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Luxury Automakers Ramp Up India Investments On Anticipated Future Growth
  • by , 16 hours ago
  • India is the world’s seventh largest passenger vehicle market, and was previously estimated to topple Germany, Brazil and Russia to gain three places in the global rankings by 2015. Germany struggled from the impacts of the double-dip recession and is slowly rebounding, the Russian economy is weaker this year due to ongoing geopolitical tensions with Ukraine, and Brazil is witnessing lower vehicle volumes due to higher interest rates, inflation and negative consumer sentiment. However, despite anticipated tepid volume-growths in these three countries, India might not be able to enter the top-four-passenger-vehicle-markets bracket in the next couple of years, due to lower than expected economic growth, causing only modest gains in the country’s automotive industry. In fact, after years of positive growth, passenger vehicle volumes in India fell 6% in fiscal 2014 ended March. The industry returned to growth in the last four months, growing by 2.5% year-over-year. But while the overall Indian automobile industry is forecasted to grow by only a low-single digit percent this fiscal year, luxury volumes have seen steady volume rises, even in tough economic conditions. Luxury automakers, especially the German big 3 Volkswagen AG ‘s (OTCMKTS:VLKAY) Audi, BMW, and  Daimler AG ‘s Mercedes-Benz are looking to gain from the untapped market potential in India, by expanding local assembling operations and distribution networks, and increasing marketing and advertising investments. Although India volumes will remain only a small portion of overall sales for luxury automakers in the near term, given the low current penetration levels, increasing disposal incomes of high income groups and lower vehicle prices on account of local production, premium volumes could significantly rise in the long term. We have a  $49.19 price estimate for Volkswagen AG, which is roughly 7% above the current market price. See Our Complete Analysis For Volkswagen AG Audi, BMW and Mercedes-Benz Bank On Compact Sales In India The global luxury automotive market leader BMW lost its India lead to Audi last year, selling 7,327 units in the country, lower than the latter’s 10,002 unit sales. On the other hand, Mercedes held the second spot with 9,003 volume sales in India. Mercedes aims to become the highest-selling premium automaker in India going forward, on the back of higher sales for compact vehicles. A bulk of growth in India’s relatively nascent luxury car market is expected to come from the compact saloon segment. Emerging economies generally harbor relatively more price-sensitive customers, who might opt for a lower priced luxury car. German automakers, who form more than 95% of the Indian luxury car market at present, are looking to target millennial customers, who tend to prefer smaller and lesser expensive alternatives. According to Audi, the average age of a premium car buyer in India is around 35 years, lower than the global average of 43-45 years. Compact saloons are expected to be the growth driver for the luxury segment going forward, as first-time buyers look to trade-in their non-luxury sedans for entry-level compacts. In a bid to tap into the potential of the compact luxury segment, Audi and Mercedes are introducing new models in India at competitive pricing, on account of local assembly. In the past, foreign automakers imported completely-built-units, which carry 100% or more customs duty. However, automakers such as Audi, Mercedes, BMW and Jaguar Land Rover have accelerated local assembly of units in India, which attracts only 30% customs duty. Audi recently launched its compact sedan A3 in India, in a price range of 22.95-32.66 lakh rupees ($38,000-$54,000), placing it in competition with Mercedes A-, B-, CLA-Class and BMW 1-, 3-series in the sub-25 lakh category. Audi expects this model to contribute around 15% to its India volumes, which are expected to rise by a double-digit percent this year again, after increasing 11% in 2013. On the other hand, Mercedes reported a strong 25% year-on-year growth in the first half of 2014, selling 4717 units, after growing 32% in 2013. Mercedes is now looking to double its local production capacity from 10,000 units presently. Both Audi and Mercedes have emphasized focus on their compact models A3 and CLA AMG respectively, in terms of advertising as well, to attract higher sales in India. We have a  $87.12 price estimate for Daimler AG, which is roughly 6% above the current market price. See Our Complete Analysis For Daimler AG Indian Premium Vehicle Market Poised For Growth Despite lower passenger vehicle sales in India, the luxury segment is expected to grow from around 32,000 units in 2013 to nearly 50,000 units this year, according to IHS Automotive. In fact, the combined India volumes for Audi, BMW, Mercedes and Jaguar Land Rover, which stood at 30,100 last year, are estimated to jump 168% by 2018. Although this massive percentage rise in volumes in India might not significantly impact overall volumes for the German automakers in the near term, an early advantage in the country could be crucial, as seen for Audi in China. Audi entered China before its compatriots and now sells over 30% of its vehicles in the country. Key to the growth in India could be the increasing proportion of high net worth individuals, low current ownership rates and focus on compact vehicle sales. Low Current Penetration Levels Provide Opportunity Less than 2% of all passenger vehicle volumes are formed by luxury models in India presently. In contrast, the luxury segment forms around 7% of the net vehicle volumes in China, and is a constant 10.5-11.5% of the net passenger volumes in the U.S. Low current levels of penetration provide potential growth opportunities for luxury automakers. Around 55% of Mercedes’ sales in India are from cities other than Delhi and Mumbai, where most of the high income consumers reside. The brand now operates 64 sales outlets across 36 cities, and is looking to penetrate deeper into the country in order to expand its consumer base. Increasing Proportion Of High Income Groups Could Spur Sales The population of high net-worth individuals (individuals with investable assets of $1 million or more) in India was over 200,000 in 2012, and is expected to grow sevenfold by 2020 to 1.5 million. On the other hand, the number of ultra-high net-worth individuals (UHNIs), which increased by 16% last fiscal, is estimated to triple in the next three years in the country. As higher income groups form the target base for luxury automakers, increase in their proportion as well as wealth could spur luxury automobile sales in India, going forward. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    Lexmark Raises Bid Price For ReadSoft Again
