In The Headlines
Could Apple’s “China Problem” Get Worse?
Apple is coming off a 26% sales decline in Greater China, the steepest drop among its five regions. More worrisome is that the greatest risks may lie ahead. That is the view of a growing chorus of experts and prognosticators concerned about the unpredictability of the Chinese government. Earlier this month, China shut down iTunes Movies and iBooks just six months after Apple introduced the services there.
Analysts from UBS and Goldman Sachs have published recent reports discussing China’s potential power to thwart Apple’s growth, and Eurasia Group founder Ian Bremmer said earlier this week that China is very likely to limit Apple’s access to the country’s consumer base.
Looking at the competition, it is clear that history does not favor Apple. Google, Facebook, and Twitter are shut out of China, while enterprise vendors IBM, Cisco, and Hewlett-Packard have struggled in the world’s second-biggest economy because of government-favored domestic rivals. For Apple, it is a massive overhang. Greater China (including Hong Kong and Taiwan) accounts for 25% of revenue and has supplied the majority of its growth, thanks to the rapid expansion of the Chinese middle class.
“It bears watching whether the recent ban of Apple’s iTunes and iBooks stores in China has broader implications for how friendly the environment remains for Apple to grow its business in the country,” Goldman Sachs analyst Simona Jankowski wrote in a report following the company’s disappointing second-quarter earnings release. Apple shares plunged 10.3% following the earnings report. Jankowski pointed out that the dramatic drop in revenue from Greater China came after five-straight periods in which growth exceeded overall expansion.
Apple CEO Tim Cook refused to sound the alarm. Hong Kong represented “the vast majority of the weakness,” with sales in mainland China falling 11%, Cook said. When removing the impact of currency swings, mainland revenue was down 7%. Cook also reminded investors that comparable figures were particularly difficult in the quarter because mainland revenue a year ago surged 81% on iPhone and Mac sales. “And so as I back up from this and look at the larger picture, I think China is not weak as has been talked about,” Cook said. “We may not have the wind at our backs that we once did, but it’s a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.” However, Cook did not address the geopolitical risks, which are widely seen as very real.
Apple has just been through a high-profile battle with the FBI over whether the company should be required to help law enforcement unlock an iPhone tied to the San Bernadino, California, terrorists attacks. The Justice Department, in attempting to refute Apple’s claim that it will not compromise consumer privacy, said in a legal filing last month that the company helped the Chinese on 74% of requests for iPhone data in the first half of 2015.
Apple broadly disputed the claims as an “unsupported, unsubstantiated effort to vilify” the company. But coupled with the forced closure of two Apple services, it sparked a bigger debate about how far the Chinese are willing to go in pressuring the company, and to what degree Apple would cooperate. Bremmer of the Eurasia Group said he could see Apple facing the same types of issues that have hampered Facebook, which like so many U.S. websites, is banned in China. “I’d be very surprised in five years’ time if we see Apple having the kind of access to the Chinese consumer that they presently enjoy,” Bremmer said.
Citations
1. http://cnb.cx/1Wv2Jil – CNBC
2. http://bit.ly/1U0MSrY – Newsweek
Tractor Supply Grows by Catering to the New Rural Lifestyle
Tractor Supply Company, a long-time specialty retailer, has emerged as a retail innovator and is evolving as it goes. The company focused for decades on selling agricultural supplies to farmers, but now offers many of the same products carried by hardware stores and home centers to people choosing a rural lifestyle. According to the company, only a small fraction of customers farm full-time, while the majority of customers are those who favor an increasingly popular lifestyle, which, even in urban areas, is grounded in sustainable small-time farm practices and homesteading.
While the growth of big-box stores seems to have crested, Tractor Supply continues to boom. Its stores, which average about 16,000 square feet, are small enough for quick penetration into new markets. The company’s shift from focusing on career farmers as customers led to rapid growth within the past 18 years. In that time, Tractor Supply’s store count went up nearly 500 percent to 1,400 locations, with no stop in sight.
Alongside stacks of 50-pound bags of Producer’s Pride Hog Grower pig food and sunshine yellow CountyLine Heavy-Duty Super Spear hay handlers, customers can find bins of weighty grade-5 hexagonal head bolts, the kind commonly used to fasten structural steel. They could buy similar bolts at Lowe’s or Home Depot and pay for them individually, but at the Tractor Supply, they are sold in bulk and cost only $3.69 a pound. And at those other stores they could not pick up a four-pack of Diamond Classic Heeled Horseshoes on the same trip. “We always say you can buy everything we sell someplace else, but you can’t find someplace else that sells everything we carry,” says Barbarick.
Tractor Supply has built a $6.2 billion (2015 revenues) business by understanding the precise needs and habits of its customers. The typical Tractor Supply customer owns land, keeps pets, raises chickens, and drives a pickup. Some are hobbyists, but many of them have professional farming operations, although their holdings are likely measured in acres, not square miles.
Tractor Supply has approached retail’s cardinal rule of “Know Your Customer” as both mission statement and math problem, and in the process has become an (albeit unlikely) lifestyle brand, famed for an in-store experience so satisfying that its rustic-chic brick-and-mortar operations are well fortified against the onslaught of consumers who want to buy everything on their smartphones.
