Category: Global stocks

Business Strategy & Outlook

The ITT is well positioned to continue to win in its marque brake pad business (nearly 30% global market share), while a focus on continuous improvement will push both its industrial process and connect and control technologies’ segments into greater than 20% adjusted segment operating margins. The market is overly focused in the near term on raw material inflation and the semiconductor shortage. That said, the semiconductor shortage should begin to ameliorate in 2023. More importantly, ITT regularly outperforms light vehicle production by greater than 800 basis points. While the somewhat less outperformance in a flat market through-the-cycle, we still believe this is a growth business that produces strong returns on capital (mid-30s). The ITT will continue to win based on a combination of material science expertise, technological innovations like the smart pad, and its consistent record of on-time delivery (greater than 99%).

Furthermore, the CEO Savi and CFO Caprais will implement the same successful playbook they used in motion technologies, or MT, in ITT’s other businesses. Successful tactics from this playbook include lean and automation to drive shop floor productivity gains, improved supply chain low-cost sourcing, and better price management. While MT is extensively automated, that’s not necessarily the case for all ITT’s facilities, such as with Seneca Falls. Furthermore, recent acquisitions offer attractive synergy opportunities. For instance, Habonim’s simplified and standardized design process is a core competency, and The ITT can implement best practices to save on both manufacturing and engineering expenses. Finally, the investors underappreciate the windfall from the commercial aerospace recovery. While revenue passenger kilometers have been decoupled from economic output, these headwinds will subside as COVID-19-related restrictions dissipate over time. Passen Therefore, connect and control technologies will be ITT’s strongest growth segment

Financial Strengths

The ITT is on solid financial footing and we give the firm a moderate credit risk rating. We note that following a transaction on June 30, 2021, ITT no longer has any obligation with respect to pending and future asbestos claims. We think ringfencing this liability was an excellent move on the part of management, since it removed both uncertainty and headline risk. Using a punitive methodology (incorporating all interest-bearing obligations and calls on capital), ITT consistently runs a net cash positive position. Therefore, we are not overly concerned about whether ITT can service its current obligations.

Bulls Say

• Solutions like copper-free and smart brake pads will help ITT win content on additional and existing platforms, and its material science expertise should help with wins in the electrical vehicle original equipment segment. 

• CEO Luca Savi will bring the same focus and drive operational efficiency to both IP and CCT as he did in MT; long-term, both IP and CCT can deliver 20% segment operating margins. 

• An unleveraged balance sheet gives the company room to make value-accretive acquisitions.

Company Description

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spinoffs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy and Outlook 

With a narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. The narrow-moat rating is based on Lululemon’s intangible brand asset. The “Power of Three x2” five-year plan laid out at Lululemon’s April 2022 investor event as sound. The firm’s three priorities are product innovation, e-commerce, and international expansion. The product innovation is critical as many competitors, including no-moat Gap’s Athleta, sell women’s leggings of similar quality. Thus, Lululemon will need to introduce new fabrics and technology to hold its popularity in this critical category. The firm also plans to add to its assortment in men’s (24.6% of 2021 sales) and expand its nascent athletic footwear line. These categories fit the Lululemon brand, they also bring it in direct competition with athletic apparel firms like wide-moat Nike.

Boosted by the pandemic, Lululemon’s e-commerce will become increasingly important. There should be a 21% growth for the channel in 2022 and expect e-commerce sales will permanently exceed store revenue by 2024. Lululemon’s e-commerce should benefit from investments in digital capabilities (such as buy online, pick up in store), new product, and an expanding loyalty program. Its e-commerce operating margins at 44% in the long term, rising digital sales should lift its overall profitability. There is an opportunity for Lululemon to expand outside of North America. Sales outside the region accounted for just 15% of total in 2021 but have been growing more than 30% per year. Lululemon is building its brand overseas and has a large opportunity for new stores and larger online sales in China, the second-largest activewear market. The 2031 sales outside of North America will approach $4.2 billion (up from $957 million in 2021) and account for 23% of total sales.

Financial Strength

Lululemon is in exceptional financial shape. Lululemon is the rare apparel firm that developed a multibillion-dollar brand without long-term debt. The firm closed April 2022 with $649 million in cash and an undrawn $400 million revolving credit facility. Lululemon will generate significant free cash flow for stock buybacks. The firm’s free cash flow to equity has grown rapidly over the past six years (to $1 billion in 2021 from $154 million in 2015), allowing it to repurchase about $1.8 billion in shares in that period. It will generate about $6.9 billion in free cash flow to equity over the next five years and use most of it for buybacks. However, Lululemon may reduce shareholder value by repurchasing shares above the fair value estimate. The firm could easily afford to issue dividends but has not done so and will not do it in the future too. Lululemon’s capital expenditures are at an annual average of 6.2% of sales over the next decade. Its capital expenditures as a percentage of sales are relatively high for a firm in its industry as it operates its own stores. Most of its capital expenditures are for remodelling and relocation of stores and opening new stores. Lululemon will open about 370 stores over the next decade. The firm is also investing heavily in its digital capabilities.

