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Blue Apron and GNC, two examples of the struggle to fight against thematic headwinds

Blue Apron and GNC, two examples of the struggle to fight against thematic headwinds

 

In Tematica Investing, we focus on companies that are benefitting from tailwinds associated with our investment themes. As a good institutional portfolio manager knows, avoiding problematic investments is critical as they can sabotage returns to be had from well-positioned ones. In our Tematica lingo, that means avoiding companies that have thematic headwinds bearing down on their businesses and buying companies that are rising the tailwinds.

 

No need to revisit Blue Apron shares

We’ve been bearish on shares of Blue Apron (APRN) and we’ll try not to pat ourselves too hard on the back as we take a victory lap on that call.

As we saw yesterday, there is a good reason to remain that way as Walmart (WMT) is formally getting into the meal kitting business. While many were expecting Amazon (AMZN) to leverage its Whole Foods Market business with its own meal kitting offering (we still are), Walmart is leveraging its position as the largest grocer to enter the fray. The goal for the brick & mortar retail giant is to help build its digital footprint as well as take share from the restaurant industry, which has been pressured by weak traffic and average ticket pressure. Odds are Walmart is also looking to ride the consumer shift toward healthier eating and snacking that is part of our Food with Integrity theme along with a hefty dose of our Connected Society one.

All in all, this looks like a good extension for Walmart and one that is poised to make an already challenging environment even more so for Blue Apron.

 

 

Struggling GNC Holdings looks East

Another company that has been running into a significant thematic headwind is GNC Holdings (GNC). Once a dominant player in the sports performance and nutrition space (otherwise known as body-building), the supplement retailer has been attempting to reposition itself to a wider audience as a seller of “health, wellness and performance products.” As the performance market has moved online and to other sources, GNC has been attempting to capture more women and appeal to the Boomers and their set of nutritional needs, which are far different than the iron clangers in the free weight section of the gym.

To say this stock price chart looks like a one-way roller coaster that only goes down would be an understatement. A better comparison would be an alpine slide that starts extremely high up a mountain, has several twists and turns, but only goes in one direction – down. Since peaking in late 2013 near $60, that’s exactly what we’ve seen with GNC shares as its profits turned to losses despite a comparatively modest dip in revenue over the last few years.

 

 

In perusing the company’s latest 10K filing, the company offers up an explanation of sorts: “Prior to 2017, we had been experiencing declining traffic trends leading to decreasing same-store sales in our retail stores. After extensive consumer research and market analysis, we determined that our business model needed to be reimagined.”

Not exactly what a shareholder, existing or prospective one, wants to hear, but at least we can credit the management for not acting like an ostrich with their head in the ground as Amazon rolled into space as did others. The combination of having to “reimagine” its business model as well as fend of competitors led annual Selling, General & Administrative expenses to rise over 2015-2017 as revenue shrank, pushing GNC to deliver bottom-line losses.

Digging into the financials, the company experienced negative same-store sales in every quarter during 2016 and the first two of 2017. Making matters worse, average transaction amount was in negative territory over the last five quarters, and sales at GNC.com sales were falling as well. December 2017 quarterly sales were up 0.2% in company-owned stores vs. down 1.2% in the September 2017 quarter.

Not exactly a recipe for success, but clear signs the company could be in turnaround mode. What makes this potential turnaround interesting is the new partnership with CITIC Capital and Harbin Pharmaceutical Group. As a way of background, CITIC Capital is a global investment firm with a strong position in China and the Harbin Pharmaceutical Group is a joint venture of several China-based pharmaceutical companies. CITIC will invest $300 million in the form of a newly issued convertible perpetual preferred security with a 6.5% coupon payable in cash or in kind and a $5.35 conversion price. GNC will use the funds to repay existing debt and for other general corporate purposes, and on an as-converted basis, CITIC will hold roughly 40% of GNC’s outstanding equity. That’s a significant shareholder and one that will also appoint a total of five members to GNC’s newly expanded 11 member board.

The company expects the transaction to close in the second half of 2018, but it will require regulatory approval in both the U.S. and China. Given the current geopolitical tensions we are reading about almost daily, there could be some speed bumps associated with these approvals. Also too, GNC is ramping marketing associated with its recently launched pricing strategy and loyalty program, One New GNC strategy in the current quarter. This likely means margin pressure is poised to continue.

