Going Organic

Walmart recently announced that it was partnering with Wild Oats to sell organic foods in their stores at prices 25% below other organic food brands. If successful this could be a game changer in the organic foods world, typically understood to be a niche market for a premium paying customer. In this regard Walmart has a potential goldmine of untapped customers who shop on a budget and have been keeping away from organic foods due to the cost factor.

The opportunity that lies open before Walmart is a market that currently makes up about 4% of total grocery sales in the United States and is expected to grow to 5% by 2019. The largest components of these sales are produce and dairy. In the case of dairy, the share of organic to total milk sales ratio in the United States has grown from 1.92 in 2006 to 4.38 by 2013. Interestingly during this period, except for the year 2009, there has been a decline each year in total milk sales while sales of organic milk have been increasing. Since around that time consumers were feeling the direct hit of the Great Recession on their personal finances, it may be possible that it led to a cutback in the purchase of higher priced organic milk. However the fact that every other year the consumption of organic dairy has increasing might suggest that the status of organic foods as “luxury” grocery may be changing. And Walmart could benefit by taking it even further in affordability to a growing number of customers who are willing to try it.  In fact Walmart’s own survey indicates that 91% of their customers would be willing to buy organic foods if they were available at more reasonable prices.

But the question is whether the reduction of this price premium by Walmart will pose a threat to the Natural foods stores that have so far been out of reach for a majority of customers. The typical customer who shops at such stores is already willingly paying a higher price not only for their grocery, but also for the ambiance, the healthy cuisine in-store restaurants, and so on. So natural food stores can probably keep this group of customers even if Walmart offers a more competitive price. However, it is the potential “converts” who are not buying organic foods at present but would try it at a more reasonable price that could open up a still largely untapped market with great growth potential.


Ceco Environmental: Three Takeaways from the Q4 Conference Call

Ceco Environmental (CECE) is a global air pollution control company that I have evaluated in the past as a potential investment opportunity. In its recent released Q4 2013 earnings report the company beat expectations with an EPS of $0.26, but missed revenue expectations. This was despite the fact that its revenue expanded over 100 percent year over year, mainly on account of acquisitions, and gross profit was up 50% from last year. But to me the highlights of earnings release were in the following three themes that indicate the future direction of the company.

Acquire and Integrate: In my last article on Ceco I had written in detail about the business and management’s strategy relating to acquisitions. Total revenue in 2013 was $197 million compared with $135 million primarily due to the acquisition of new businesses. In order for an acquisition to be successful it is crucial for the integration of the new asset with the existing operations to be seamless. In this regard the company has been successful so far in smoothly integrating the recent acquired MetPro and realizing $9 million of synergies from it. Management has consolidated 3 manufacturing facilities and office buildings, selling the Met Pro facility and moving ahead on the path of realizing synergistic value from the integration. Recent acquisitions have opened up new revenue sources, contributed to an increase in bookings as well as more recurring business opportunities. Another example of the effective management of the integration process has been that operating margins improved with MetPro under the Ceco umbrella, and the company was also able to achieve 19% SGA including MetPro, despite it having run on higher SGA before.

Grow Overseas: The Company currently has about $3 billion of installed capacity worldwide and there is an opportunity to grow recurring revenue from this source since currently it counts for only about a third of the business. It is looking to expand operations in China both as a market and manufacturing source. In fact, it was indicated that there could be a potential acquisition as part of a manufacturing expansion initiative in China in the near future. While the company has operations in countries like India, China, Canada and Latin America, a large proportion of the business is still in the United States. So there is still room for expansion of its business internationally. Moreover in developing countries environmental/pollution control regulations and laws are likely to grow and create opportunities for the company.

OneCeco Initiative: Most of the revenue growth reported in the quarter was from acquisitions and organic growth was not robust during the period. But one of the company’s initiatives highlighted in the earnings call could also be instrumental in moving the dial on this. The OneCeco sales initiative is a tool to consolidate all air pollution control products and technologies and use this powerhouse to gain more market share and grow margins. The company is tracking its sales performance closely under this OneCeco “segment” and management expects that only 50% of the gains from this initiative have been realized yet. The initiative has already resulted in the creation of over 150 new RFQs and led to over a dozen new air pollution control projects. I think this could be an astute way to blend, bundle and leverage economies of scale for the benefit of Ceco as well as its customers.

Why I am currently Neutral on Blucora

Blucora (BCOR) has been in the news for all the wrong reasons lately. First, the company was hit with accusations of possible policy violations which resulted in the stock tanking. A couple of days later the company released their fourth quarter earnings beating both revenue and EPS expectations, but lowered guidance for the next quarter. Management revealed that Google, their largest search partner and contributor of the lion’s share of their search revenue, had renewed their partnership but only partially.

