Consumers Preview 10-14-2009
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BENTLEY INVESTMENT GROUP Consumers Preview Presentation October 14, 2009
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
ECONOMIC INDICATORS
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Gross Domestic Product = C + I + G + NX Looking at how large the “C” is in GDP.
GDP information can be found here: http://www.bea.gov/national/index.htm#gdp
Consumer spending is a vital component of any economy, in the U.S. it currently represents 71% of GDP
GDP is a gauge of the health of a country’s economy – GDP is measured as a comparison to the previous quarter
Bentley Investment Group | 2009-2010
GDP “Personal spending on cars, clothes, food and other items accounts for 71% of gross domestic product, according to the latest Bureau of Economic Analysis data. That's slightly above the level one year ago and well above the long-term average around 65%.” –USA Today (October 11, 2009)
Bentley Investment Group | 2009-2010
Consumer Price Index (CPI) –Rising or Falling? –Which industries? –Elasticity of the Goods?
CPI information can be found here:
The CPI is one of the most important indicators in terms of moving the markets and setting monetary policy for the Fed.
Bentley Investment Group | 2009-2010
http://www.bls.gov/CPI/
Retail Sales Report –Overall Retail Sales –Ex-Autos –Industry Specific Sales
Retail information can be found here:
The ex-autos sales growth exceeded economist estimates of a 0.2 percent increase. Excluding a 10.4 percent drop in auto sales, retail sales actually rose 0.5 percent in September Bentley Investment Group | 2009-2010
http://www.census.gov/retail/
Retail Sales Ex-Autos
Bentley Investment Group | 2009-2010
Unemployment & Jobs Data • 15.1 million Americans currently out of work
Unemployment information can be found here:
• Monthly Release and weekly jobless claims: – Most recent release, 10/2/09: 9.8% – Highest rate since June of 1983 – Leads to consumer uncertainty and resulting “tight wallets”
Bentley Investment Group | 2009-2010
http://www.bls.gov/cps/
Consumer Sentiment • Univ. of Michigan Survey of Consumer Confidence: Consumers surveyed on current attitudes as well as economic expectations.
Consumer Sentiment information can be found here: http://research.stlouisfed.org/fred2/series/UMCSENT
• Conference Board Consumer Confidence: – Respondents appraisal of current business conditions – Expectations of business conditions 6 months hence – Respondents expectations regarding their total family income Bentley Investment Group | 2009-2010
University of Michigan Consumer Confidence
Bentley Investment Group | 2009-2010
Conference Board Consumer Confidence Index • Slight dip in the index as of the latest September release, after an uptick in August. • “While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes. With the holiday season quickly approaching, this is not very encouraging news."
Bentley Investment Group | 2009-2010
Consumer Credit • Latest Federal Reserve credit release: October 7th – Credit outstanding fell for the 7th straight month by $12 billion- larger fall than expectations.
– “Households are in paying down debt mode, they’re not in the mode of taking on new debt.”
Bentley Investment Group | 2009-2010
Bentley Investment Group | 2009-2010
THE CONSUMER SECTOR… …DIVIDED
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Discretionary and Staples
• Consumer Discretionary includes automotive, housing, entertainment and retail - this sector is highly cyclical and relies highly on consumer leisure spending.
• Consumer Staples include food, beverages, tobacco, prescription drugs and household products – this sector is not as exposed to economic cycles and thus is considered more immune to recessions.