  • by , 16 hours ago
  • tags: LXK HPQ ACN IBM
  • In May, Lexmark International (NYSE:LXK) had announced its plans to acquires Readsoft, a Swedish document and business process management company that offers both on-premise and cloud software, for $182 million. However, the company has had to raise its offer four times in order to acquire majority share in ReadSoft. With the recent increase in offer price to 57 Swedish Krona (SEK) a share ($8.26), the company bought a 35.4% stake from its founders, Lars Appelstal and Jan Andersson. Post this buy, Lexmark’s voting stake in Read soft has increased to 52.2%, which gives it voting control of the company.   Lexmark has subsequently brought its stake up to 42.9% of the shares, which is significantly higher than the 10.9% stake of a competing bidder, the Ohio based software developer Hyland. And Lexmark controls 57.7% of the votes, which gives it majority control.   Hyland’s plans at this juncture are unknown and the situation remains a little unclear. As a result of the current bid, ReadSoft is valued at $254 million (1.75 billion Swedish crowns at a conversion rate of  1 US dollar = 6.8986 Swedish crown), significantly higher than the original $182 million bid. This note briefly summarizes why ReadSoft acquisition is important for Lexmark. See our full analysis on Lexmark ReadSoft Is Important For Lexmark’s Perceptive Business According to Lexmark, the addressable market for both electronic content management (ECM) and business process management (BPM), is fairly large and offers good growth rates. Lexmark estimates that worldwide spending for content and process management in 2013 exceeded $10 billion. It expects that the content and process management software will account for about 30% of its revenue by 2015. The content and process management is expected to grow at 10% per annum in the near foreseeable future. The company plans to achieve this growth by leveraging its Perceptive Software’s strength. Perceptive business has four primary functions:  capture, content, process and search. It has been able to supplement growth in these areas through acquisitions (with financial and strategic support from Lexmark). As a result, Perceptive Software has emerged as a leader in Gartner’s magic quadrant for enterprise content management (ECM) solutions. Although it continues to rollout products (such as Perceptive Content 7 and Perceptive Evolution) to leverage the growth in the ECM vertical by providing support through cloud computing, Lexmark still needs to augment its product portfolio through acquisition, especially in regions where it has limited reach. ReadSoft not only adds  account payable process automation to Perceptive’s portfolio, but also increases its reach to the rapidly expanding document business process solutions footprint in EMEA, which is the second largest content and process management software market in the world. Furthermore, the company has over 12,000 customers worldwide (including BASF, Siemens, Bosch, HSBC, ING, Lego and John Deere) and Lexmark can now deliver solutions to these enterprise customers. This acquisition will accelerate Lexmark’s objective to expand its operations to 70 countries through ReadSoft’s offices. ReadSoft will also gain from the synergy of its products with Perceptive’s. Furthermore, the company can also leverage Lexmark’s support services to improve customer experience for its existing users and sell its product to the existing client base of  Perceptive Software. These factors will boost Perceptive’s revenue in the future. We believe these factors justify Lexmark’s revised bid for ReadSoft. While the deal is still under consideration, we continue to closely monitor the situation. We currently have a  $44.77 Trefis price estimate for Lexmark, which is 10% below its current market price. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) |  Get Trefis Technology
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    L Brands Beats On Profits And Raises Full Year Guidance
  • by , 17 hours ago
  • The parent company of Victoria’s Secrets and Bath & Body Works, L Brands (NYSE:LB), continues to perform very well in an environment that has been tough for most apparel retailers in the U.S. The company reported modest growth in its comparable store sales and profits in the second quarter of 2014, while many retail chains struggled to match their previous year’s levels. L Brands’ profits increased by 5% to $188.4 million and its earnings per share came in at $0.63, which was a penny ahead of the consensus estimate. Interestingly, the retailer was able to beat its own EPS guidance of $0.57-$0.62. L Brands’ overall sales growth also topped estimates as its revenues increased 6% to $2.68 billion, which was $50 million ahead of the street estimates. The retailer’s comparable store sales increased by 3% with similar growth across Victoria’s Secret and Bath & Body Works . However, gross margins narrowed slightly to 39% in Q2 2014 from 39.3% in the same quarter last year, due to the highly promotional environment in the U.S. Following these results, the company raised its full year EPS outlook slightly, which has been a rare occurrence in the U.S. retail market. L Brands now expects its full year EPS to be around $3.03-$3.18, up 3 cents from its previous guidance. It may be worth noting that the retailer had lowered its full year EPS guidance after its Q1 results as it expected discontinuation of certain categories to have a negative impact. However, the new outlook suggests that sales in other categories are going strong, which is good news for the company. Our price estimate for L Brands is at $63.95, which is just ahead of the market price. However, we are in the process of updating our model in light of the recent earnings release.