The last time I wrote about the company in October 2013, I had analyzed its growth potential based on recent performance and acquisitions. In the same article I noted concerns regarding its relative inexperience in the mobile space and heavy dependence on Google, but overall it still appeared to be a good growth opportunity. Recently, in the light of events mentioned above I decided to take a more cautious “hold” approach towards the company. This was because these events brought into sharper focus for me the importance of the following –

  1. Blucora’s dependence on Google
  2. Need for better information on the company’s future strategy

Dependence on Google

While I have no way of knowing about the accuracy of any of the accusations raised against the Company, it does make one thing very clear. Even the suggestion of a doubt on the future of the Blucora-Google partnership can wreak havoc on the stock. For context, the Search segment of the company’s business is about 75% of their revenue and Google alone accounts for nearly 85-90% of it. So at least at present, Blucora’s success is closely intertwined with its relationship to the search giant.

It helps that the company announced in its earnings call last week that Google had renewed its partnership with them until 2017 in the desktop search area.  However the renewal did not extend to the mobile and tablet space. The immediate implication is the financial headwind, reflected in lowered guidance. The long run implication is the possibility of a further break in the alliance with Google in the future. Since the Android OS has the largest market share in the mobile market globally, it also implies that Google is the search engine of choice in that medium. So the end of Blucora’s mobile/tablet agreement with Google is a blow to the company.

But to put this into perspective, mobile is a relatively small driver of the company’s search revenue at present. Management stated that about 85% of the search traffic from Google comes over desktop, which is still covered under their renewed agreement. Alternatively, on the mobile front the company has other liaisons like Yahoo that will continue to power their searches. Also the mobile/tablet market still has a lot of unchartered territory; so the company could potentially carve a niche for itself in that space. Management mentioned plans during the recent earnings call to explore search and non-search solutions like text, video, etc. But there is still not enough clarity around the company’s plans for mobile growth. In my last article as well I had concerns about the Search segment’s lagged development in this field.  But with this latest development with the Google partnership, this issue has become more relevant.


Needed Clarity on Long Term Strategy

In the recent past the company has made a move to diversify its revenue streams through the acquisitions of the DDIY tax business TaxAct and the ecommerce business Monoprice. Both segments have been performing fairly well, although ecommerce sales were softer than expected in the fourth quarter. Overall the ecommerce segment generated revenue of $39.7 million in the fourth quarter with order growth of about 10%. TaxAct revenue grew at about 75% year over year while recording a loss, in line with expectations, due to seasonality in the tax business. It is expected to track guidance in the 2014 tax season.

At present these two acquired segments combined comprise only about 25% of the company’s total revenue. They are also very different from the company’s core search business. But while they may not be obvious synergistic acquisitions, they may turn out to be useful diversification tools that the company needs. One advantage is that they open up the growing DDIY tax and ecommerce market to the company that could potentially grow into a larger proportion of sales in the future. In fact, if the company has more future acquisitions planned that are executed and integrated successfully, then this may be a way to reduce the heavy dependence on search and Google. But again, the long term strategy on acquisitions and vision of what the company wants to evolve into, is not very clear at the moment.


At present Google is certainly the mammoth in the search landscape. So in the near future at least, the success of Blucora’s search segment is tied closely to its partnership with Google. Currently I am comfortable with a more cautious approach of having a neutral position towards the company. I would like to wait and watch how it operates in the mobile world without Google, and get more information on what plans it has in the future of building a business that is not overwhelmingly dependent upon one partner.


The week ahead in economic news…

  • Tuesday
    • Case-Shiller home price index December data is scheduled for release on Tuesday.  Although lagged by nearly two months, a noticeable slowdown would support other housing indicators.
    • Consumer Confidence February results are also expected to release on Tuesday.  Consensus expectations point toward an index value around 80 on par with January.  Continued sluggishness in the job market could push the consumer confidence numbers to come in below expectations.
  • Wednesday
    • New home sales January results are expected to release, and expectations are for slightly lower numbers compared with December.  With the decline in existing home sales, new home sales could come in below expectations as winter weather and low inventory more than likely hampered sales in January.
  • Thursday
    • Weekly Jobless numbers will be released which will provide further insight into February’s employment picture.
    • Durable goods orders for January could shed some additional insight on the state of the economy.  After a noticeable 4.3% decline in December, orders are expected to decline a further 2.5% in January.
    • Markets will be closely watching Janet Yellen’s testimony at the Senate for any additional insights into the Fed’s monetary policy.
  •   Friday
    • Q4 GDP revision release and expectations are for a downward revision of 2.4% compared to an initial release of 3.2%.
    • Chicago PMI for February is expected to come in at 56.0, down from 59.6 recoded in January.
    • The release of January pending home sales should provide some insight into home sales in February.  The 8.7% decline observed in December brought the index to the lowest level observed since Oct-2011.

Chipotle Mexican Grill: the Good, the Bad and the Unknown

As a frequent customer of Chipotle Mexican Grill (CMG) I have been happy with the quality of food, promptness of service and reasonableness of price that I have experienced. Given that its revenue has expanded in the last five years at a compounded annual growth rate of almost 21%, there are many others that share that feeling. The company has risen as a leader in the “fast casual” industry, intelligently filling the gap that existed between less healthy fast food options and healthier but more expensive sit down restaurants.  My own experience as a customer and Chipotle’s incredible growth story has prompted me to don my investor hat and try to evaluate if buying the company’s stock would be as satisfying as buying its delicious food.

