Cree’s Growth Remains Strong Despite Short-Term Slowdown
A surplus in the LED market, the consequent decline in prices and downward pressure on margins were the key trends that plagued the LED industry in 2012. The LED market dynamics improved considerably in 2013, primarily driven by the launch of new innovative products and the closing price gap with traditional lighting. Cree (NASDAQ:CREE), a leading innovator of LEDs, witnessed a 22% year-over-year growth in revenue in the first half of fiscal 2014 primarily driven by strong LED lighting demand.
The company is scheduled to report its fiscal Q3 2014 earnings on April 22 and expects its revenue to either decline marginally or remain flat in the quarter. (Fiscal years end with June.) Cree’s stock price has declined by more than 20% since the company reported its Q2 2014 earnings on January 22. The expected slowdown in Q3 2014 is more on account of seasonal trends, primarily the expected decline in LED demand due to the Chinese New Year holiday. Cree derives over 35% of its revenue from China.
Our price estimate of $63 for Cree is at an approximate 15% premium to the current market price. (We will update our valuation after the Q3 2014 earnings release.) We continue to believe in Cree’s long-term growth potential. LED penetration is expected to increase in the future and being one of the leading global LED manufacturers, Cree will benefit from the trend, in our view. With $1.1 billion in cash and no debt, the company has a strong balance sheet, which gives it the ability to invest in growing its business and respond to new market opportunities.
See Our Complete Analysis for Cree Here
With Rapid Innovation, CREE Remains One Of The Leading LED Manufacturers
Cree is one of the leading LED players committed to driving global LED adoption and closing down the price gap with conventional lighting through innovation. Product innovation in the last few quarters has opened new applications and improved LED returns, in turn driving demand for Cree’s products. The company has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. This places it in a strong position to leverage the growth in LED adoption.
Below are some recent product launches and developments that affirm Cree’s competitiveness in the LED market:
– Cree’s Low Cost LED Bulb: Cree hit a milestone in driving LED adoption a year back by launching a LED bulb for as low as $10. The LED bulb is considered as one of the biggest industry innovation in years and has been seeing tremendous success at Home Depot stores. In November 2013, the Cree LED bulb earned the ENERGY STAR label, which means these bulbs qualify for incentive rebates through certain local utilities. With the rebate, where they are available, the Cree LED bulbs is available for under $5. Driven by a full lighting season, utility rebate, new products and increased marketing activities, Cree’s LED bulb sales to consumers doubled sequentially in Q2 2014.
Cree has expanded its LED bulb portfolio with a 75-watt (consumes 84% less energy and provides similar levels of brightness compared to traditional incandescent bulbs) as well as a 100-watt replacement bulb, which at $19.97 is the lowest-priced 100-watt LED replacement bulb. The company has also lowered the prices of the Cree LED Bulb product line by as much as 23%, which we believe will further accelerate sales in coming months. [1]
– True White Series: Cree became the first company to comply with the voluntary standard set by California regulators to make bulbs more closely resemble the warm white light from traditional incandescent bulbs. The company launched a new LED bulb, the TrueWhite series, which comes close to the quality of light from a 60-watt incandescent. Available in the range of $18-$20, the Cree LED bulb has a color rendering index (CRI) of 93 and a score of 100 is the closest to natural light that a bulb can get. The True Light bulb uses 78% less energy and lasts 25 times longer compared to traditional incandescent light bulbs.
– $99 Street Light: Cree’s XSPR Series Street light is the first $99 LED streetlight designed to compete head-on with low-cost, high-pressure sodium streetlights in residential applications while delivering 65% energy savings and a significant upgrade in light quality.
In the long run, Cree aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers.
Higher LED Adoption & Operational Efficiency To Improve Gross Margins
Despite a very competitive market environment, Cree’s gross margins in 2013 improved due to better factory utilization on account of higher LED volumes, process improvements and new lower-cost product designs. However, the rising proportion of lighting sales puts pressure on Cree’s overall gross margin as lighting products offer lower profit margins compared to LED components.
In Q2 2014, Cree earned 27.9% gross margin on lighting products as compared to 45.4% gross margin on LED components. However, the company claims that the gross margin earned on LED bulbs is improving. The company saw its lighting gross margin improve from 26.9% in Q1 2013 to 27.9% in Q2 2013.
We believe that higher LED volumes combined with lower new cost products, cost reductions and higher factory utilization will help increase Cree’s overall gross margin in the future.
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Rite Aid’s Q4’14 Earnings: Wellness Stores Drive Growth
April 11th, 2014 by Trefis Team
Backed by its store re-modeling initiative, efficient cost management and customer loyalty programs, leading U.S. drugstore chain Rite Aid (NYSE: RAD) reported its sixth consecutive quarter of positive net income in Q4 2014. The company witnessed a 2.2% growth in its Q4 2014 revenue primarily on account of an increase in pharmacy gross profit, driven by generic purchasing efficiency as well as an increase in front-end gross profits. Rite Aid’s ongoing expense control measures benefited the company in the quarter. Q4 2014 net income stood at $57 million as compared to $124 million in Q4 2013. However, if we exclude LIFO charges and losses on debt retirement from the results of both years, net income this year was higher by $29 million.