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    Two Key Executives Leave Walgreen Due To a $1 Billion Forecasting Error
  • by , 17 hours ago
  • tags: WAG RAD CVS
  • A $1 billion forecasting error in Walgreen’s (NYSE:WAG) Medicare-related business cost the company’s two top executives (the CFO and the president of its pharmacy, health and wellness division ) their jobs. Walgreen’s CFO estimated $8.5 billion in pharmacy unit earnings for the year ending 2016 at the board meeting in April this year. (Fiscal years end with August.)  However, the estimate was lowered by $1.1 billion last month as the company had not factored in an increase in the price of some generic drugs that it sells as part of its annual contracts under Medicare. The extent of price degradation built into contracts was not fully understood or factored into forecasts.  Walgreen gets 25% to 30% of its prescriptions from Medicare Part D plans, which subsidizes the cost of prescription drugs and prescription drug insurance premiums for Medicare benefits in the United States. The company has appointed Kraft Foods’ former CFO, Timothy McLevish, as its new CFO.In its Q3 2014 earnings, Walgreen highlighted that the the market has shifted from historical patterns of deflation in generic drug costs into inflation in the last one year, a trend that is is negatively impacting margins. The company has witnessed higher costs for a subset of generic drugs and in some cases these increase have been significant. Walgreen witnessed a decline in its pharmacy margin last quarter mainly on account of increased third-party reimbursement pressure (particularly due to a few contract step downs), higher 90-day prescriptions at retail, fewer generic drug introductions and a larger than expected generic drug inflation. Of all the factors, the company believes that the generic drug inflation had the most adverse impact on pharmacy gross margin. Walgreen is focused on driving cost discipline across the company to offset the negative impact on gross margin. Apart from its ongoing store optimization efforts (shutting down the unprofitable stores), it is identifying additional opportunities to lower its expenses. A key member of Walgreen’s executive team has been appointed to focus on increasing efficiencies and providing high quality and cost effective pharmacy services that reduce total pharmacy costs. Additionally, Walgreen’s expects the completion of the strategic transaction with Alliance Boots to drive sustainable efficiencies and value for the combined enterprise, offsetting the increase in drug pricing. Additionally, Walgreen expects the rate of decline in new generics introductions to moderate going forward and turn positive towards the end of the year. A higher rate of generic drug introductions can improve margin in the latter part of the year. (Read: Walgreen Sustains Its Top-Line Growth But Reports Lower Gross Margin ) View our analysis for Walgreens Our price estimate of $64 for Walgreens is marginally higher than the current market price. See More at Trefis | View Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology
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    Cloud Migration, Salesforce1 Could Help Sustain Salesforce's Impressive Topline Growth Trajectory
  • by , 17 hours ago
  • (NYSE:CRM) reported its fiscal Q2’15 results on August 21. (Fiscal years end with January.)  Revenues topped the consensus estimate of $1,288 million, growing 38% to reach $1,319 million. The company also exceed analyst estimates in its bottom line, with a non-GAAP earnings per share figure of 13 cents compared to the consensus estimate of 12 cents. Interestingly, the company provided a breakdown of sales by product offering for the quarter. However, prior period information was not reported for comparative purposes. Revenues from its core offering, the Sales Cloud, stood at $610 million for the quarter. Revenues from subscriptions to its Service Cloud and Marketing Cloud stood at about $319 million and $122 million respectively during Q2’15. The Salesforce1 platform, which was launched before the start of Salesforce’s annual Dreamforce conference in November 2013, generated revenues of approximately $182 million during Q2’15. Geographically, developed markets of Europe and the Americas registered constant currency growth rates of approximately 36% and 39% respectively in Q2’15, compared to 34% each from a year prior period. The acceleration in top line growth in these regions was facilitated by an increase in IT spending on the back of a recovering global economy. Sales from the Asia-Pacific region, which contribute about 10% of revenues, grew slower than these developed markets during the quarter, at 27% year on year. However, the Asia-Pacific region’s growth rate during Q2’15 was higher than its growth rate from a similar period a year ago. In this earnings article, we take a look at the recently reported Q2’15 results from Salesforce. We have a $47 price estimate for which is under revision to incorporate the latest quarterly earnings. See our full analysis for Growth in SaaS CRM Deployments Should Benefit Salesforce The global market for Customer Relationship Management software has been exploding each year, with intensifying competition amongst vendors and aggressive investments from customers. Technology market research provider Gartner expects the global CRM market to expand to approximately $36.5 billion by 2017, from