The Good

1.       Simple Concepts: Chipotle has built a business and a reputation by focusing on a few basic ingredients and serving dishes that are based on permutations and combinations of those. This makes it easier for the company to focus on improving the quality of these ingredients. It has done so by moving towards more organic, sustainably grown or raised, non GMO, lower carb raw materials.

In terms of service as well, having few simple ingredients is very helpful in keeping speed and service levels high in their assembly line style setup of made to order meals.

Every so often the company does expand its offerings to cater to a wider range of customer tastes and preferences. Some examples are sofritas or tofu for vegetarians or salad and burrito bowls for the carb conscious. But overall it has stayed true to using a few building blocks to build many different structures.

2.       Strong Financials: Chipotle has been continuing along a path of robust financial growth for the last several years. After the company reported its solid Q4 2013 performance recently the stock soared 12% at opening the next day. The fourth quarter was another strong quarter for the company with revenue growth of nearly 21% and comparable restaurant sales growth of approximately 9% on a year ago basis. Operating margins for restaurants increased by a 100 basis points year over year, while earnings per share increased nearly 30% over prior year to $2.53 in the fourth quarter.

Historically, between 2009 and 2013 the company’s revenue grew at a compounded annual growth rate of nearly 21% and diluted earnings per share grew at about 28% over the same period.  The company ended the year 2013 with over $323 million in cash and cash equivalents and 185 more restaurants under its belt. Another attractive factor is that it has virtually no long term debt and total cash per share of $18.64. While the company does not pay cash dividends, reinvestment of cash into the business can compensate the stock holders by providing future returns.

3.       Room for Expansion: The Company has been growing its culinary empire in three main ways; new restaurant openings, organic growth and international growth. As of year ended 2013 it operated 1572 restaurants in 40 states in the U.S., 7 in Canada and 9 in Europe. So there is still plenty of room for both domestic and international expansion. An instance is that the first Chipotle location opened up in Reno only earlier this month.

Additionally expanding its frontier overseas could be instrumental for the company in maintaining the pace of growth that it needs to justify its price. In the last quarter of 2013 the company opened up a total of 56 new restaurants and plans to open a total of 185-190 locations in 2014. Included in this growth are the company’s ventures into Asian fast casual through its ShopHouse restaurants in the D.C. and L.A. areas, as well as, Pizza Locale, its experiment with pizza, in Denver. If it is successful in taking the ideas and culture that has helped make Chipotle a trailblazer in the industry and applying them to these new types of cuisines, then it could be a great way for the company to branch out and grow. It is also investing in a more enhanced marketing plan using digital media, food and music festivals to increase its reach to potential customers.

The Bad

1.       Valuation Multiple: The least attractive thing about Chipotle for me right now is its valuation. From a Price to Earnings perspective it is valued at over 50 times earnings. This puts immense pressure on the company to deliver stellar financial results quarter after quarter and maintain strong sales growth rates, which can be challenging. For instance, 2013 revenue growth over prior year was about 18%, which while strong, was a little below growth rates from the previous few years. If this does prove to be a trend of plateauing growth, and the company is not able to accelerate with help from expansion into new markets and cuisines, then a multiple of this level will become very hard to justify. Also with such rapid growth and lots of public exposure, the company has to not only perform well but beat a lot of high expectations continuously to maintain growth in its stock price, and justify the high valuation.


2.       Comparable and New Restaurant Sales: Drilling down into comparable restaurant sales, the company gave guidance of low to mid-single digit growth in 2014 mainly because of tough 2013 comps. This organic growth is important for the company as there are higher margins associated with it. Also, as noted in their 10-K filing, in the past the stock price has slid down when the company experienced slowing comparable sales. While the company is skilled in maximizing efficiency and productivity from each of its restaurants through strategies like its assembly line setup, placement of best employees during peak hours, etc., there is a peak beyond which it is not possible to increase productivity. For example, the record so far has been 300 customers served at a location in one hour. While impressive, this is neither the average, nor easy to maintain and exceed.

As far as new restaurants are concerned, the company has a lot of opportunity to grow in domestic and international markets as I wrote above. This is also the main source of sales growth for the company. But the guidance for 2014 indicates between 180-195 planned restaurant openings in 2014. In the years 2013 and 2012 the number of new restaurants opened were 185 and 183 respectively. So the rate at which new restaurants are added has not been accelerating in the last few years.

Additionally, the company does not franchise. This helps with maintaining consistency of product and service but can be a limiting factor on growth.


3.       Brand Dilution: The Company has undoubtedly done well so far, establishing itself in the fast casual healthy Mexican food business. By extension it should be able to apply the same panache to its new Asian and pizza ventures. But there are also chances that by wearing too many hats the company may not only fail to succeed in the new initiatives, but also lose focus on its core business and take a hit to its reputation.