Bulls Say’s

• Lululemon’s online sales increased to $2.8 billion in 2021 from less than $100 million in 2010. It is estimated its e-commerce operating margin at roughly 44%, about 20 percentage points better than its store margin. 

• Lululemon has a big opportunity in greater China, where the firm operates fewer than 100 stores. China is the second-largest athletic apparel market in the world and has high growth. 

• Lululemon is often credited with the development of “athleisure”, which is a major change in how people dress and continues to thrive.

Company Profile 

Lululemon Athletica Inc. designs, distributes, and markets athletic apparel, footwear, and accessories for women, men, and girls. Lululemon offers pants, shorts, tops, and jackets for both leisure and athletic activities such as yoga and running. The company also sells fitness accessories, such as bags, yoga mats, and equipment. Lululemon sells its products through more than 570 company-owned stores in 17 countries, e-commerce, outlets, and wholesale accounts. The company was founded in 1998 and is based in Vancouver, Canada.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

The no-moat Dick’s Sporting Goods lacks an edge as sporting goods are sold through an increasing number of channels. Although its sales have soared during the pandemic, the impact is temporary, as growth in sporting goods retail has generally been minimal due to external competition. According to IBISWorld, sporting goods retail sales experienced average annual growth of just 1.3% in the five years before the pandemic. Dick’s competitors include e-commerce operators (such as wide-moat Amazon), mass retailers (such as wide-moat Walmart), specialty stores (narrow-moat Lululemon, Foot Locker, Bass Pro Shops/Cabela’s), and branded stores and owned e-commerce from major vendors. As an example of the latter, narrow-moat Adidas’ direct-to-consumer business constituted 39% of its 2021 sales, up from 25% in 2015. Further, the COVID-19 crisis has accelerated manufacturers’ direct-to-consumer efforts, as evidenced by Foot Locker’s acknowledgement that wide-moat Nike will reduce shipments to the firm. One cannot believe Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels. Its compound average yearly sales growth of 3% over the next decade, at the lower end of projected U.S. activewear growth of 3%-5%.

Dick’s recent profitability has greatly improved, but one cannot not think the gains can hold. The firm recorded a 16.5% operating margin in 2021, but this as anomalous. In 2013, Dick’s forecast its operating margin would increase to 10.5% by 2017 from 9.0% in 2012, but its actual operating margins were only in the midsingle digits in the years before the pandemic. The 2021 operating margin was the peak level and expect its operating margins will trend downward over time due to a lack of pricing power. Ultimately, one cannot think the firm needs such a large store base (about 860 stores) especially as its e-commerce has risen during the pandemic (21% of sales in 2021, up from 16% in 2019). The Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above the fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

• Dick’s is the largest pure sporting goods chain in the U.S. Its has a large loyalty program that is integrated with that of Nike. Dick’s has a strong business in high school and youth sports. 

• Dick’s is replacing hunting with women’s activewear and other apparel in some stores. Popular activewear probably has better margin and growth prospects than hunting. 

• Dick’s has adapted well to a market that has changed during the pandemic. Its digital sales skyrocketed to about $2.6 billion in sales in 2021 (21% of total), up from about $1.4 billion in 2019 (16% of total).

Company Description

Dick’s Sporting Goods retails athletic apparel, footwear, and equipment for sports. Dick’s operates digital platforms, about 730 stores under its namesake brand (including outlet stores), and about 130 specialty stores under the Golf Galaxy, Public Lands, and Field & Stream names. Dick’s carries private-label merchandise and national brands such as Nike, The North Face, Under Armour, Callaway Golf, and TaylorMade. Based in the Pittsburgh area, Dick’s was founded in 1948 by the father of current executive chairman and controlling shareholder Edward Stack.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy’s service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Chewy was founded with the intention of outcompeting wide-moat Amazon for online pre-eminence in a category that was rife with inefficiencies and saw only low-single-digit online penetration at the time. By emphasizing the labor-intensive aspects of the business model that its largest competitor intentionally eschewed (building out an army of dedicated customer service representatives whose principal qualification was their love of pets), the firm amassed a loyal customer base, with robust autoship penetration and strengthening monetization over time, generating net revenue retention of over 100% for each annual cohort. The firm’s 72% autoship penetration, a subscription-based model that pet consumables lend themselves to particularly nicely, defrays fulfillment cost pressures relative to large peers, given that a high degree of order predictability renders inventory management markedly easier, reducing split shipments. With a digital native platform, expansion into adjacent sales layers in pet healthcare (filling prescriptions, offering telehealth services, partnering with veterinarians through “Practice Hub,” and offering pet wellness and insurance plans in conjunction with TransUnion), Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021 . With the expansion of higher-margin private label product, pet healthcare, and increasingly valuable maturing cohorts, Chewy looks poised to continue its leadership well into the future, in a category with 30% online penetration and no apparent glass ceiling for e-commerce saturation.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above the fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

• E-commerce penetration should continue to increase in the category, favoring digital native players like Chewy. 

• Chewy’s subscription-based model (72% autoship penetration) should help it retain the bulk of the customers it has added since the onset of COVID-19. 