about $20.5 billion last year, representing a compounded annualized growth rate (CAGR) of about 15.5%. More importantly, a recent Gartner update on the global CRM market highlights the fact that cloud deployments of CRM suites are outpacing standard on-premise deployments. The Software-as-a-Service (SaaS) model of CRM deployment, pioneered by Salesforce, is expected to register a higher CAGR of approximately 23% than the broader CRM market through 2017. The higher growth rate for SaaS-based CRM software has resulted in greater share of on-demand deployments. Gartner estimates more than 50% of CRM sales to be SaaS-based by 2015. On a longer term, Gartner estimates as much as 85% of CRM suites to be deployment on-demand by 2025. Salesforce should benefit from both the explosive growth in the CRM market, and the shift towards on-demand deployments from companies. The company has followed market trends carefully and has diversified itself from being a sales automation software provider into a successful sales analytics provider, presenting targeted customer-centric solutions to its users that increase their marketing return on investment (ROI). Successful deliverability of high ROI on marketing investments for its customers has resulted in a rapid expansion in its customer base over the years. And we expect increasing stickiness from older customers and expanding renewal rates from newer customers should help sustain revenue growth for the company. In terms of deferred revenue, Salesforce’s deferred revenue base expanded by 32% on a year-on-year basis to reach $2.35 billion. For Q3’15, Salesforce estimates deferred revenues to grow about 30% year on year. Moreover, the company’s unbilled deferred revenues increased to $5 billion by July 2014, underlining Salesforce’s strong business pipeline for the future. Salesforce1 Could Become a Potential Multi-Billion Dollar Product for Salesforce Salesforce launched the ‘Salesforce1′ platform before the start of its annual Dreamforce conference in November 2013. This new offering is engineered to connect various apps and a multitude of devices across on a single platform and greatly increases mobility for sales representatives. Built on an API first philosophy, Sales Cloud on Salesforce1 features additional API tools for developers to create and deploy enterprise-level applications across mobile devices. The platform has generated sales of about $346 million in H1’15, which represents a fiscal year revenue run rate of about $700 million. We believe the platform could see tremendous growth prospects and become a billion dollar sales generator for Salesforce in the very near future. With about 1.7 million developers on the platform and ten times more APIs than before on its development platform, we believe Salesforce is well-positioned for the growth in mobile CRM applications in the future, especially from the retailing industry. In its recent Q2’15 earnings call, Salesforce reported having signed a deal with Safeway to build applications that increase store productivity for the retailer. We expect the platform to build scale across industry verticals in the near future through Salesforce’s diverse customer base. See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    Aeropostale's Earnings Tumble Again, But Increasing Average Unit Retail Provides Hope
  • by , 18 hours ago
  • tags: ARO AEO ANF
  • Aeropostale ‘s (NYSE:ARO) shares dropped by more than 10% in after hours trading after the company reported a loss of $63.8 million in Q2, and projected wider-than-expected losses for the current quarter, which includes the critical back-to-school season. Low store traffic remains the biggest concern for the retailer and traffic trends haven’t changed much in the past couple of quarters, despite the launch of promising fashion collections. Earlier this month, Aeropostale reported that its comparable sales (including e-commerce) fell by 13% during the quarter and its revenues declined by a similar amount to $396 million, which was marginally ahead of the consensus estimated of $395 million. Interestingly, about a week back, Aeropostale revised its Q2 EPS outlook from a loss of $0.55-$0.61 to $0.42-$0.45, but it missed the lower end of its new guidance by a penny. Moreover, certain asset impairment costs and restructuring charges increased its Q2 loss to $0.81 per share. This compares to a loss of $0.43 per share or $33.7 million incurred in the same quarter last year. While Aeropostale’s overall Q2 performance was dismal, there were a few bright spots. The company’s average prices (average unit retail) increased by 6% during the quarter, due to good customer response to fashion collections such as Bethany Mota, Pretty Little Liars, and Live Love Dream . This indicates that although shoppers bought less at Aeropostale, they shopped at higher prices. Also, the retailer exhibited some progress on its cost cutting efforts as SG&A expenses fell 3% to $121 million. However, SG&A expenses relative to revenues increased by close to 300 basis points as comparable sales fell sharply. Aeropostale’s new CEO, Julian R. Geiger, has been back at the company only for a few days, and hence he did not speak much during the earnings call. Yet, we will eagerly wait for updates on strategies he plans to employ for the company’s turnaround. Our price estimate for Aeroposatle is at $8.32, implying a premium of over 115% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.