Another issue for the company is upward price pressures on its food ingredients in 2013, that are expected to continue in 2014 as well. Pressures such as these pose a difficult situation for the company since its USP is selling healthy, high quality food at a reasonable price. The tradeoff between potentially raising menu prices versus abandoning some of the company’s organic, non GMO food initiatives could impact the image of the company.


The Unknown

Conclusion: Will Chipotle Mexican Foods stock keep going from strength to strength, or will it have a hard time justifying the high P/E multiple it is trading at presently, remains to be seen. Powered by continued financial strength and a business that has given new meaning to “fast food”, Chipotle stock has been soaring. Between its last closing price and the same day a year ago, it has grown over 76%. While there are many factors that could propel its growth in the future, I think that at the moment the valuation puts it out of my comfort zone. It may continue to perform well but I think it might be a challenge to keep growth continually at the same pace, or ahead, of expectations.

Acme United Corporation – Value in Simplicity

Some companies slip under the radar for investors simply because what they offer is not exciting or groundbreaking. Yet, they may be solid, well-managed businesses that are good value for money. I think Acme United Corporation (ACU) is one such company. Its strong fundamentals, reasonable valuation, tactical acquisitions, strategic partnerships and pool of intellectual property, make this low profile business interesting.

Business: Through it brands Westcott, Clauss, Camillus, Physician’s care and Pac Kit, the company sells cutting and measuring tools and safety supplies for a variety of uses in homes, offices, industries, hospitals and schools. Typical products of the company include scissors, knives, sharpeners, paper trimmers, medical cutting instruments, measuring instruments, first aid kits and the like. It employs 171 full time employees and operates in the United States, Asia, Canada and Europe through wholesale and retail distributors, hardware stores, office supply stores and so on. In 2012 it generated revenues of $84.4 million with 80 percent of its total sales attributed to the U.S. segment (which includes Asia), and 10% each to Europe and Canada. Its import sales to the U.S. from its Asian business have been growing as a percent of total sales from 16% in 2012 to 22% in 2013.

Financial Performance: The Company reported robust growth in Q3 2013 as net sales grew nearly 9% and gross profit expanded by almost 7% year-over-year. The five year annualized revenue growth rate has been nearly 6%. Net income and earnings per share also advanced over 20% and 15% in the same period from a year ago. Net cash from operating activities was at $3 million at year-end September 2013, compared with a negative $1.4 million balance in 2012. The net debt position of the company also improved to $13.2 million by Q3, down about a million dollars from the prior year.

While the U.S. segment sales grew by nearly 10% and sales in Europe witnessed a robust 26% growth, sales in the Canadian segment declined due to weakness in the office products business and losses from some large accounts. However, the U.S. segment was bolstered by improved performance in Camillus knives sales, growth in first aid kits and stronger back to school sales. In the European segment the strong growth was fuelled by increases in mass market retail of knives for kitchen use, new distribution by signing on a large German distributor and expansion into Scandinavia.

The company declared a cash dividend of 8 cents per share in December in line with previous, which has been growing at a five year annualized growth rate of almost 17%.

Valuation Multiples: From a price to earnings ratio perspective, the company trades at a reasonable multiple of 12.44 which is lower than the industry average. The price to book ratio is also below 1.5 while the price to sales is a modest 0.55, which is below the industry average of 1.11 and much below one of its direct competitors, Johnson and Johnson (JNJ).

Tactical Acquisitions: The Company has been making moves to grow and diversify its business through a series of acquisitions and strategic partnerships. In 2011 it acquired Pac-Kit, one of the oldest brands in the first-aid kit business, for $3.4 million. The first-aid kit business has been one of the strong performers for the company and it has since been moving forward in producing hazard protection kits for disaster management.

This was followed by the acquisition of the C Thru Ruler Company in 2012 for which the company paid $1.47 million for inventory and intellectual property. It produces transparent measuring instruments which has increased the company’s exposure to students, schoolteachers and scrap bookers.

In 2013 the company acquired a new, 340,000 square feet manufacturing and distribution facility in North Carolina for $2.8 million that is meant to consolidate two distribution centers and improve operational efficiency. While the company had duplicate operating costs of two facilities as it upgraded the new purchase, in the long run it provides additional space to expand operations and /or store inventory. After adding in the price of updates to the purchase price the facility will cost the company upwards of $4 million, but has been estimated to have a replacement cost of $13.5 million, potentially making it a bargain buy for the company.

Each subsequent acquisition that the company makes provides it with another step forward towards diversifying its product offering and customer base and creating capacity to fulfil future demand growth. Since it operates in an industry with low barriers to entry, this broader customer base and brand familiarity for customers could be useful to compete.

Innovation and Partnerships:  The business of Acme United may not sound thrilling, but it too calls for product innovation and thoughtful design. Along these lines the company has continued to develop new and improved products like titanium coated non-stick cutting tools for better performance, measuring instruments with non-microbial coating and new disaster survival kits. It continues to invest in R&D and maintains several patents and trademarks that are critical for business preservation and brand recognition.