“They are the store for people that actually know what they’re doing, as opposed to do-it-yourselfers or for home improvement,” says Dave Marcotte, who researches retail trends for London-based global consultancy Kantar Retail. “Compressed-air tools, welding torches, pet foods, apparel—all of that stuff is very functional, but it’s associated with people that know what it is. You’re not going there for discovery.” That laser focus has paid off. The retailer boasted $410 million in net profits last year, a 6.6% margin. Two decades of increasing profits and a stock price that has climbed 250% in the past five years (to a recent $89.56) have made the company a Wall Street favorite.
Tractor Supply has 1,500 locations spread across 49 states. The company plans to open 115 stores in 2016, and 120 stores per year after that until 2,500 are in operation, mostly in rural or exurban areas. The growth has been largely financed through cash from operations. Long-term debt stands at just $167 million as of the end of 2015. That expansion is not happening willy-nilly. A wave of data-fueled decision-making takes place long before a new store opens. Potential locations are identified using a model that considers dozens of factors–including the number of tractors and head of cattle in the immediate vicinity—to allow the company to predict a store’s viability.
Citations
1. http://onforb.es/23evFvm – Forbes
2. http://bit.ly/23evEaN – Hardware Retailing
The Good News Is . . .
• U.S. home resales rebounded more than expected in March, suggesting the housing market recovery remained intact. The National Association of Realtors said existing home sales surged 5.1% to an annual rate of 5.33 million units last month. Sales were up 1.5% from a year ago. Existing home sales rose in all four regions last month, jumping 11.1% in the Northeast and accelerating 9.8% in the Midwest.
• UPS, Inc., a leading package delivery service, reported earnings of $1.27 per share, an increase of 813.4% over year-earlier earnings of $1.12 per share. The firm’s earnings topped the consensus estimate of analysts by $0.05. The company reported revenues of 14.4 billion, an increase of 3.2%. Management attributed the company’s results to improved profitability in its international package delivery and supply chain services business units.
• Abbott has agreed to acquire St. Jude Medical for $25 billion, bringing together two large manufacturers of devices for cardiovascular disease. They expect sales in that market to be about $8.7 billion. Under the agreement, St. Jude Medical shareholders will get $46.75 in cash and 0.8708 shares of Abbott, amounting to about $85 a share. The combination would allow the two companies to cut about $500 million in costs, both on the sales and operational sides. Abbott also plans to assume or refinance St. Jude Medical’s $5.7 billion in net debt.
Citations
1. http://bit.ly/22NHdFz – Natil. Assoc. of Realtors
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1rFNw30 – UPS, Inc.
4. http://nyti.ms/21jZuv5 – NY Times Dealbook
Planning Tips
Tips for Understanding Smart Beta Exchange Traded Funds (ETFs)
Smart beta exchange traded funds (ETFs) have become popular with many investors in the last few years. Investors are increasingly turning to smart beta investments in order to seek outperformance. According to research firm Morningstar, at Sept. 30, 2015, there were more than 450 U.S.-listed smart beta products, with a collective $510 billion in assets. The ultimate goal of these ETFs is to achieve both diversification and lower risk for the investor. Below are some tips to help you better understand these investments. Be sure to consult with your investment advisor to determine if smart beta ETFs are appropriate for your financial situation.
How smart beta ETFs are constructed – Traditional ETFs attempt to mirror the performance of indices like the S&P500 stock index. These indices are typically weighted by market capitalization; thus stocks with bigger market capitalizations have a bigger influence on the performance of the index. Smart beta ETFs work like traditional ETFs, but the indices they follow are weighted differently. Smart beta ETFs are passive investment tools that track smart beta indexes. Smart beta ETFs are designed to track chosen or newly constructed, alternatively weighted indices and their component companies. A smart beta index may be constructed from a traditional index by using weighting factors based on dividends, cash flow, total sales and book value rather than market capitalization. Some ETF managers may use other weighting factors, such as low volatility or momentum.
Smart beta ETFs combine elements of both passive and active investing – Smart beta aims to improve upon the notion of “buying the market,” by using a rules-based fundamental screening and portfolio construction methodology. It is essentially a “smart” blend of active and passive. It is active in that it seeks to outperform the market, or cap-weighted indexes, over time. But it is also passive in that the strategies are rules-based and transparent to investors, as well as cost-efficient. In this respect, smart beta is thought to have the “best of both worlds” by some.
Smart ETFs require more scrutiny – Not all smart beta strategies are alike. Investors must carefully look under the hood at smart beta ETFs and assess what indices, biases and specific factors each uses, what firm is creating / updating the underlying index and how often, and also what company sponsors the corresponding smart beta ETF.
The risk profile of smart beta ETFs can change market conditions change – Choosing smart beta funds is more challenging than picking conventional passive investments, where the cost of exposure to a given index is the clinching factor. For example, a typical momentum strategy might do well in trending markets, but when markets turn it could significantly underperform; conversely, quality factors can be defensive when markets are challenged, but tend to underperform in strongly rising markets when investors look to take advantage of cheap companies that have been oversold.
Carefully consider performance – Smart beta strategies may help investor portfolios outperform benchmark indices over the long term, however, this trend cannot be assured. Data from December 1991 through June 2015, based upon five specific factors, show that U.S. smart beta ETF factors and methodologies outperformed the S&P 500 index over five full market cycles and in different economic climates, although absolute performance varied. But more recently, smart beta strategies have often underperformed more traditional approaches.
Citations
1. http://bit.ly/1XWiPk9 – ETFdb.com
2. http://bit.ly/1VEYSAD – Investopedia
3. http://cnb.cx/1TB3Vyk – CNBC
4. http://bloom.bg/26ClHsg – Bloomberg
5. http://on.ft.com/21keEk6 – Financial Times