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    Renren's Q2'14 Earnings Preview: No Significant Improvement Expected In The Quarter
  • by , 18 hours ago
  • China’s largest social networking site,  Renren Inc (NYSE:RENN) is set to announce its Q2 2014 earnings on August 26. The company has been struggling since the last few quarters due to intense competition in the advertising industry, low monetization on mobile devices and a delay in launching new games. In Q1 2014, Renren reported a 40% year-on-year decline in revenues and its operating loss widened to $29.2 million, compared to $20.4 million in Q1 2013. It does not expect to see much improvement in Q2 2014 and anticipates revenue to decline in the range of 47%-52%. Renren has restructured its highest revenue generating business, online gaming (accounts for over 50% of its revenue), and intends to launch new games in the latter half of the year, which should help the company arrest the fall in revenues in subsequent quarters. Additionally, now that Renren has sold its remaining interest in the group buying business (Nuomi) to Baidu, it can focus on its core businesses of social network and online gaming. We will update our $3.43 price estimate for Renren after the Q2 2014 earnings release. See our complete analysis of Renren here Weak  Mobile Monetization Will Negatively Impact Advertisement Revenue Even though users spend 80% of their time on Renren via mobile devices, mobile accounts for only 11% of the company’s online advertising revenues. That’s because the adoption of mobile advertising in China is low and the company only started selling mobile ads in the final quarter of 2013. Renren’s online advertising revenue declined 19% annually in Q1 2014. Demand for PC advertising has been declining due to increasing competition in the advertising space and due to a rising proportion of traffic coming from mobile. Renren’s competitors, Weibo and WeChat, have done well to overcome such problems by focusing on e-commerce and online payment. Renren is still in the early phases of expanding its mobile advertising business. It is bolstering its mobile apps, mobile commerce and mobile gaming to enhance growth in the mobile channel. While we do not forecast any significant revenue contribution from this strategy in the near term, we believe a successful implementation could lead to an acceleration of revenue growth in the longer run. Restructuring Efforts & New Game Launches In The Second Half Can Fuel Growth Some new games were beta-tested by Renren at the end of Q3 last year, and the company realized that those games needed further development. A consequent delay in launching these games, along with the maturity of certain older games, has weighed on the company’s top line over the last couple of quarters. Renren’s online gaming revenues declined by 53% in Q1, to $12.7 million, due to the restructuring efforts and the absence of new launches. The company now intends to focus on creating and licensing high quality games. It plans to launch some new games in the second half of 2014. We believe that revenues in the online gaming segment will continue to be weak in the next few quarters, as the new games are likely to take time to ramp up and gain popularity. Historically, Renren has relied on in-house developed games to generate revenue. The rapidly growing mobile gaming market offers an opportunity to the company to generate incremental revenues by licensing high quality games from other developers. There has been a shift in the online gaming industry from PC to mobile. The mobile gaming market is growing at a very fast pace and is expected to double by the end of this year. That’s because mobile devices are increasingly being used to access the Internet, and the cost of developing mobile games is much lower than developing PC games. Renren restructured its gaming business in Q4 2013 and Q1 2014 to leverage the above trend, which can help re-accelerate its revenue growth from online games in the future. See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    Best Buy's Q2'15 Sales To Be Impacted By The Weak Consumer Electronics Market But Long-Term Prospects Remain Positive
  • by , 18 hours ago
  • The largest specialty retailer of consumer electronics in the U.S., Best Buy (NYSE:BBY), will report its Q2 2015 earnings on August 26. (Fiscal years end with January.)  A weak consumer electronics market, as well as growing competition from retail giants including  Amazon (NASDAQ:AMZN) and  Wal-Mart (NYSE:WMT), has eroded Best Buy’s top line growth in the last few years. After witnessing a significant decline in its top line in fiscal 2013, the company saw its growth re-accelerate in fiscal 2014, as it benefited from its restructuring initiative. Though revenue ($9 billion) declined by 3.3% annually in Q1 2015, meaningful progress against the Renew Blue priorities (its restructuring program) resulted in a better than expected non-GAAP operating margin of 2.3% in the quarter. Best Buy expected its same-store sales to decline in Q2 and Q3 2015 on account of lower expected industry-wide sales in many of the consumer electronics categories the company sells. The company reports that the forecaster NPD expected the consumer electronics industry to decline by 2.6% in Q2 2015. Best Buy expects its cost cutting efforts to offset the weaker sales and costs related to its price matching policy. The company remains confident that