with more inventory and clearly ended with more clearance. And so as we enter into the spring season, one would expect that there would be a bubble of inventory that we would see in spring, which we could use to fuel in spring”

As long as traditional retailers continue to struggle, there will be opportunities

“There will be opportunities in the marketplace. As long as traditional retailers continue to perform the way they are performing, you would think that there would be more opportunities there. So from that perspective on the supply side, we feel good, which is why we are keeping ourselves liquid and feel we are well positioned to take advantage of the opportunities in the marketplace.”

Michael O’Sullivan

Haven’t seen too much impact from competitors getting into off price

“So Michael, its Michael O’Sullivan. We really haven’t seen any impact at this point. I mean if you think about the size of some of those new off price entrants, that’s not too surprising, that is too small to have made much of an impact. But I guess I say more broadly, we try not to get too distracted by what other companies are doing and what new entrance is coming into the market.”

Inditex and H&M Financials

Arguably the most important retail trend of the last 10 years has been the emergence of fast fashion retailers.  Inditex (Zara), H&M and Forever 21 have seen explosive growth to the extent that Inditex’s founder is now wealthier than Warren Buffett.

What’s more amazing is that because Inditex and H&M aren’t US listed companies and Forever 21 is private, most US investors haven’t had a chance to participate in the trend.  Because of this there’s been less focus on the behemoths that these companies have become here in the states.  Inditex has a larger market cap than Target, Macy’s, Nordstrom and Gap combined.  Below are some comps to show how it gets there.  Needless to say the multiple is rather generous.

How large would JCP be if it grew by 10-15x?

In an interesting moment yesterday, Bill Ackman said that he believes that he could realize a 10-15x return on his JC Penney investment.  In order to get a sense of what this means, below is a table comparing the market caps of other US retailers to JCP.  If JCP were to increase 10x from its current $4.3B market cap, that would make it the 4th largest retailer in the US.  To increase by 15x would make it the 3rd.  To be a 10 bagger, Ackman has to believe that JCP wont just beat the Kohls, Macy’s, Sears and TJ Maxx’s of the world, but also be bigger than Target and Costco too.

How much is Lulu Worth?

Below is a comp table for a few specialty apparel retailers that I put together.  Similar to CMG, it’s pretty amazing to see the value that the market puts on Lululemon relative to the current size of its business.  LULU has phenomenal operating metrics compared to its peers to be certain, but the price that a shareholder has to pay to own a part of the business is pretty exorbitant.

At a $7.5B enterprise value, LULU’s 180 stores are valued at ~$42m per store and a whopping $14,875 per square foot.  Obviously you’re paying that price for growth not current operations, but think of the number of stores that need to be opened to bring the price per square foot more in line with the company’s peers.  That price is nearly 10x more than the closest comp on this table.  LTD has 16x more stores than LULU but only 2.2x the market value.

Retail Sales June 2012

Retail sales were reported this morning for June and were weak again.  For the third straight month, retail sales declined, which is a reasonably rare occurrence.  Since 1992, there have been 4 periods that retail sales have declined in three straight months.  Two of those periods happened in 2008; one of those periods lasted for 6 months.  Below is a list of negative retail sales streaks:

Looking at the bigger picture, retail sales growth has slowed to just a 3.8% y/y increase in June.  The slowing trend doesn’t necessarily indicate recession, but certainly demonstrates that the rapid growth phase of the economic cycle is over.  As recently as this time last year retail sales were up 9.2% y/y, but  now it looks like there isn’t the same slack in the economy that there was then to generate large growth numbers.