An innovative marketing strategy has been to partner with survivalist Les Stroud to develop and design survival tools, knives, etc. This adds a touch of adventure and excitement to the business and uses the celebrity survivalist’s reputation to reach out to a new group of customers.

Another astute liaison emerged between Scott’s Miracle Gro and Acme United in 2013 when the two companies entered into a licensing partnership to develop two new types of garden tools, namely, Scotts Air Shoc and Miracle Gro Environline. This provides Scotts the opportunity to expand its repertoire to garden tools, while for Acme it is another avenue to increase sales and become more visible to the established customer base of another retailer.

Seasonality: One of the challenges for the Company is the seasonal nature of its sales, primarily due to timing of back to school sales. It typically performs better in the second and third quarters of the year. However there may be very early indications of some shift in this seasonality in favor of the company. The fourth quarter has benefited from Christmas promotions of Camillus knives and hunting knife sets, while the industrial safety kit business has been boosting growth in each quarter.

Overall: Acme United is a company that has been maintaining strong financial performance, paying dividends to its shareholders and growing its operations domestically and internationally. Its products are easy to understand, and while it faces competitors like Fiskars and Johnson and Johnson, it has a well established reputation in its lines of business.  At the time of writing the stock was trading at $15.30 which was above the 20 and 50 day moving averages and near a simple resistance bound of the past three month’s high points. Given recent performance and strategies for future growth, I think that this low profile company has the potential to be a good value for money.

A Long Wait

We have been hearing for a number of years now about the “tough” job market out there. That is generally true; but the employment situation varies by educational, demographic and even geographic factors, amongst other things. Overall the employment picture has been improving slowly as the economy continues to recover the nearly 8.8 million jobs lost in the last recession. The average duration of unemployment has declined from 38 weeks in December 2012 to 37.1 weeks in December 2013. So people are finding more jobs, and finding them faster than they did a year ago. But things have been less rosy for those that have been looking for jobs the longest. According to data from the Bureau of Labor Statistics (BLS) 53.7% of unemployed persons had been without a job for 15 weeks or more in December 2013. While this was down from 54.4% in the previous year, it is still a large percentage of people that have had to undertake a painfully prolonged job search. From the employer’s perspective a longer period away from gainful employment may imply a depletion of a candidates skill set, reinforcing the cycle of unemployment.

Another poignant feature that surfaces in BLS data from 2012 is that the average duration of unemployment increased with age, being as high as 54.6 weeks for those in the age group of 55 to 64 years. This is despite the fact that the actual unemployment rate has been lower among people in this age group compared to those that are younger. So while those that were older were less likely to be unemployed than their younger counterparts, if they did lose their jobs, it was a long, arduous journey to find work again. A possible explanation could be that with a large pool of unemployed people looking for jobs, employers may have been more likely to hire younger, less experienced employees who may be available at a lower pay.

The jobs situation is improving overall, but it has been an incredibly long, painful journey for many.

Under Armour – A Fascinating Journey

Under Armour’s (UA) stock has been on an intriguing journey. At the time of writing this article it had closed at $104.76, up 23% from the previous day’s close, following a great fourth quarter earnings report. This is an all-time high for the stock which has surged nearly 106% from $50.87 exactly one year ago. The company beat expectations with a spectacular quarter and continued its growth streak of 15 consecutive quarters of over 20% growth, with 35% topline growth. It raised its guidance for 2014 and the stock surged.

Interestingly, the last time I wrote about the company it had also completed another successful quarter with impressive revenue growth of 26%. Surprisingly the stock fell at the time despite the company’s better than expected financial performance. The company was growing then, and it is growing now. Its stock has seen solid growth over a year, but it does not always move expectedly. I think the reason is because there is a great deal of coverage and expectations attached to it which can create bumps along the road. In addition, it also has a fairly high P/E ratio. But given its strong performance so far, could it still be a good investment?

Since the last time I wrote about the company there have been some developments that may give a preview of its future potential.


Q4 2013 Earnings: The Company validated the optimism around it by delivering solid financial results in the fourth quarter. It reported growth in both its wholesale and direct to consumer business with growth of 35% in Apparel, 24% in Footwear and 52% in Accessories. The company continued its commitment to push its Women’s and Youth categories in Q4. It opened 5 new factory house stores while expanding 9 existing locations with a broader selection of items such as Women’s and Footwear. In my last article I had noted the opportunity to expand the limited product lines of the brand being sold at many distribution points. So this is a step in the right direction to bridge that gap. Gross margins improved, supported by favorable sales mix and airfreight expenses and earnings per share increased 27% year over year. Overall the last quarter performance was another piece of evidence the company’s strategies are paying off in quarter after quarter of strong financial performance.


MapMyFitness: The acquisition of MapMyFitness in November 2013 marked Under Armour’s foray into the world of digital/mobile fitness. A connected community of over 20 million registered users, it allows them to build fitness routes and workout regimes while tracking and sharing their fitness experiences. It has a suite of popular apps like MapMyRide and MapMyRun and is integrated into over 400 “wearable tech” devices. But at a purchase price of $150 million, does this acquisition bring enough to the table for Under Armour?

