Wednesday, 20 August 2014

When the tide goes out make are you still have your swimwear on . . .

Sometimes being an investment banker cyclist there's a little moment of schadenfreude that gets me through the day. Today it was the results from US sporting goods retailer Dick's Sporting Goods (Ticker: DKS).

I never did get golf. I tried hard, but I  never did understand the culture. To be frank I was also hopeless and didn't have the patience to spend the hours necessary to progress my game. By the time I moved to Singapore in 2006 I also needed to get fit and so without even knowing it at the time I had played my last game of golf. I noticed a nice piece on Market Watch today looking at the results from Dicks Sporting Goods. Highlighted in the piece was the company’s Golf Galaxy stores which suffered a 9.3% decrease in same store sales. Now some call this the "Tiger effect", but retailers would do well to understand that the baby-boomer bubble is fast peaking and the tide has already gone out with generation X. Lets look at an example. Here's a chart of the Giant Manufacturing Company of Taiwan (9921.TW) v. Callaway Golf (ELY):

I took Callaway because it's a pure golf company, others like TaylorMade are owned by bigger companies (in that case Adidas). Giant is one of the biggest bicycle manufacturers in the world. The outperformance of cycling is obvious, it's clearly been a better investment choice. Now that doesn't mean that bicycle growth will continue because at some stage the market will become saturated. Think about it this way; the limits of golf participation started to become obvious as clubs jacked up membership fees to basically exclude people from participation. In other words it became an "exclusive" sport in a world that is embracing "inclusivity". Gen X onward no longer sees golf as an aspirational sport in the way that the baby boomers have. The world changed. We no longer see smoking as a relaxing indulgence, nor drinking alcohol at work (think Mad Men) as acceptable. There's a whole world now seeing health costs spiral and they want to mitigate that in a way that golf just can't. Golf is still going  to be a sport people play, it's just that it won't grow at the same rate and as an investment banker I call this a mature industry. Golf as a sport or investment now will pay dividends like a bond pays coupons, but it won't provide capital growth that it has in the past. As an investor you need to recognise these moments and embrace them for what they are, not what they were. 

This brings me to some disturbing news from the gambling industry. The trend of casino closures in Atlantic City New Jersey continues with doors shutting at the Show Boat. Atlantic City was once the venue of choice for the north east US gambler, the casinos have tried to transform to resorts, but the weather, the falling cost of air travel and a surge in competition especially at the lower end started to eat away at the business model. Four of Atlantic City's 12 casinos have closed, meanwhile the State of New Jersey looks likely to approve more competition in the form of a new venue at the Meadowlands, a complex which is a limo drive from Manhattan. 

Atlantic City isn't the only place where the Casino industry is showing signs of weakness. Macau’s casino revenue fell 3.6% in July, following a 3.7% decline in June. Interestingly VIP play was estimated down by about 20% as in June, while mass market play continued to expand around 30%, and July produced similar results. 

Macau gambling . . . the best behind us?
That to me is indicating that the high rollers go where they get the newest toys and the mass market goes where they can. That's dangerous for a location, because in terms of the lower end it means other localities can change the paradigm quickly because of nothing more than geography. I know my HK broker friends will tell me that China isn't about to open multiple resorts on the mainland anytime soon and that's true enough. Right now Macau has the location advantage, but as with what happened with Atlantic City, so to can the same thing happen to Macau. If cycling is the new golf, and Meadowlands is the new Atlantic City, then just fill in the blanks for the next Casino mecca in Asia. Investors in casinos should note that the sky is not falling, but the growth is slowing. 

I'll be at another BBY Disruptive Lunch tomorrow and I'm looking forward to it. I've really enjoyed looking at some of these new businesses over the last few months and am somewhat buoyed by the extent of the enterprise I'm seeing in Australia. There's still a solid core of "mining is the only game in town" investment banking here, but you get the sense that the tide has gone out on that sector for the moment. BHP's de-merger plan this week could be the last great party of the decade for the mining teams of the big banks. If you're at a bank that misses out on a mandate associated with this you better be looking for a new arrow in your quiver. 


Wednesday, 13 August 2014

InStitchu . . . BBY disruptive lunch follow-up . . . a new suit

Ever purchased an off the rack suit at a department store and got home to find there's something just not right? We've all done it, male, female, tall, short, fat, thin, athletic, etc. When I moved to London in 1997 I was 30kgs heavier and had some fairly cheap and nasty suits in my wardrobe. The first time I walked into to Selfridges department store in Oxford Street and tried to buy a suit it took so long in the alterations room that even the sales guy suggested I'd be better off going to Saville Row and having one (or preferably three) tailor made for me. After a reasonable bonus under the belt I never bought a suit at a department store again. The only downside was making the time for proper measurements, fittings and final adjustments.