The bottom line is even though GNC is facing steep competitive domestic pressures, it’s new relationships could pivot its business but there are several hurdles to be overcome. Keyword being “could.” The risk related question I find myself asking is “Yes, I understand what the management team is saying, but what if the pivot or turnaround doesn’t happen as expected?”

We’ve seen many a company that in the face of thematic headwinds and mounting competitive pressures have attempted to reposition their businesses. Few have succeeded. My gut tells me that GNC, much like Blue Apron, Blackberry (BBRY), Angie’s List, GoPro (GPRO), Fitbit (FIT) and others, is on the road to nowhere for investors. But that’s my gut, which means reminding myself to keep an open mind and watch the data as it becomes available.

 

 

 

No need to catch the falling knife that is Blue Apron, we have Amazon

No need to catch the falling knife that is Blue Apron, we have Amazon

This year we’ve seen several busted initial public offerings, and one of them is Blue Apron (APRN), which came public at near $10 and been essentially cut in half over the last four months. As was joked in the business pages, that is “less than the price of one of its meals.”

Such a sharp drop raises the question, “Could the fall in the stock be overdone?”

That’s a fair question as one of the tools in the investing kit is picking off undervalued stocks. The keyword that makes all of the difference is “undervalued” as it relies on the notion that at a certain point, other investors and the market will recognize the potential value to be had in the underlying business.

Let’s remember the impetus that led to Blue Apron landing on the busted IPO list: Amazon’s (AMZN) intent to acquire Whole Foods and trademarking its own meal kit offering. This made Blue Apron, along with Kroger (KR) and other grocery stores, the latest company to be upended by Amazon. Last week we saw Amazon add eMeals to AmazonFresh. Through the program, eMeals subscribers can now send their shopping list, which is automatically generated for all meals selected each week, to AmazonFresh as well as Walmart (WMT) Grocery and Kroger ClickList. Another thorn in the side of Blue Apron.

There was more news for Blue Apron last week as the company announced a “company-wide realignment” to “focus the company on future growth and achieving profitability…” As part of that realignment, Blue Apron said it would be cutting 6% of its workforce. Let’s remember that this comes less than a handful of months after the company went public!

But it gets worse.

Current consensus expectations have Blue Apron losing $1.56 per share this year, with bottom-line losses narrowing to -$0.73 per share in 2018. Keep in mind the company botched its first quarter as a public company when it posted a second-quarter loss of $0.47 per share vs. the expected $0.30 per share loss. That’s a huge miss out of the gate as a newly public company.

Put that out of the box earnings miss together with its headcount reductions and we have a pretty clear credibility problem with the management team, which is likely to be outclassed and out-muscled by Amazon and other grocery chains. And that raises the question as to what is Blue Apron’s competitive advantage? Recipes? Ingredients? Those can both be replicated by Amazon, especially with Whole Foods, and others as they scale up their natural and organic offerings to ride our Food with Integrity investment theme tailwind.

As we ponder that, let’s not forget that Blue Apron closed its June 2017 quarter with $63.3 million in cash on its balance sheet. That compares to the net loss of $83.8 million during the first half of 2017 and the expected net loss of that is expected to grow in the second half of the year. Simple math tells us, the company is poised to face a cash crunch or do a painful secondary offering to bring in additional cash. We’ve seen this movie before and it never has a happy ending.

The bottom line is APRN shares are cheap, and they are cheap for a reason – they are running headlong into the headwind of our Connected Society and Food with Integrity investment themes. My advice is to move along and not be tempted by the falling knife that is APRN. Better to focus on a well-positioned company that has an enviable or defendable competitive advantage. To us here at Tematica, that is Amazon (AMZN) in spades.

  • Our price target on Amazon (AMZN) shares is $1,150.
The Expanding Pain Point Fueling Safety and Security Investment Theme

The Expanding Pain Point Fueling Safety and Security Investment Theme

Over the last few weeks, we’ve been reminded of the dark side of our increasingly Connected Society, given cyber attacks and hacks at Equifax (EFX) and more recently Amazon’s (AMZN) Whole Foods and Sonic Corp. (SONC). Those are but a handful of examples in what is an expanding pain point that is fueling our Safety & Security investing theme and the ETFMG Prime Cyber Security ETF (HACK)* shares on the Tematica Investing Select List.