  1. MapMyFitness is a tool for Under Armour to go beyond being a seller of performance gear, and be a provider of a holistic customer fitness experience.  While this enhanced experience would be a plus for its existing customers, the acquisition also opens up a platform that provides exposure to new, potential customers that have been using the forum.
  2. A future, integrated ecosystem where all the needs of the customer including gear, fitness tracking devices, as well as interactive tools available on these devices, are all met in a one stop shop, is good for retention.
  3. Information is an extremely valuable asset for a business. The analytics data generated by users of MapMyFitness is a window into customer behavior for Under Armour.

The company’s stock closed about a percent higher than the previous day’s close at $83.53 after the acquisition was formally announced on November, 14th.


Holiday 2013: The Company outperformed its major competitors during the 2013 holiday season, witnessing 34% sales growth based on heavy promotions and strong performance of its fleece line. Unlike the general grim mood for retailers this season, Under Armour’s strong presence as an online retailer paid off in robust sales. Its fleece and ColdGear was also helped by the cold temperatures in this winter season.


Notre Dame: Under Armour made a splash earlier this month by announcing a 10 year deal with Notre Dame that is being touted as the largest financial commitment made by an athletic brand to a university. Under the agreement the company will be dressing and providing equipment for all men’s and women’s varsity teams at Notre Dame. While this is great exposure for the brand, it comes at a price estimated by ESPN to be near $90 million in cash and product. The university also got the option to pick up some company stock as part of the deal. While the company has had robust revenue growth and has a strong cash position, this is still a large financial commitment. So what does this deal do for Under Armour?

  1. Simply put, it puts Under Armour on the map. Faced with much larger and more established competitors like Nike and Adidas, brand building is important for the company and it is taking it seriously. Being able to offer a deal attractive enough to replace Adidas’s 17 year partnership with Notre Dame is a statement of confidence.
  2. The well-known Fighting Irish teams are a good medium for the company to get more publicity and promote its brand domestically and internationally.

After reports of the Notre Dame deal came out on January 10th the company’s stock touched a pre-Q4 earnings high of $88.75.


Winter Olympics 2014: The Olympics are undoubtedly amongst the biggest events in the athletic world and this year Under Armour is hoping to make a mark with its Mach 39 speed skating suit that has been developed through a partnership with Lockheed Martin. A radical, new design that is expected to give U.S. athletes an edge in the competition, it has already generated a buzz as “the world’s fastest speed skating suit” which is great from a marketing and PR perspective for the company. It is an indication of the company’s innovation and marketing savvy.


Conclusion: Overall, I still think that Under Armour is a company that has a clear vision for growth, and most importantly, commitment to that vision. Its track record of strong financial performance has been supporting the growth story. But while this quarter the company’s stock price soared with strong results, I still think that there are a lot of high expectations attached to it. Whether it is the holiday season or a quarterly earnings report, there seems to be a general positive outlook for the company’s performance. And it continually has to outdo itself to beat those expectations. My view of the company remains unchanged since I wrote about it three months ago. It could offer long term growth to an investor who is willing to take bumps along the road in his/her stride.

Upwardly Mobile: The mobile payments landscape, PayPal and Apple

The latest buzz surrounding the Wall Street Journal’s recent report of Apple Inc.’s (AAPL) plans to take on mobile payments as the next frontier in its remarkable journey has raised questions and opinions galore about the future of the mobile payments world and existing competitors like eBay’s (EBAY) PayPal.

The Mobile Option: Mobile payments can be defined to include purchases of merchandise and services, bill payments, donations and money transfers between persons. Different types of payment platforms and mobile wallets can be used by customers and merchants to conduct business on mobile websites as well as in stores. These payment systems can work through various technology; media apps downloaded on smartphones for easy checkout and payment options, blue tooth enabled devices at stores,  near field communication or NFC to name a few. NFC is a technology that enables smartphones and other equipment to communicate with each other through touching or tapping to enable transactions.

Apple’s Opportunity:  Given that Apple Inc. reported last year that it had 575 million registered iTunes users and had sold approximately a total of 375 million iPhones and 155 million iPads; it already has a large potential customer base in place for a mobile payments system. It also has synergistic capabilities in place like Touch ID, its fingerprint identity sensor, which can be leveraged for authentication and fraud prevention.  Also its iBeacon Bluetooth technology can possibly be used for in store transactions. Recently the company applied for a patent covering payments using signals between phones and wireless devices. And while mobile payments may be in its “infancy” in Apple CEO Tim Cook’s words, reports by e commerce companies and market researchers generally have a positive outlook on adoption rates and market share growth for mobile commerce. Although the company has not yet confirmed any reports relating to its mobile payments strategy it would not be uncharacteristic for the company to tackle a technology in its early stages, build it into a quality product or service, and make it the new normal. But there are existing players in this market like PayPal, Square, Stripe, Google Wallet and Isis to name a few, who have a head start.