its growth will re-accelerate in the next few years as it continues to make progress on its turnaround strategy. We will update our $26 valuation for Best Buy after the Q2 2015 earnings release. See our full analysis for Best Buy Significant Progress On The  Renew Blue Program Will Help Re-accelerate Growth Introduced in 2013, Best Buy’s “Renew Blue” program is the company restructuring initiative targeted at the following areas:   merchandising, marketing, online stores, Geek Squad services, supply chain, cost structure and employee engagement. Best Buy claims to have made progress in each of these initiatives and intends to continue investing in the same in fiscal 2015 as well. The company’s Net Promoter Score (NPS), which measures satisfaction levels for both customers that buy and don’t buy its products, increased 2.5% year over year in Q1 2015. - Merchandising: Best Buy continues to add differentiated in-store customer experiences in several key categories, including appliances, home theater and mobile. Last quarter, it opened two new Magnolia design center stores-within-a-store and aims to add around 20 more by the end of this year. Pacific Kitchen & Home and Magnolia design center stores-within-a-store have outpaced the company’s initial expectations. In the mobile category, Best Buy introduced the selling of new installment billing plans with Sprint and Verizon in Q1 2015, and started selling AT&T’s plans in Q2 2015. It claims that customer adoption of these plans has been growing. Best Buy is now the only national retailer to launch installment billing plans with multiple carriers. - Marketing : Best Buy is focusing on evolving its marketing strategy to more targeted, personalized and relevant customer communication, including the shift away from traditional TV advertising to more relevant digital marketing. It has been working on a big data project called Athena that will shift its marketing effort to more personalized email messages and offers, which will enable a more targeted approach to customer marketing. This is one of Best Buy’s key growth initiatives for the next two years. Best Buy has one of the largest repositories of customer data derived from individuals’ past purchases, browsing histories, locations and demographics. By launching project Athena, the company aims to better engage its customers for its loyalty program and credit card offering. The Athena initiative is still at a very early stage and Best Buy expects to see improvements in marketing effectiveness every quarter. - Accelerating online sales: Accelerating growth in its online segment remains one of the main focus for Best Buy, as it aims to update its website to get on par with Amazon (NASDAQ:AMZN) and other competitors. As a percentage of total domestic revenue, online revenue increased 190 basis points in Q1 2015, to 8.2% versus 6.3% last year. Last year, Best Buy initiated a pilot ship-from-store approach (in 50 stores) which enables all its distribution centers, and not just the ones previously allocated to e-commerce, to handle online orders. The company claims that 2% to 4% of its online traffic does not result in a purchase because it does not have the inventory in its distribution centers, but around 80% of the time the stock is available in one or more of its retail centers. Best Buy has now rolled out ship-from-store to over 1,400 stores. (Read: Best Buy To Benefit From Increasing Online Sales ) – Changes to the field and store structure : Best Buy has consolidated and simplified its field organizational structure, which is now reorganized around key markets with the goal of having the local strategy for each of those markets. It has also reduced the number of management-level roles within the stores. Though it has increased the percentage of retail labor that is customer-facing, it has managed to lower its labor cost. Cost Reduction Initiatives To Ease Pressure Off Margins Best Buy’s innovative schemes to re-accelerate its business have impacted its gross margins,w hich declined from 23.2% in fiscal 2012 to 22.8% in fiscal 2014. In Q1 2015, Best Buy’s gross margin declined by 75 basis points (to 22.4%). The company is still in the transitory phase, and thus its gross profit is expected to remain under pressure due to a number of factors.  These include not only competitive pricing, lower sales, and incremental investment in pricing and the Renew Blue SG&A program, but in additional expenses related to mobile warranty programs and the new credit card agreement. However, Best Buy has taken a number of steps to lower its cost burden, which can ease the pressure off margins to some extend. Though we forecast Best Buy’s gross margin to continue declining, we anticipate a lower rate of decline compared to the past. Best Buy aims to reduce its cost of goods sold by increasing its supply chain efficiency and modifying its return and replacement policy. Having exceeded its cost reduction target of $725 million in Q4 2014 (it delivered cost reductions of $765 million in the quarter), Best Buy has increased its Renew Blue cost reduction target to $1 billion. In Q1 2015, Best Buy eliminated an additional $95 million in annualized cost, taking the total Renew Blue cost reductions to $860 million. Excluding the impact of the increased mobile warranty expense, Best Buy’s cost savings and other operational improvements have materially offset its price matching policy and other Renew Blue investments. Seee More at Trefis | View Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology
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    Trina Solar Q2 Preview:Margins Could Shrink On Higher Costs, Less Favorable Sales Mix
  • by , 19 hours ago
  • tags: TSL YGE
  • Trina Solar (NYSE:TSL), one of China’s largest solar companies, is expected to publish its Q2 2014 earnings on August 26. The company has guided panel shipments of between 950 megawatts (MW) and 1.01 GW for Q2, which could possibly make it the first solar company to ship upwards of a gigawatt in a single quarter. However, despite the strong shipments, we do not expect to see a significant sequential bump in earnings or margins, given that the company could see higher polysilicon costs. Additionally, the company saw a favorable sales mix to high value markets during Q1 and this is a trend that it may not be able to replicate in Q2. During Q1, revenues rose by around 71% year-over-year to $445 million, while net income came in at around $26.5 million, compared to a loss of about $64 million a year ago. Below is a brief look at some of the trends that we will be watching when the company reports earnings. See Our Complete Analysis For Solar Stocks  Trina Solar |  Yingli Green Energy | First Solar |  SunPower Trefis has a $14 price estimate for Trina Solar, which is about 20% above the current market price.
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    Lear To Expand Seating Division By Acquiring Eagle Ottawa
  • by , 19 hours ago
  • Global automotive interiors supplier  Lear Corporation (NYSE:LEA) is closing on a deal to acquire Eagle Ottawa, the world’s largest supplier of premium automotive leather, for over $800 million. The company’s revenues increased by 67% between 2009-2013, as annual global automotive production rose by 25 million units during this period. With most European economies returning to growth, U.S. sales slowly rebounding to pre-recessionary levels, and continual strong demand in China, global production is expected to grow by 21 million units by 2021. Lear’s business depends on the performance of its automaker clients, which in turn depends on the global vehicle demand. Flush with cash, the company is looking to further expand its seating business and gain from the rising vehicle demand, especially in the luxury segment, owing to Eagle Ottawa’s expertise in premium seating supplies. We estimate a $98.92 price for Lear Corporation, which is roughly in line with the current market price. See our full analysis for Lear Corporation Demand For Premium Vehicles Remains Strong Global vehicle production rose 4% in the first half of the year to 43.1 million units, but the premium segment has been growing at a faster rate, bolstered by higher proportion of high net worth individuals and increasing disposable incomes. BMW, the world’s highest selling luxury automaker, is also Lear’s largest luxury client, constituting 10% of the net sales in 2013. Retail sales for BMW have risen 10% to almost 1.03 million units through July, reflecting strong luxury demand worldwide. In addition to BMW, Lear also supplies seating and electrical interiors to other premium automakers such as Volkswagen’s Audi, Daimler’s Mercedes-Benz, Chrysler and Jaguar Land Rover. In fact, Lear is the exclusive seating provider for some of the compact models made by the German automakers BMW, Audi and Mercedes in Europe. Compact vehicles are volume models for these automakers, as consumers look to trade-in their large sedans for entry-level premium vehicles, especially in emerging economies. Recent trends in some of the markets around the world signal how luxury vehicle sales could remain strong, going forward. China: Fastest Growing Emerging Economy China is our example for high premium vehicle growth in a market where the automotive industry is, in general, flourishing. China is the world’s largest automotive market, accounting for 28.6% of all passenger car registrations or sales last year, and is expected to form 30% of all global volumes by 2020.  Although the country’s economic growth is expected to slowdown in comparison to the double-digit growth rates seen in 2010-2011, it is still the world’s fastest growing major economy and continues to attract large-scale investments in the automotive sector. The country’s auto market is projected to grow by around 8.3% in 2014, which although is down from last year’s 13.9% volume rise, will outpace the estimated rise in global vehicle volumes. The luxury segment, which presently constitutes around 7% of the net vehicle volumes in the country, is expected to spearhead China growth. The luxury car market in China is still immature, unlike in the U.S. and some European markets, and is expected to grow at a CAGR of 12% through 2020, due to increasing disposable incomes and strong consumer preference for luxury brands. Brazil: Slightly Slowing Emerging Economy We take Brazil as an example of an emerging market, where due to weak economic conditions this year, the automotive industry has been slowing. South American vehicle production declined 17% year-over-year to 1.8 million units in the first half of the year, dragged down by slow sales in Brazil, Argentina, and Venezuela. Vehicle demand in Brazil, the fourth largest vehicle industry in the world, has taken a hit this year due to tighter credit availability, lay-offs resulting in unemployment and lower consumer