Unsurprisingly to us, there is yet another new report that not only paints a gloomier picture but also forecasts a continued ramp in cyber attacks. We see this as confirming our $35 price target on HACK shares over the coming quarters. New research by Gemalto showed that almost 2 billion data records around the world were lost or stolen by cyber attacks in the first half of 2017. Worse yet, the number of breaches is slated to rise further. Per the latest Gemalto breach level index report, there were 918 breaches during the first six months of 2017, and of those breaches, 500 had an unknown number of compromised records. Meanwhile, the top 22 breaches involved more than one million compromised records.

With new regulations such as the U.K. data protection bill, the European Union’s General Data Protection Regulation and Australia’s Privacy Amendment (Notifiable Data Breaches) Act set to come into force in the coming months and quarters, odds are we will see another step up in the number of reported security breaches. No wonder in its latest annual results, consulting firm Deloitte described cybersecurity as a “high growth area” for the firm.

A somewhat different view on this was had with FedEx’s (FDX) recent earnings report, in which it copped to the fact that cyberattack Petya cost the company around $300 million dollars. This should serve as a reminder the impact of a cyber attack can cost a company day to day, but it also has implications for its stock price when it misses earnings expectations.

We see all of the above as a reminder of the incremental spending to be had to fend and secure companies from prospective cyberattacks, a good thing for the companies contained inside the HACK ETF.

  • Our price target on Safety & Security investing position in the ETFMG Prime Cyber Security ETF (HACK) remains $35.

 

* One quick housekeeping item, there was a recent name change for HACK shares to ETFMG Prime Cyber Security ETF from PureFunds. The underlying strategy of the ETF and its focus on cybersecurity stocks remains intact.

Initial observations of the Amazon-Whole Foods marraige

Initial observations of the Amazon-Whole Foods marraige

With the official closing of the Amazon (AMZN) acquisition of Whole Foods Market (WFM) yesterday, I made a point of visiting two locations near me outside of Washington, D.C. The traffic in the store was greater than usual for a Monday, as were the length of the lines at the checkout counters. There were a number of prices that were better as has been reported, and there was a pop-up stand for Amazon Echo devices.

What was missing, however, were the appropriate Amazon’s private label brands that are slated to hit shelves at Whole Foods locations, as well as the lockers that will allow for both delivery of items as well as returns.

I say appropriate items because Amazon has quietly expanded the scope of its private label products from food (Happy Belly, Mama Bear and Wickedly Prime) and supplements (Amazon Elements) to fashion, electronics, household items, cosmetics, lingerie, and furniture to name a several. Conversations with the store managers confirmed Amazon private label products will be turning over in the store “over time” where appropriate. That hasn’t slowed Amazon from including Whole Foods’ private label brand, 365 Everyday Value, on its website although based on some basic searching 365 Everyday Value has yet to be offered under Amazon Fresh.

Like many large acquisitions, integration and the targeted synergies come over time, and I are still in the very early days of these two companies being under one roof. I expect the rollout of Amazon private label products to be had at the 470 Whole Foods locations in the U.S. and the U.K. over the coming quarters with added benefits coming (Amazon Fresh, Amazon meal kits and the instillation of Amazon Prime as the new membership rewards program).

As the combined entity flexes its product and logistical offering, I suspect before too long the conversation will shift from “death of the mall” to “death of the grocery store.” One of the “secret weapons” that Amazon has over its grocery and other competitors that range from Kroger (KR) to Wal-Mart (WMT) is the high margin Amazon Web Services, which continues to be embraced by corporate America as it increasingly migrates to the cloud.

One thing I am pondering is based on the number of Whole Foods locations, will Amazon look to make other grocery acquisitions in a bid to reach key markets that have a high concentration of Amazon Prime customers? If so, this could quickly turn the conversation from “the death of the mall” to the “death of the grocery store.”

 

  • We continue to rate Amazon (AMZN) shares a Buy with a $1,150 price target.

Source: Whole Foods prices cheaper with Amazon – Business Insider