PayPal’s Head Start: PayPal is one of the leaders in the mobile payments space. In its Q4 2013 earnings call eBay Inc. declared that commerce over mobile had grown 88% in a year, exceeding expectations.  Mobile payment volumes over the PayPal platform increased from $600 million in 2010 to $27 billion in 2013. For the quarter, PayPal mobile payment volumes reached $8.8 billion. A majority of PayPal’s mobile payments came from eBay; one example of the benefit of synergies from keeping these businesses together. The company expects enabled commerce volume through mobile to grow 65% on average annually for the next three years. PayPal gives users the ability to easily complete transactions online through mobile devices by using its checkout options. In store transaction methods like using a customer’s phone number and pin with participating vendors may be easier to implement than NFC enabled platforms.

PayPal has 137 million active registered accounts, but its active mobile user base is approximately 17 million. Its mobile payments service is available in over 80 markets and supports 26 currencies. Through its mobile apps it enables customers to transfer money and upload checks. For merchants there is functionality to accept mobile payments, process checks using a phone camera, or swipe a credit card using a card reader on their mobile device.

Market for Mobile: Forrester Research published research predicting that the spending growth over mobile payments for American consumers would be 48% on a compounded annual growth rate basis between 2012 and 2017, increasing from $12.8 billion to $90 billion in a span of five years.

A report by Gartner predicted that global mobile payments transaction values and volumes will grow at an average rate of 35 percent annually between 2012 and 2017 with over 450 million users and a $721 billion dollar market by 2017. It identified the performance of NFC as disappointing, which is not entirely surprising since it requires the installation and use of new devices and systems that may make it relatively hard to adopt. While the report showed that shopping over mobile was weaker due to unsatisfactory customer experience overall, it had an optimistic outlook for money transfers worldwide.

This was echoed in another study by the Board of Governors of the Federal Reserve System in early 2012 which revealed that most mobile payment users (47%) used it for online bill payments in comparison to only 36% that used it for online shopping. While 66% of users made use of credit or debit card numbers entered into mobile phones, only about 22% used a medium like Google Wallet, iTunes or PayPal. This indicates that there is still a long way to go, or alternatively a large untapped market, for the likes of Apple or PayPal to expand their influence.

Limitations: One of the biggest apprehensions for consumers regarding mobile payments is transaction and information security, so a stellar reputation in this area can be useful in getting conversions. The Board of Governors study also indicated that many users did not adopt mobile payments since they did not view it as better than the alternatives.

I think for a company to be a successful in this area, security will need to be accompanied by simplicity. A great example is Starbucks (SBUX) which allows its customers to use its mobile app to buy merchandise in its stores, earn and use rewards and also give gifts by transferring money from within the app. In its F1Q 2014 earnings call the company discussed how it has been benefitting from the move to mobile by leveraging its proprietary mobile payment technology. Approximately 10 million customers used its mobile app and nearly 5 million mobile transactions were recorded in stores each week. In fact it’s mobile and cards payments added up to 30% of its total payments in the United States. The company plans to stay on top of this trend by using personalized service and geo targeting on mobile platforms along with expanding its mobile payments services to China to take advantage of the large potential market there.

Fight to the Finish: It is still mostly speculation whether Apple will move forward with a mobile payments strategy in the near future and what form it will take. But with its existing iPhone and iPad user base, proven track record of innovation and grasp on enhancing customer experience, it can be a formidable competitor. PayPal has experience in the mobile payments business and is using eBay effectively to grow; but needs greater growth outside of the business it gets from eBay.  While mobile commerce is still a relatively small part of e commerce in general, it is growing at a much faster pace and a strong mobile payments infrastructure will be needed to support it. It is hard to say how the landscape will look in the future.  But if people continue to use technology to change the way they shop and do business, then despite tough competition, this may not be a zero sum game.

eBay Enterprise – Opportunities Exist

eBay, Inc. (EBAY) is a commerce company well known for its online marketplace that provides both fixed price and auction style transactions, and also for PayPal, its fast-growing payment solutions service. The company reports its performance under three broad segments; Marketplace, Payments and GSI Commerce. Since Q2 2013 GSI has been re-branded as eBay Enterprise and accounted for approximately 5.5% of the company’s net transaction revenue at $185 million, as of September 2013. Being a smaller and relatively newer segment it is somewhat less talked about than the other two, but is nonetheless an intriguing aspect of the business. My article today will focus on eBay Enterprise and try to evaluate its potential as a business driver for the company.

Business & Recent Performance: eBay Enterprise offers e-commerce, marketing and Omni channel services to major retail brands. It provides a web platform that includes services such as site management, shopping carts, shipping and online marketing, among others. eBay enterprise was born in 1999 as Global Sports Inc., an e- commerce platform for sporting goods that expanded its partnerships to several other retail categories over the years. By the time it was acquired by eBay in 2011 its revenue had grown at a compounded annual growth rate of nearly 65% from $5.5 million in 1999 to $1.4 billion in 2011. Since the acquisition eBay has integrated and re-branded nine companies into eBay Enterprise that add marketing, search, mobile messaging and email among other capabilities to its managed services portfolio.