InStitchu is a company that is trying to combine technology with old world tailoring. Bespoke without the price tag? For somewhere between $300 - 600 they'll deliver you a suit in 4 weeks that they say will fit you perfectly. I'd be lying if I said that I approached the business with 100% confidence as I'm quite skeptical in general of retail businesses and and the clothing space particularly. 

Over the years I can't remember ever getting a decent return from an investment in a stock who's business is based on selling clothes to the general public. I liked what I heard from Robin McGowan and James Wakefield at the most recent of the BBY Disruptive Lunches, so instead of trying to go into all sorts of detail about the metrics behind their business plan I decided to just test them out by buying a suit. I got the idea after remembering the way I missed an absolute "gimme" of a trade by failing to buy into Japanese retailer Fast Retailing (9983) (owner of UNIQLO). One broker practically begged me to go into one of their storers and just buy a white T-shirt and guaranteed me that afterwards I'd understand why this stock was going up.  Eventually I did buy a that T-shirt, but not before seeing the stock more than double in the meantime. 

Fast Retailing (9983) v. N225
InStitchu appealed to me because I had a chance to be a very low touch buyer. I wanted to try and never meet an employee face to face. Here's how it went:

1. Get an account(s)

I was going to get measured using the mPort body scanner that links to Institchu. That meant I needed two accounts, one for InStitchu and one for mPort. I suggest you get your mPort account before going to a body scanner as it will save time once you're in the booth . . . . Oh, and personally I prefer not to be typing personal information into a terminal in a booth in a public place. 

2. Get measured

I went to a body scanner in the centre of Sydney. You enter the booth and log in via a touch screen. The computer voice will guide you through what to do and point out where to hang you clothes and importantly where to stand.  

It takes a couple of minutes to do the scan and you'll be asked to wait (in your underwear) while the computer confirms that they have a stable scan. It's probably less that 5 minutes and there's a lock on the booth, so no need to worry about unwelcome guests. 

Once you have this you need to link it to your InStitchu account. As an aside your body scan can be used to calculate various health metrics, but you need to pay to unlock those functions. The first basic scan is free. 

3. Choose a suit, style and  . . .  you get the picture

It's very straight forward. Choose a suit style, colour, fabric and add details. You can have different coloured lining, workable cuffs as well as the usual array of lapel styles and venting. While you're going through the process an instant messenger appears and an InStitchu advisor can help you through the process. I like this both from a design point of view, but also from a business angle because it gives InStitchu the chance to avoid the "won or done" nature of internet selling . . . if it doesn't work first time people tend not to give you a second chance.

It should be said that InStitchu doesn't just make standard lounge suits, you're offered dinner suits, jackets, shirts and various accessories. They also have some advice regarding mix n' matching various pieces.

4. Problems?

I ran into a problem because for some reason my body scan wasn't downloading my measurements to InStitchu. I'll be honest and say without the instant messenger I would have given up and said no sale. But "Monica" offered me a free measurement service at their Sydney location and promised me that this could all be solved. I went to the office and got measured (normally $30). Even though this all went smoothly and I had the added bonus of getting to see and touch the fabrics I think InStitchu needs to solve whatever the problem there is with the link between mPort and themselves. I've asked the company to send me a comparison between the measurements taken by their "live" staff and mPort so I can see the tolerances involved and therefore the likelihood of post delivery adjustment being needed.

5. Payment and delivery

I paid $467 for my suit, but need to subtract from that $50 discount offered to investors who attended the BBY lunch. I also provided references for 3 friends that earned me a $35 credit for future purposes. My usual spend on a suit is closer to $2000 from a tailor here in Sydney. I'll be reporting back after I see the results. My expectations are fairly low as I always think the mantra "you get what you pay for" is both true and wise. If I get a suit that fits and lasts a once a week wear over a working year I'll be happy given the price. 

The suits are manufactured in China. I assume they're using computer cutting for the patterns. The team told the lunch that they've gone through a few suppliers to help cut down on the error rates and to increase the overall quality of the garment. Margins are roughly 50%, but as I'm not a retail analyst I couldn't tell you how that compares with boutique tailors or department stores. The business is growing, with a surprising up-take from wedding related shoppers which makes up about 20% of revenue. That makes sense to me, what with this trend toward bigger weddings where the bridal party size can be pretty ridiculous in my experience. This means that you need to get matching suits, shirts and ties for all those involved and getting that at a department store or hire place just doesn't always work. 

I'm not going to recommend you buy a suit or a shirt just yet from InStitchu, but if you're an investor I think it's worth checking out their business. In my mind I see this as just another reason to avoid owning shares in department stores.