Panorama Ridge, detour to Garibaldi Lake, Victoria’s Secret ($VSCO), and thoughts on the retail and the fashion luxury market (Please don’t expect anything cutting edge or quantifiable – this is more of a late night doozy courtesy tired legs and a sore behind)
Damn the Rain, Full Steam Ahead(!)
So after five years of slogging through textbooks and various theoretical and practical modules so to speak on my second innings, (it feels good to have a second career, in that one gets the taste of retirement early on itself…) which is in the Investment / Finance business, I’ve finally reached the long awaited stage where I don’t need to hit the books in a structured and required manner.
Moving forward to today, I finally have some free time to indulge in some of my non-professional interests, and managed to hike up the Panorama trail today. The weather was iffy, but it played to my advantage as I enjoy being out in the rain and the elements as compared to the sun, owing to my dogmatic belief that being with the elements brings one closer to nature.
What I Think of When in Nature
I think there’s a bit of charm in being alone with the elements. Being closer towards the end of summer and the start of fall, basic hiking accessories are overkill, and a SAT Phone definitely so, whether back-country or not.
The magic in hiking alone is that it allows me to think of things in a more dynamic and free manner as compared to sitting at home, shooting the breeze with friends, or looking out over the sea with a crisp pint in hand. Truth be told, the hiking niceties, in my opinion aren’t required today – they originated way back when modern tools and equipment weren’t available so as to:-
- Recognize a fellow adventurer’s risk to venture out
- Identifying as a friendly person, who can be hailed if need arises / do a basic greeting and checkup when passing
Now this brings us to my current state of mind, which has been engrossed with the Retail industry of late, and in particular the premium fashion / beauty segment – (Capri ($CPRI), Tapestry ($TPR), Abercrombie & Fitch ($ANF) – not quite luxury, but once the cult classic and seemingly back en-vogue, Victoria’s Secret ($VSCO) and LVMH ($LVMUY) and L’Oréal ($OR.FP).
To say that I spent most of my time during the hike barring a few minutes mid-hike & during a dip in the Garibaldi, thinking of the industry dynamics a fair bit would be an understatement. It’s not always investing, these occasions are prime time to figure out what I want out of my life in the next 7-10 years & life / career goals or just thinking about friends past and present as well.
Retail Brass Tacks & How I think about Securities (Post Research)
Brass Tacks
So a key thought in my mind with respect to the above names, and in particular Capri, Tapestry, and Victoria’s Secret (see below for disclosure) – is the fact that all the three names were at sky high values around 2021, wherein demand for items of all the three companies was pulled forward in quick-time owing to Covid-19. It is to be noted that $VSCO’s spin-off occurred on Aug 02, 2021 which was no doubt an opportunistic play to maximize company value by being able raise the maximum amount of monies when markets were running rampant.
Cue to today, after the cleanse of late 2022 and most of 2023, coupled with the interest rate hikes, the companies are generally trading relatively cheap on a look forward basis. Now add to this that premium or luxury retail companies are usually the bellwethers for economic doom or boom, a few years in advance (see 2011 and 2016-18. Interestingly, my boss in 2020, who was running a business with low two digit EBITDA (in $mm) mentioned during peak covid-19, that the whole industry was expecting a recession around 2019 or so – which never came)
This brings us to the recently announced merger between Tapestry and Capri Inc. Generally speaking, mergers are sought by the acquirer and the acquiree so as to enhance long term value, which is easier when valuations are in a trough along with the revenues and operating margins. The $57 per share cash buyout of Capri puts its premium well north of the average 30 – 35% usually seen in cash deals based on the closing price of the last trading day before announcement.
$VSCO, with its IPO in Aug 2021, is still carrying a heavy amount of debt load on its balance sheet. Tacking on the lease payments outstanding to the debt would make the total $ amount even more insurmountable especially given its tepid performance of late. This brings us to the question – what makes me think that these companies and their industries are attractive?
Thinking about Securities
Whilst there may be value in spending hours modelling out a three statement balance sheet and fine tuning the model to perfection as a part of the research process, the way I go about my stuff is structurally unstructured. That is, once the initial razzmatazz of company history, management, financials, key ratios, excel modelling and anything else that will make the finance gods happy is done with, I just think about the business and not about the stock.
When I do this, it’s a process of marrying all of the above factors and then putting myself in the place of the CEO or the CFO / COO (or just as someone who owns the whole business for that matter and is in-charge of all the functions) and thinking about what changes the business needs based on the financials, what the other competitors are doing, what are the market expectations (boom / bust) and how to safeguard the company’s future in the eventuality of a recession. It’s during this process where it’s more of a mental decision matrix which dovetails the above factors. And then I think a little bit more, with every step during the hike which feels like oxygen, the thoughts often veer to whether I believe the current stock quote is rich or undervalued, whether the business has a strong franchise etc.
Coming to $VSCO and $CPRI, even with their large or minimal debt load respectively, we are currently in uncertain times as far as markets are concerned – given that we are wading in an alphabet soup of rate cuts / hikes, pull forward revenues by covid-19, followed by a market cleanse without recession, and the upcoming elections later this year (owing to which a lot of lobbying efforts and policy building will be on hold relatively speaking).
Assuming standard human behavior, one would imagine that any administration would not want to be known or attached, with the legacy of a recession or a market crash, during its time in office. Whilst the current administration has done a decent job of navigating a situation not seen since 1918, the upcoming elections could sway a rate cut in the near future, followed by tightening post elections (assuming they hold on to the office) and gradual cutting again, as the economy stabilizes to non pandemic style econometrics pattern.
Now, assuming a new administration comes in, given that they have a few years in the office, unless the economy is in dire straights (and hopefully no money for nothing a la covid-19), it may be well possible that tightening of the belts will be on cards for the initial year or so, before letting things cool down so as to taper to a photo finish towards the end of the administrations tenure.
How this ties in to the above companies is simple. Premium luxury brands may be seen or rather basically are the soothsayers of the economy by virtue of the goods that they sell. Given the generally comatose situation of the economy and the markets given the above myriad factors, the revenues (and growth), margins and profits could potentially be subdued with little or no growth (or even contraction), which is what the above mentioned merger is potentially capitalizing on.
Post elections, once there is more clarity in the markets and the economy, yours truly, who is busy walking his route and playing CEO of $VSCO would be able to take decisions much more freely in order to expand & grow (just an example). Assuming the economy gets back on track and the “numbers go up”, we may well see rich valuations for the above companies circa earlier years of the last decade. Part of me wonders if the Capri / Tapestry valuation and merger thesis is based on these factors along with synergies which are hopefully realized.
Concluding Ramblings
So to bring it all together, I do think that the above mentioned businesses are potentially undervalued at the right price and could well be the most sought after securities when going bargain hunting. Now, I will remain non-committal as to what I believe to be the right price to purchase.
But that would be more because each investor has their own style and time horizons. The conclusion(s) that may be taken away from this article, or rather which I hope are taken away from this article would be the trifecta of:-
- Retail and Premium fashion / Luxury businesses will likely do well after the elections
- The best research is to just think
- Some of the best ideas often come during solo activities
Now to those who are disappointed that there are no quantifiable numbers in this article, I’d apologize, but the disclaimer at the top would likely have put-off the number crunchers, so this likely doesn’t apply to you. Time to close this top of the head ramble with an excellent picture at the top of the Panorama Ridge as promised….Happy Investing and huntings!
