"One of the reasons that people acquire luxurious brands and products, either it is to show that you have arrived, or it is to know that you own that unique piece. Holy smokes, a Vacheron Constantin Tonneau Tourbillon costs 184 thousand Euros, or that was the quote that I saw. 32 stores globally. That is it, no more for now. There is not only the price of the pieces that are beyond reach of most, but they are difficult to reach. Exclusivity is however in the luxury goods business part of the allure. A rich and discerning customer wants to know that they are part of an exclusive and select group."
To market, to market to buy a fat pig. Rebecca Black says that it is Friday and seven am and you have to get up. I am not sure what is worse, Ms. Black's cheesy music or the fact that seven am is an acceptable time to wake up in the morning. What do I know, Rebecca Black has her other music videos on YouTube seen millions of times, really. And besides, many people in the industry might have spoofed the video, but Black possibly made good money and makes good money from her YouTube channel. And just in case you forgot, she is 16 now, 13 then. So, I should be championing someone who puts herself out there and gives her career a full go with the internet. Well done. But that does not mean I have to like the music.
Back to markets quickly, before I reveal my real music tastes and others suggest that I can't possibly like that! US markets were beaten up, concerns over global growth emerging again. Eddy Elfenbein (Byron is a big fan) in his weekly newsletter had some interesting points though. Worth revisiting actually. "Earnings aren't bad either. For the first-quarter earnings season, 76% of the companies in the S&P 500 beat earnings expectations, while 53% beat sales expectations." And the US jobless situation is improving. When the top line improves significantly for many businesses all the hard work done whilst the going was really tough will bear fruit. Of that I have no doubt. It is starting to happen already.
Wal-Mart had numbers yesterday that showed that the snow and poor weather at the beginning of the year dampening consumers enthusiastic shopping habits. Well, at least that is what the biggest retailer in the world is saying. Notwithstanding the bad weather, Wal-Mart managed sales of 115 billion Dollars for a ninety day period. Yes, if it is not a leap year then the first quarter has exactly 90 days. 1.277 billion Dollars of sales a day.
A bit of perspective here. In their last financial year, The Foschini Group had sales of 12.896 billion Rand. At the current exchange rate, 10.34 to the US Dollar, that equates to 1.247 billion Dollars. In the prior quarter, on a single day inside of all of the Wal-Mart stores the sales were more than The Foschini Group (brands like Foschini, Markham, exact!, sportscene, Totalsports, American Swiss, Matrix and Sterns). That is guaranteed to blow your mind. As Byron well points out, if I were to do the math for the entire annual turnover of the South African retail sector and compare it to Wal-Mart, we were probably be completely floored. Wal-Mart, is it a great investment?
I suspect that Wal-Mart falls into that category that when it gets dirt cheap (which it does from time to time), that is the moment to act. The yield is 2.5 percent, the multiple is 15.8. That seems expensive for a business that does not really have the ability to grow earnings quickly. A bit of irony here, the expectations for Facebook (unrelated to Wal-Mart of course, other than the pithy pictures of the people shopping there posted on the platform) earnings growth this year is somewhere in the region of 96.4 percent. And their multiple? 50 times. Price to earnings to growth means that Facebook has probably a lower PEG ratio than Wal-Mart. Sometimes the simple fundamentals tell you very little about the prospects, what matters at the end of the day is paying a reasonable price for a quality business.
OK, as promised: Richemont, the Swiss luxury goods group, announces its audited consolidated results for the year ended 31 March 2014 and proposed cash dividend. That is the download for you to read. At face value the results are not what you would expect, but there were definitely currency headwinds. The cash position is at an all time high.
OK, but the company talks about fewer stores opened but they were very pleased about sales in their domestic markets. In other words locals buying their goods. Asia Pacific is now the largest region (40 percent), that trend has been ongoing whilst the Chinese continue to indulge themselves with quality. I think that simple word quality is at the heart of this investment. Vacheron Constantin is 259 years old. Not the person, that is impossible, but rather the brand. Vacheron Constantin is a high end watchmaker. I guess if you are asking about what the price of their collections are, that may or may not be the right starting point.
That is however, one of the reasons that people acquire luxurious brands and products, either it is to show that you have arrived, or it is to know that you own that unique piece. Holy smokes, a Vacheron Constantin Tonneau Tourbillon costs 184 thousand Euros, or that was the quote that I saw. 32 stores globally. That is it, no more for now. There is not only the price of the pieces that are beyond reach of most, but they are difficult to reach. Exclusivity is however in the luxury goods business part of the allure. A rich and discerning customer wants to know that they are part of an exclusive and select group. And that is at the heart of it all, much like natural beauty (Table Mountain to the Kruger Park), you cannot replicate quality Maisons with hundreds of years of history. In fact, the bulk of the Richemont brands are over a century old. From the Richemont website, here are the years of founding of the respective businesses: Purdey (1814), Baume & Mercier (1830), Jaeger-LeCoultre (1833), Lange & Sohne (1845), Cartier (1847), Officine Panerai (1860), IWC (1868), Piaget (1874), Lancel (1876), Alfred Dunhill (1893), Van Cleef & Arpels (1906) and Montblanc (1906).
Not being able to replicate brands makes these businesses even more valuable than they were acquired for in the first place. The margins after the expensive store footprint and the heavy advertising (and possibly expensive watch and jewellery specialists, both back and front end) are 35 percent for jewellery and 26 percent for the watchmakers segment. Group operating margins for the year were lower at 22.7 percent. But still astonishingly high. Total sales for the group for the year clocked 10.649 billion Euros, profits were 2.067 billion, an increase of only thee percent. EPS was 3.676 Euros per share, remember that the shares here are one tenth GDR's (global depositary receipts). So our earnings here in Rand term in the exchange rate would be 5.25 ZAR per share. And the dividend, after the pesky 35 percent tax rate for Switzerland is 91 Swiss Franc cents. Which after the ten for one equals 1.06 ZAR per share. Remembering that if you get your paperwork in order you can claim back 20 more (2 for the GDR) Swiss Franc cents. That is then 1.30 ZAR per share. Not very generous on the dividend.