spending. However, despite the decline in overall auto volumes, the luxury segment of the Brazilian vehicle market is growing at a steady pace. Brazil is one of the most unequal countries in the world. Despite having a small proportion of high net worth individuals (HNWI), which form the target base for luxury vehicles, Brazil’s combined HNWI wealth of around $4 trillion is the third largest for any country. Interest rate hikes, which have affected overall automotive sales, are expected to benefit the more affluent customers, who would generate larger returns from their investments. In addition, Brazil luxury car sales represent a very small portion of the overall vehicle industry presently, and are estimated to constitute only around 1.7% of the net sales by the end of this year. The government has also offered tax breaks on imported cars from automakers such as Mercedes-Benz and BMW, who have vowed to begin local production within the next couple of years. Premium vehicle sales could continue to remain strong in Brazil, despite declining sales in the country’s overall automotive market. U.S.: Saturating Developed Market U.S. is the world’s largest premium vehicle market, and our example of a somewhat saturated developed market where the proportion of luxury vehicles has hovered in a narrow range of 10.5-11.5% since 2008. The automotive market in the U.S. is regaining momentum after the economic downturn, and vehicle production volumes are expected to surpass the previous record of 17.3 million units in 2000 by the next couple of years. Although the North American vehicle market is relatively mature, growth lies in potential upgrades to luxury vehicles and/or replacement of ageing vehicles in the region. In fact, the average age of a passenger car in the U.S. reached 11.4 years in 2013, while the average age stood at 8.4 years in Europe and below 5 years in China. In addition, as some of the emerging economies have become more volatile, and the European countries are still trying to rebound from the double-dip recession, investments in the relatively stable North American market could be beneficial for automakers. The seasonally adjusted annualized vehicle sales rate in the U.S. stood at 16.5 million in July. According to IHS Automotive, light-vehicle production is expected to rise by 3.8% to 16.8 million units this year in North America, and grow to 17.5 million units by 2016. This means that even if luxury vehicles form a stable 10.5-11.5% of the net volumes in the U.S. going forward, growth lies in the overall growth of the country’s automotive market. New Business Could Boost Seating Division’s Bottom Line Lear’s seating division constitutes just over 50% of the company’s valuation, according to our estimates. Eagle Ottawa generates around $1 billion in revenue, and is the leather supplier for over 50% of all cars in the U.S., including many for GM and Ford, which together constituted 44% of Lear’s 2013 sales. Inclusion of new business would not only boost Lear’s top line, but due to Eagle Ottawa’s expertise in premium leather, the company could also gain additional contracts from luxury automakers. Luxury vehicles require higher seating content per unit, and thus will boost Lear’s average content per unit. In addition, Eagle Ottawa’s acquisition underscores Lear’s strategy of expanding its seating operations, as well as adopting environment-friendly and cost-effective methods of production. Eagle Ottawa introduced a process to recycle the scrap hide into a traditional leather alternative for automakers, investing $3 million into its Rochester Hills plant to manufacture its recycled composition leather line. Lear’s earlier low-cost seating initiatives include: The 2012 acquisition of Guilford Mills, an auto-fabric supplier. Guilford Mills has provided low-cost seat cover solutions to Lear, and has also helped the company expand its seating-fabrics offerings. Lear also expanded its seating systems business this year with the opening of its fourth facility in Romania. A new seating plant at Iasi, known as one of the major centers for the textile industry, aims at providing low cost seat-cover solutions for Lear with emphasis on seating surface materials, including cutting and sewing capabilities. As Lear looks to produce standardized seat structures and mechanisms, which can be adapted to multiple segments, developments and investments costs might fall in the coming future. The company’s seating division saw a decline in operating margins last year, with the figure falling to 4.8% from 6% in the previous two years. This was mainly due to manufacturing and launch inefficiencies in the Americas. However, margins are expected to rebound to 5.5-6% this year on the back of higher sales and improved efficiencies. We currently estimate the seating division’s long-term margins to remain relatively stable at around 6%. In view of Lear’s strategy to acquire new high-margin businesses and expand sales, particularly to premium automakers, profitability could further rise for the seating division. If margins grow steadily to around 6.5% by the end of our forecast period, there could be a 7% upside to our current price estimate for Lear. Taking into account the possible increase in Lear’s global seating market share following the Eagle Ottawa acquisition, the upside could be around 10%. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology


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