Bentley Investment Group | 2009-2010
ENTERTAINMENT/ MEDIA INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Why Invest in this Industry? • Undervalued due to low revenues from advertising • Directly correlated to consumer spending • Pro-cyclical
Bentley Investment Group | 2009-2010
Finding a Quality Company • Well diversified within industry – Opportunities for cross promotion – Reduction of risk due to diversification – Take advantage of economies of scale • Greater purchasing power
• Quality Products – Consumers will buy/watch what is appealing – Copyrights to big-name characters Bentley Investment Group | 2009-2010
Key Industry Statistics • • • •
GDP Consumer disposable income Consumer Confidence Is industry expanding – Firms aren’t limited to growth by taking market share from other companies – International markets
Bentley Investment Group | 2009-2010
Advertising Revenues • Have declined in recent quarters • Is expected to increase with economy strengthening – Automobile industry
Bentley Investment Group | 2009-2010
RESTAURANT INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Industry By Segment
Bentley Investment Group | 2009-2010
Key Ratios And Statistics • • • • •
Real gross domestic product Disposable personal income of consumers Commodity prices Unemployment rate Interest rates
Bentley Investment Group | 2009-2010
Upside • • • •
Low barrier to entry/high return Franchising Commodity prices likely to ease Labor costs to move slowly
Bentley Investment Group | 2009-2010
Downside • Across industry gross margins decreasing due to low sales figures • Consumers expected to save more, spend less • Travel to be weak in 2009 despite cheaper fuel. • Intense competition and high fixed costs
Bentley Investment Group | 2009-2010
APPAREL INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Industry Basics • Large, mature and highly fragmented • Within national brands, 10 largest companies account for 16% of wholesale apparel sales • Low barriers to entry: simple technologies, ease of expansion, low fixed assets per emp. • Major apparel companies: Nike, V.F. Corp, Polo Ralph Lauren, Hanesbrands Bentley Investment Group | 2009-2010
State of the Industry • Industry is heavily affected by state of the economy, availability of credit and the consumer’s willingness to buy: • Credit crunch has damaged apparel firms’ ability to borrow: troubles at CIT • Consumer woes: unemployment, credit constriction, loss of wealth Bentley Investment Group | 2009-2010
A “New Normal” for Apparel? • A long recovery for consumers: unemployment, deleveraging, and renewed focus on savings • Less credit to fund extravagant purchases • Frivolity to frugality: a new consumer mindset? Bentley Investment Group | 2009-2010
Challenges for the Apparel Industry • Restore pricing integrity • Align supply and demand: inventory adjustment and cash generation • Cope with the “new normal:” providing value for consumers and embracing trends (green initiatives, e.g.) Bentley Investment Group | 2009-2010
Analyzing an Apparel Company • Macro factors: rate of unemployment, trends in discretionary income • Sector-specific factors: rate of spending on apparel vs. other discretionary items, dominant fashion trends • Assess individual companies based on financial position, competitive stance, brand recognition, target demographics, etc. Bentley Investment Group | 2009-2010
CONSUMER NON-DURABLE INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Consumer Non-durables • 2 Segments: – Household products (soaps, detergents, cleaning products) – Personal products (shampoo, toothpaste, health and beauty aides)
Bentley Investment Group | 2009-2010
How Nondurables Operates • New Products = key driver of company’s future sales growth – Look for companies integrating new products, and investing in new R&D
• What drives demand? – Price: products are necessities; a decrease in disposable income puts downward pressure on product prices – Demographics: more people = more bodies to bathe = more houses to clean – Household Income: Demand is directly linked to household income trends – increase in income moves consumers up from bargain products to premium ones – Innovation: companies creating excitement about their products Bentley Investment Group | 2009-2010
Key Ratios • Disposable Income: inflation adjusted income less taxes – April 2009 was at 2.8% down from 4.7% growth in 2008
• Personal Consumption Expenditure: compared with disposable income – April 2009, decline of 2.9% compared to a decline of .06% in 2008
• Consumer Price Index: tracks retail price inflation (deflation) for products sold to end-use consumers – April 2009, CPI projected to decline 1.7%
• Foreign Currency Exchange Rates: US household and personal care products industries outsource growing portions of their sales
Bentley Investment Group | 2009-2010
Analyzing the Industry • Assess the Business – Market leadership and brand strength, do people recognize their products? – Who are their competitors, how do they match up?
• Income Statement – Sales, Gross Profit Margin, Operating Margin, Net Income, EPS
• Balance Sheet – Debt Leverage
• Performance Ratios – ROA, ROE
• Price-to-Earnings Ratio Bentley Investment Group | 2009-2010
RETAIL INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
How to Value Retail: Macro • GDP • Consumer Confidence Index and Consumer Sentiment • Retail Sales, released monthly – Chainstoreage.com has historical sales figures
• Unemployment • Consumer Price Index (Inflation) Bentley Investment Group | 2009-2010
How to Value Retail: Industry • Compare apples to apples; Abercrombie and Fitch and Wal-Mart are both retailers but they are not in the same business – Compare sales revenue – Relatively similar products – Demographic targets
Bentley Investment Group | 2009-2010
How to Value Retail: Key Metrics Same store sales Sales per square foot Inventory turnover Profit margins (again remember to compare against similar companies) • Compare room for growth; domestically or internationally • • • •
Bentley Investment Group | 2009-2010
Retail Going Forward Week Ahead – Retail sales released this morning • Good sign if sales continue to decrease by less than estimates (or if they are positive)
– CPI & Jobless Claims announced on Thursday • Low inflation and less people filing for unemployment insurance is good for consumers
– Consumer Sentiment released on Friday • If people are more optimistic about the future they will be more willing to spend Bentley Investment Group | 2009-2010
Questions?