Even worse unfortunately is having to get the dividend difference (15 percent dividend tax here, 35 percent in Switzerland) back, which is not complicated, but a tedious process which requires leg work on the part of each and every individual. It is one of those unavoidable things in life.
Other than that, is Richemont a good investment? Yes. Very definitely yes. There are more rich people around the world than ever before in humanities existence. There are more people full stop. Aspirational consumerism is a huge trend that we like a lot. The currency headwinds are unavoidable, for now, the Euro levels will wax and wane relative to their prospects, but we should get a clearer picture during this current financial year around stability. This is one of the single best investments that JSE investors have access to. We continue to buy.
Byron beats the streets
Today we received a detailed update from Woolworths with regards to the David Jones acquisition. I'll break it up into 3 important parts namely rationale, funding and progress update.
Rationale
Sasha has covered this in detail before so I am just going to do a standard copy paste from the announcement to remind you.
"As an iconic Australian retail brand, David Jones provides the perfect platform for expansion in Australia, occupying a similar customer positioning to WHL in South Africa at the premium end of the apparel market, with both businesses enjoying strong aspirational brand identities and a strong alignment of values that put the customer first, offering excellent service and quality. The Proposed Acquisition supports WHL's strategy and is a rare opportunity to create a southern hemisphere retailer with meaningful scale, better able to compete with global retailers, leverage common fashion seasonality with enhanced sourcing capability and leverage the South African headquartered design, buying and procurement capability."
There certainly are some good synergies available. Pushing Woolies brands within David Jones stores makes a lot of sense. So does bringing the David Jones brand here to SA. We are huge suckers for foreign brands. The list goes on.
Funding
The total purchase consideration is expected to be R22,351 million. R10bn of that funding will come from both cash on hand (R2bn from their latest results) and a R10bn term facility. The surplus of this cash will also be used to fund current operational cash needs. A A$400 (R3.98bn) bridge loan will be raised in Australia. I am sure the rates in Australia are very favourable. The difference (about R9.4bn) will be raised through equity bridge funding (which uses equity as collateral and will be repaid by a rights issue after the transaction is done). Woolies current market cap is R65bn so the rights issue will look to raise about 14.5% of the market cap from us the shareholders. That is not big at all which is good news. The details of the rights issue still need to be finalised but the recent resurgence in the share price I am sure makes this a lot easier.
Progress update
Both the Australian Foreign Investment Review Board and the Financial Surveillance Department of the South African Reserve Bank have given their approval. Shareholders now need to approve the deal which the board unanimously recommends. David Jones shareholders also need to approve. They assume this will all take place by 17 July when the acquisition will go through. Remember the rights issue will only take place after this.
The Vestact Take
At first we at Vestact were a bit sceptical of the deal. They were getting things very right going about their business and growing organically, why throw such a big spanner into the works? But the more we have looked into it the more we realise we have to trust management on this one. They have done it before and they certainly have the skills and expertise to buy a depressed asset and turn it around. If you are still not convinced watch this interview with CEO Ian Moir he goes into great detail about the acquisition. We continue to accumulate Woolies shares.
Michael's musings: Cisco down. But up
Wednesday evening we had Cisco release their 3Q results, which were a beat on the streets expectations. The beat resulted in an increase of 6% in their share price yesterday. So here are the numbers, revenue of $11.55 billion, down 5.5% but better than the expectations of $11.3 billion and even better than their own guidance of a drop between 6-8%. Margins were better than expected as well, with gross margins sitting at 62.7% compared to expectations of 61.3%. EPS is down to 42c a share from 46c the same time last year.
A big contributor to the drop in revenue is due to orders in emerging markets being down 7% yoy, with Russia and Brazil being the two weakest with drops of 28% and 27% respectively. Russia having a big drop is understandable due to their Ukraine foray, but I haven't seen a reason for Brazil. In any case they do say they don't expect emerging markets to pick up for a couple of quarters. Compare this to US orders being up 7%. The US is where the growth is due to its size, both in number of companies and spending power.
A big story for Cisco is their prediction that by 2020 the "Internet of everything" will have an economic impact of $14.4 Trillion. Not a small number by any means, with Microsoft saying that it will be worth $1.6 trillion within the next four years (a lot lower number but highlighting the potential for this new area of connectedness). The "Internet of Everything" is where you will have smart devices in your house and life. Where all these smart devices will speak to one another and to you were ever you are. This is great news for Cisco because as more devices start talking to each other the more switches and other networking devices they will sell.
The company has over $50 billion in cash, which is around 40% of their current market cap on a P/E of 16. So it is by no means expensive, but I think that the valuation given to it is based on the fact that we probably are not going to see it shooting the lights out in the growth department. Another problem is that a chunk of the cash is sitting outside of the US, so it isn't able to be put to work as efficiently as it could be, be it in the form of dividends or further capital expenditure. The internet and communication is the future and as more people come online the more products Cisco will sell, so the future looks good. We feel that the management team needs a shakeup though, John Chambers the CEO and Chairman has been there since 1995. In the world of tech it is important to stay one step ahead of everyone and in Cisco's case fresh blood could spur on growth.
Home again, home again, jiggety-jog. Markets are lower. There is a lot of anxiety. But that is natural and ongoing, all of the time of course!!
Sasha Naryshkine, Byron Lotter and Michael Treherne
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