Fiscal 2014 was Rite Aid’s second profitable year in more than five years as the company benefited from its ongoing health and wellness transformation. Though its fiscal 2014 revenue increased only marginally, net income almost doubled compared to fiscal 2013. The company believes that the continued positive growth momentum places it in a position to evolve its strategy from one that focuses on turning the company around to one that emphasizes on growth.
Effectively leveraging its cost structure, investing in new stores and making operational progress remain key focus areas for Rite Aid, as it aims to build a unique brand focused on health and wellness. In fiscal 2014, the company completed additional refinancing to extend maturities and reduce its interest expense, factors that give it the required flexibility to better execute its business plan.
We will update our valuation for Rite Aid after the fiscal 2014 earnings release.
View our detailed analysis for Rite Aid
Wellness Store Remodels Remains A Key Growth Strategy
Loyalty programs such as the Wellness+ program have been one of the key factors driving growth in Rite Aid’s pharmacy sales, as well as front-end sales. The Wellness+ program helps strengthen the relationship with customers, which in turn increases the number of loyalty shoppers at Rite Aid. It remains a key component of Rite Aid’s health and wellness offering. The company made significant progress in transforming its stores into true neighborhood destinations for health and wellness in fiscal 2014. Last quarter, Rite Aid completed 94 remodels, 3 expansions and 2 relocations, taking the total number of Wellness stores to 1,215. It plans to remodel an additional 450 stores in fiscal 2015.
The Wellness store continues to outperform the non-wellness stores in terms of same-store front-end sales and script count. In fiscal 2014, front end same-store sales in the wellness stores exceeded the non-wellness stores by 3.2 percentage point and script growth in the wellness stores exceeded the non-wellness stores by 1 percentage point.
Last year, Rite Aid successfully launched its Wellness65+ program, which is aimed at senior patients who are known to be higher spenders in the pharmacy category. By the end of fiscal 2014, 1.7 million senior citizens had enrolled in the program and Rite Aid claims that the program is attracting new customers as well as strengthening the loyalty of its existing members. According to a 2012 RAND Health study, wellness programs are the rage in corporate America, with half of surveyed companies offering wellness promotion programs. [1]
Rite Aid’s immunization program is another key component of its chain-wide wellness program. It exceeded its chain-wide goal by immunizing more than 3.2 million patients against the flu last year. Its Wellness stores, which feature the Wellness ambassadors, averaged 38% more flu shots than non-wellness stores.
Wellness stores will continue to be a key part of Rite Aid’s growth strategy over the next few years.
Recent Acquisitions To Benefit Rite Aid’s Health & Wellness Strategy
This month, Rite Aid made two acquisitions – Health Dialog Services Corporation and RediClinic – to advance its retail and wellness strategy.
Health Dialog Services Corporation is a health coaching and analytics firm which provides in-store care coaches. Rite Aid believes that the company will play a key role in advancing its Health Alliance program. It expects to benefit from Health Dialog’s industry-leading analytics and shared decision making tools as it focuses on further strengthening its healthcare offering.
RediClinic is a leading retail clinic operator operating across 30 locations in the greater Houston, Austin and San Antonio areas. Post the acquisition, RediClinic will become a subsidiary of Rite Aid. Retail clinics play an importance role in today’s healthcare delivery system and will benefit Rite Aid’s overall health and wellness strategy. Rite Aid intends to leverage RediClinic’s expertise to deliver convenient healthcare and wellness programs to its customers in select markets. Rite Aid plans to open 70 new RediClinic over the next 18 to 24 months.
Rite Aid also announced an expanded tie-up with McKesson Corporation (MCK), the largest distributor of pharmaceutical and medical supplies in the US. The new partnerships are in line with the company’s strategy to expand its offerings to cover a broader range of health products and services.
Fiscal 2015 Guidance
– Rite Aid expects the second half of fiscal 2015 to be stronger than the first two quarters, due in part to the strength in fiscal 2014’s first half as well as the introduction of several new generics in the second half of fiscal 2015.
– Total sales to be between $26 billion and $26.5 billion.
– Adjusted EBITDA to be between $1.33 billion and $1.4 billion.
– Same-store sales to increase by 2.5% – 4.5%, including the anticipated negative pharmacy sales impact of new generic introductions and continued reimbursement rate pressure.
– Earnings per diluted share of $0.31 to $0.42.
– Capex of $525 million.
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- Cree Makes The Biggest Thing Since the Light Bulb Brighter and More Affordable, Cree Press Release, March 12, 2014 [↩]