Invest in Your Future Bentley Investment Group | 2009-2010
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
ECONOMIC INDICATORS
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Gross Domestic Product = C + I + G + NX Looking at how large the “C” is in GDP.
GDP information can be found here: http://www.bea.gov/national/index.htm#gdp
Consumer spending is a vital component of any economy, in the U.S. it currently represents 71% of GDP
GDP is a gauge of the health of a country’s economy – GDP is measured as a comparison to the previous quarter
Bentley Investment Group | 2009-2010
GDP “Personal spending on cars, clothes, food and other items accounts for 71% of gross domestic product, according to the latest Bureau of Economic Analysis data. That's slightly above the level one year ago and well above the long-term average around 65%.” –USA Today (October 11, 2009)
Bentley Investment Group | 2009-2010
Consumer Price Index (CPI) –Rising or Falling? –Which industries? –Elasticity of the Goods?
CPI information can be found here:
The CPI is one of the most important indicators in terms of moving the markets and setting monetary policy for the Fed.
Bentley Investment Group | 2009-2010
http://www.bls.gov/CPI/
Retail Sales Report –Overall Retail Sales –Ex-Autos –Industry Specific Sales
Retail information can be found here:
The ex-autos sales growth exceeded economist estimates of a 0.2 percent increase. Excluding a 10.4 percent drop in auto sales, retail sales actually rose 0.5 percent in September Bentley Investment Group | 2009-2010
http://www.census.gov/retail/
Retail Sales Ex-Autos
Bentley Investment Group | 2009-2010
Unemployment & Jobs Data • 15.1 million Americans currently out of work
Unemployment information can be found here:
• Monthly Release and weekly jobless claims: – Most recent release, 10/2/09: 9.8% – Highest rate since June of 1983 – Leads to consumer uncertainty and resulting “tight wallets”
Bentley Investment Group | 2009-2010
http://www.bls.gov/cps/
Consumer Sentiment • Univ. of Michigan Survey of Consumer Confidence: Consumers surveyed on current attitudes as well as economic expectations.
Consumer Sentiment information can be found here: http://research.stlouisfed.org/fred2/series/UMCSENT
• Conference Board Consumer Confidence: – Respondents appraisal of current business conditions – Expectations of business conditions 6 months hence – Respondents expectations regarding their total family income Bentley Investment Group | 2009-2010
University of Michigan Consumer Confidence
Bentley Investment Group | 2009-2010
Conference Board Consumer Confidence Index • Slight dip in the index as of the latest September release, after an uptick in August. • “While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes. With the holiday season quickly approaching, this is not very encouraging news."
Bentley Investment Group | 2009-2010
Consumer Credit • Latest Federal Reserve credit release: October 7th – Credit outstanding fell for the 7th straight month by $12 billion- larger fall than expectations.
– “Households are in paying down debt mode, they’re not in the mode of taking on new debt.”
Bentley Investment Group | 2009-2010
Bentley Investment Group | 2009-2010
THE CONSUMER SECTOR… …DIVIDED
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Discretionary and Staples
• Consumer Discretionary includes automotive, housing, entertainment and retail - this sector is highly cyclical and relies highly on consumer leisure spending.
• Consumer Staples include food, beverages, tobacco, prescription drugs and household products – this sector is not as exposed to economic cycles and thus is considered more immune to recessions.