• With two thirds of Chewy’s customer base also boasting Amazon Prime memberships, we suspect that pressure from the e-commerce behemoth could prove less onerous than many expect.

Company Description

Chewy is the largest e-commerce pet care retailer in the U.S., generating $8.9 billion in 2021 sales across pet food, treats, hard goods, and pharmacy categories. The firm was founded in 2011, acquired by PetSmart in 2017, and tapped public markets as a standalone company in 2019, after spending a couple of years developing under the aegis of the pet superstore chain. The firm generates sales from pet food, treats, over-the-counter medications, medical prescription fulfillment, and hard goods, like crates, leashes, and bowls.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

The Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, the Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2026. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As its matter of wary of the potential of these markets, one cannot view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, it will have about 1,500 locations in 10 years.

One cannot believe Gap’s once-powerful Gap and Banana Republic brands have competitive advantages, either. According to a 2019 presentation, Old Navy was generating about 80% of Gap’s operating profit even before the pandemic. Now, with scores of Gap and Banana Republic stores slated to be closed, the brands are permanently diminished. Moreover, while a necessary move, as a  doubt that downsizing will improve Gap’s overall margins very much. The firm says that it can reach 10% operating margins in about three years, but Gap’s long-term operating margins at just 8%. Further, one cannot think fast-growing Athleta has achieved a competitive advantage. Athleta grew to more than $1.4 billion in sales in 2021 from $249 million in 2012. However, at less than 10% of Gap’s sales, Athleta is not large or old enough to provide a moat for Gap. Moreover, while the brand benefits from a strong “athleisure” trend, it lacks the pricing power of direct competitor narrow-moat Lululemon.

Financial Strengths

One cannot think Gap has any liquidity concerns even though its free cash flow dropped significantly in 2020 and 2021 due to the COVID-19 crisis and it suffered an operating loss in 2022’s first quarter. In 2021’s third quarter, the firm issued $1.5 billion in new debt that matures in 2029 and 2031 ($750 million each) at interest rates of 3.625% and 3.875%, respectively, and subsequently paid down $1.9 billion in higher-interest debt. After these transactions, it closed March 2022 with $845 million in cash and investments and $1.8 billion in debt. Given that its earliest significant maturity is now seven years away, one cannot view Gap’s debt as a concern. Under normal circumstances, the firm generates significant cash flow, including more than $700 million in free cash flow to equity in 2019. Gap suspended dividend payments and share repurchases during the crisis but resumed both in 2021. The firm has signaled that it will continue to issue dividends despite recognizing a loss in 2022’s first quarter. It is been expected it will return around 30% of its earnings to shareholders as dividends over the next decade. Gap has also been a consistent purchaser of its own stock, having reduced its share count by about 47% between 2008 and 2021. The average yearly repurchases of about $500 million over the next 10 years. The repurchases as prudent when executed at a discount to in the assessment of the firm’s intrinsic value, as has recently been the case. The Gap’s capital expenditures to average 4% of sales over the next 10 years, in line with the 10-year historical average. Gap intends to open Old Navy and Athleta stores and continue to invest in digital capabilities and its supply chain to keep up with competitors.

Bulls Say

• According to Euromonitor, Old Navy is the largest apparel brand in U.S. It competes in the discount apparel sector, which has been healthier than other areas of apparel retail. 

• Athleta has established itself in the fast-growing women’s athleisure market, one of the bright spots in North America apparel. The number of Athleta stores will nearly double over the next decade. 

• Gap’s e-commerce accounted for more than $6.4 billion in sales in 2021, 39% of its total sales. COVID-19 has accelerated e-commerce growth for Gap and others in the apparel space.

Company Description

Gap retails apparel, accessories, and personal-care products under the Gap, Old Navy, Banana Republic, and Athleta brands. Old Navy generates more than half of Gap’s sales. The firm also operates e-commerce sites, outlet stores, and specialty stores under various Gap names. Gap operates nearly 3,000 stores in North America, Europe, and Asia and franchises about 600 stores in Asia, Europe, Latin America, and other regions. Gap was founded in 1969 and is based in San Francisco.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

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Business Strategy and Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that it is seen as particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is alleged that Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. 

The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. It is probable that developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory. 

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in nondiscretionary spending categories. Nevertheless, it is likely that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strength

Brown-Forman is in solid financial health, and from analyst’s vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and no transformative transactions on the horizon in seen. Free cash flow has averaged nearly $675 million over the past five years (high teens as a proportion of sales), which is viewed as a worthy accomplishment in light of the heightened investment levels that have prevailed over the same time frame. Capital expenditures have averaged north of 3% of sales over the past five years, with management investing in production lines, warehousing facilities, and modernization and automation initiatives in its supply chain. It is anticipated that gradual normalization of capital outlays throughout expert’s explicit forecast, following a sharp increase in fiscal 2023, which stands to augment Brown-Forman’s long-term free cash flow margins despite recurring working capital investments in inventory. It is alleged that the stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $868 million in balance sheet cash as of the end of fiscal 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million.

Bulls Say’s

• Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins. 
• Flavoured line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers. 
• COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Profile 

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable nonwhiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.