Enterprise segment clients experienced same store year over year sales growth of 13% in Q3 2013, which was slower than the 19% growth rate in the previous quarter. Revenue was up 5%, offset by a lower take rate, client and channel mix and the impact of consolidating and re-branding the various businesses into eBay Enterprise. Margin growth also slowed due to lower rates and business mix. Cost of revenue as a percentage of revenue was higher for the Enterprise segment as compared to the other two reported segments of the company. The company began migration of its business clients to a new suite of Commerce Technologies and continued to leverage PayPal to improve the performance of its Enterprise platform.

Competition: The Enterprise segment faces intense competition from other commerce and technology companies like Amazon. The business customers it seeks to gain could opt to develop and use in-house e commerce platforms instead of partnering with the company.

Appeal to Potential Clients: Given the availability of alternatives mentioned above, the question is what would prompt brands to become clients? There are certain benefits that eBay Enterprise brings to the table.

Integrated Commerce Solutions: eBay Enterprise supports its retail partners in engaging a customer who utilizes various channels such as mobile, desktop, television, brick and mortar, and more, to shop. This is a customer empowered by technology who expects personalized customer service, consistent experience across channels and easy, secure transactions. One of the reasons an Enterprise partnership could be appealing to potential retail clients is because it promises holistic start to finish solutions for maximizing customer engagement. It takes the task of identifying and implementing the various technologies, delivery, distribution, supply chain, packaging, customizing, customer care, marketing and other solutions from its business clients and offers them an integrated ecosystem.

Customer analytics is another valuable service that eBay Enterprise can offer its partners. It can utilize data from specific clients and general commerce trends from its marketplace and payments portals to provide actionable insights to businesses. For example, it can help identify trends such as shift to mobile by recording a 127% growth in mobile orders for its partners between Thanksgiving 2012 and 2013, and assist in tailoring their strategy to take advantage of changes in customer behavior.

Strategic Alliances: Through its network of partnerships and suite of services the Enterprise segment can provide wide global exposure and economies of scope that may not be accessible to a retailer individually. It owns 3 million square feet in fulfillment centers including locations in the United Kingdom and Canada.

It has formed an Alliance Network with key partners to bring together a suite of services that customers can utilize to sell their products and build their brands. For example, it partnered with Ordergroove to provide subscription commerce solutions to its clients like Grainger, Teavana and L’Oreal to name a few. Engaging customers in a subscription service can be instrumental for retailers to attract and retain clients at a lower cost, up-sell and cross-sell products and services and achieve more frequent transactions. It also formed a partnership with Mercent to offer analytics and marketing solutions to its clients.

Omnichannel Retail: The enterprise solution can be of value to retailers in providing a seamless experience to its customers across various media. It seeks to assist brands in leveraging their existing assets like brick and mortar stores with the help of technology to maximize sales. For example, setting up tools such as tablets or kiosks in stores with databases of inventory, that sales associates can rapidly scan, and order items for customers from any store in their network.

Another useful feature for retail clients can be supply chain solutions that enable items to be easily located and shipped among all of their stores that are connected on an integrated network. One such service is provided by eBay Enterprise through its partnership with VendorNet that allows deliveries to be routed to the optimal point of fulfilment and is used by clients such as Juicy Couture, Toys R Us and National Geographic.

Advantage to eBay, Inc.: While currently the enterprise segment contributes a small percentage to total revenue of eBay, Inc., it presents some potential advantages for the parent company.

Diversified Client Base: Having a diversified portfolio of customers can be a good hedge against volatility for any company. Within the retail industry eBay Enterprise serves over 1000 brands and retailers from a variety of sub sectors like Apparel, Beauty, Sporting goods, Toys, Consumer Electronics, Entertainment Media , etc. Some of its retail partners are popular brands such as Aeropostale, DKNY, Kate Spade, Babies R Us, Dick’s Sporting Goods, NBA, Radio Shack, PBS and Godiva to name a few. Recently in Q3 2013 it added Sony to its list of major Enterprise clients.  In 2012 Enterprise partners recorded approximately $4 billion of transactions.

Conversion and Cross Sell:  In Q3 2013, eBay Enterprise set up a test that provided free two-day shipping to customers who used PayPal when shopping with nine of its retail clients. Its analytics data showed that free shipping was the most popular promotion this holiday season among its Enterprise partners. This is an example of how the company can leverage its various assets to cross sell its different services. Not only is there the opportunity for PayPal to gain from handling transactions for Enterprise clients, there is also the prospect of driving these clients towards opening stores on the eBay marketplace forum.

Overall: eBay Enterprise is a business that needs to constantly maintain superior technology, customer support and innovative partnerships for survival and growth. The services it provides are not unique and it faces competition from both service providers as well as in-house marketing and technology departments of retail brands. However, it does have the opportunity to identify gaps in the retail market through data from existing partners and effectively use that information to grow the business for itself and its clients. As long as eBay Enterprise stays on track with quality and innovation it could prove to be a valuable asset for the company.