Bentley Investment Group | 2009-2010
ENTERTAINMENT/ MEDIA INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Why Invest in this Industry? • Undervalued due to low revenues from advertising • Directly correlated to consumer spending • Pro-cyclical
Bentley Investment Group | 2009-2010
Finding a Quality Company • Well diversified within industry – Opportunities for cross promotion – Reduction of risk due to diversification – Take advantage of economies of scale • Greater purchasing power
• Quality Products – Consumers will buy/watch what is appealing – Copyrights to big-name characters Bentley Investment Group | 2009-2010
Key Industry Statistics • • • •
GDP Consumer disposable income Consumer Confidence Is industry expanding – Firms aren’t limited to growth by taking market share from other companies – International markets
Bentley Investment Group | 2009-2010
Advertising Revenues • Have declined in recent quarters • Is expected to increase with economy strengthening – Automobile industry
Bentley Investment Group | 2009-2010
RESTAURANT INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Industry By Segment
Bentley Investment Group | 2009-2010
Key Ratios And Statistics • • • • •
Real gross domestic product Disposable personal income of consumers Commodity prices Unemployment rate Interest rates
Bentley Investment Group | 2009-2010
Upside • • • •
Low barrier to entry/high return Franchising Commodity prices likely to ease Labor costs to move slowly
Bentley Investment Group | 2009-2010
Downside • Across industry gross margins decreasing due to low sales figures • Consumers expected to save more, spend less • Travel to be weak in 2009 despite cheaper fuel. • Intense competition and high fixed costs
Bentley Investment Group | 2009-2010
APPAREL INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Industry Basics • Large, mature and highly fragmented • Within national brands, 10 largest companies account for 16% of wholesale apparel sales • Low barriers to entry: simple technologies, ease of expansion, low fixed assets per emp. • Major apparel companies: Nike, V.F. Corp, Polo Ralph Lauren, Hanesbrands Bentley Investment Group | 2009-2010
State of the Industry • Industry is heavily affected by state of the economy, availability of credit and the consumer’s willingness to buy: • Credit crunch has damaged apparel firms’ ability to borrow: troubles at CIT • Consumer woes: unemployment, credit constriction, loss of wealth Bentley Investment Group | 2009-2010
A “New Normal” for Apparel? • A long recovery for consumers: unemployment, deleveraging, and renewed focus on savings • Less credit to fund extravagant purchases • Frivolity to frugality: a new consumer mindset? Bentley Investment Group | 2009-2010
Challenges for the Apparel Industry • Restore pricing integrity • Align supply and demand: inventory adjustment and cash generation • Cope with the “new normal:” providing value for consumers and embracing trends (green initiatives, e.g.) Bentley Investment Group | 2009-2010
Analyzing an Apparel Company • Macro factors: rate of unemployment, trends in discretionary income • Sector-specific factors: rate of spending on apparel vs. other discretionary items, dominant fashion trends • Assess individual companies based on financial position, competitive stance, brand recognition, target demographics, etc. Bentley Investment Group | 2009-2010
CONSUMER NON-DURABLE INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
Consumer Non-durables • 2 Segments: – Household products (soaps, detergents, cleaning products) – Personal products (shampoo, toothpaste, health and beauty aides)
Bentley Investment Group | 2009-2010
How Nondurables Operates • New Products = key driver of company’s future sales growth – Look for companies integrating new products, and investing in new R&D
• What drives demand? – Price: products are necessities; a decrease in disposable income puts downward pressure on product prices – Demographics: more people = more bodies to bathe = more houses to clean – Household Income: Demand is directly linked to household income trends – increase in income moves consumers up from bargain products to premium ones – Innovation: companies creating excitement about their products Bentley Investment Group | 2009-2010
Key Ratios • Disposable Income: inflation adjusted income less taxes – April 2009 was at 2.8% down from 4.7% growth in 2008
• Personal Consumption Expenditure: compared with disposable income – April 2009, decline of 2.9% compared to a decline of .06% in 2008
• Consumer Price Index: tracks retail price inflation (deflation) for products sold to end-use consumers – April 2009, CPI projected to decline 1.7%
• Foreign Currency Exchange Rates: US household and personal care products industries outsource growing portions of their sales
Bentley Investment Group | 2009-2010
Analyzing the Industry • Assess the Business – Market leadership and brand strength, do people recognize their products? – Who are their competitors, how do they match up?
• Income Statement – Sales, Gross Profit Margin, Operating Margin, Net Income, EPS
• Balance Sheet – Debt Leverage
• Performance Ratios – ROA, ROE
• Price-to-Earnings Ratio Bentley Investment Group | 2009-2010
RETAIL INDUSTRY OVERVIEW
Bentley Investment Group | Fall 2009 Bentley Investment Group | 2009-2010
How to Value Retail: Macro • GDP • Consumer Confidence Index and Consumer Sentiment • Retail Sales, released monthly – Chainstoreage.com has historical sales figures
• Unemployment • Consumer Price Index (Inflation) Bentley Investment Group | 2009-2010
How to Value Retail: Industry • Compare apples to apples; Abercrombie and Fitch and Wal-Mart are both retailers but they are not in the same business – Compare sales revenue – Relatively similar products – Demographic targets
Bentley Investment Group | 2009-2010
How to Value Retail: Key Metrics Same store sales Sales per square foot Inventory turnover Profit margins (again remember to compare against similar companies) • Compare room for growth; domestically or internationally • • • •
Bentley Investment Group | 2009-2010
Retail Going Forward Week Ahead – Retail sales released this morning • Good sign if sales continue to decrease by less than estimates (or if they are positive)
– CPI & Jobless Claims announced on Thursday • Low inflation and less people filing for unemployment insurance is good for consumers
– Consumer Sentiment released on Friday • If people are more optimistic about the future they will be more willing to spend Bentley Investment Group | 2009-2010
Questions?
Invest in Your Future Bentley Investment Group | 2009-2010
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