Posts By: Jayden Preston

Qurate Retail: The Perfect Candidate for a Leveraged Turnaround?

Qurate Retail

 

 

Prelude

 

This is the year 2019. And shopping has never been easier. Browse for a product on Amazon, and tens of thousands of options show up; with just one click, your chosen product will be by your doorstep in 1 to 2 days. Shopping online offers the broadest range of products and the convenience to receive your purchased item without even leaving your room. And while Amazon has close to half of the US e-commerce market, most retailers now have an online offering.

 

Of course, if you insist on your desire to get the product in your hands immediately, the option to purchase the item at physical stores is still very much in place. Or you might look for a social gathering, in which you spend time with family and friends in shopping malls, picking a few things up along the way.  Even though the world is inevitably moving more and more toward e-commerce, the majority of retail spending is still conducted at physical stores.

 

To most people, the retail landscape seems to be divided between the above two options. That is unless you belong to a small group of mostly female baby boomers. They are typically home-owners, married, college educated, aged 35 to 64, and shopping for themselves. They shop without leaving their home. Yet, they shop “with their friends” as well. They do so by devouring live TV shows that are hosted by “lifestyle influencers” whom they have grown to be “close to”. Almost every day, the hosts, through a dialogue among themselves, will introduce and recommend quality items that are being sold at a discount. As a viewer, if these female baby boomers are interested in the product being discussed, they can place their orders through a call, using the TV remote control, or via the retailer’s website. They may not have an item to purchase in mind at the beginning. But after watching the demonstration and receiving recommendation from the TV hosts, many of them would make the decision to give the item a try.

 

The above, in essence, describes the business of QVC and HSN, the two TV shopping businesses that serve as the core of Qurate Retail.

 

 

Business Overview

 

Corporate History

 

Qurate Retail was formerly Liberty Interactive. Being a Malone company, Liberty Interactive has a convoluted corporate history. What matter to our understanding of the current Qurate are the following:

 

1. QVC came under the control of the predecessor of Qurate Retail in 2003.

 

2. In 2008, HSN was spun off from IAC/InteractiveCorp, and Liberty Interactive established a stake in HSN. Liberty Interactive completely acquired the remaining 62% of HSN that it didn’t already own in July 2017 for USD 2.1 billion. Included in the HSN deal is a group of catalog businesses in the home and apparel space, collectively referred to as Cornerstone group.

 

3. In August 2015, Liberty Interactive paid USD 2.4 billion for zuilily, an online flash retailer.

 

4. Finally, during the reorganization in March 2018, QVC Group received assets, including stakes

… Read more

RLI Corp (NYSE:RLI) – Just Wait for the Price

Introduction

 

Founded in 1965, RLI Corp. is a specialty insurance company with a niche focus. Initially, the company was called Replacement Lens Inc.*, as the company started out as an insurer for contact lens. They were once the largest insurer of this product in the world. In 1976, RLI expanded beyond contact lens insurance into property and casualty insurance.

 

Fast forward to the present, they now offer insurance coverages in both the specialty admitted and excess and surplus markets. Through 3 subsidiaries, they operate their insurance business nationwide in the US.

 

Coverages in the specialty admitted market, such as their energy surety bonds, are for risks that are unique or hard-to-place in the standard market, but must remain with an admitted insurance company for regulatory or marketing reasons. In addition, their coverages in the specialty admitted market may be designed to meet specific insurance needs of targeted insured groups, such as professional liability and package coverages for design professionals and stand-alone personal umbrella policy.

 

The excess and surplus market, unlike the standard admitted market, is less regulated and more flexible in terms of policy forms and premium rates. This market provides an alternative for customers with risks or loss exposures that generally cannot be written in the standard admitted market. This typically results in coverages that are more restrictive and more expensive than coverages in the standard admitted market. Often, the development of these coverages within the excess and surplus market is generated through proposals brought to them by an agent or broker seeking coverage for a specific group of clients or loss exposures.

 

RLI distributes their insurance products through their own branch offices that market to wholesale and retail producers. The top 3 states for RLI are California (16% of total direct premiums earned in 2016), New York (14.1%) and Florida (10.4%).

 

 

Description

To understand an insurance company, it’s important to look at both its insurance operation and investments.

 

Let’s begin with a more detailed look at its insurance operation.

 

In terms of market segment, RLI categorizes them into 1) Specialty Admitted Insurance Market, 2) Excess and Surplus Insurance Market and 3) Specialty Property and Casualty Reinsurance Markets.

 

As mentioned, in the Specialty Admitted Insurance Market, most of the risks they underwrite are unique and hard to place in the standard admitted market, but for marketing and regulatory reasons, they must remain with an admitted insurance company. This market is more regulated than the other two markets RLI are in, particularly regarding rate and form filing requirements, as well as restrictions on the ability to exit lines of business. In 2016, this is the biggest market for RLI, representing about 67% of their total gross premiums written.

 

Excess and Surplus Insurance Market is the second biggest market for them, contributing 30% of the gross premiums written in 2016. This market focuses on hard-to-place risks, with more flexible policy forms and unregulated premium rates. For the overall property and casualty industry, this excess and surplus market represents about 5% …

Read more

Kroger (NYSE:KR): A Little Too Hard

On 16 June 2017, Amazon announced a $13.7 billion acquisition of Whole Foods. The announcement then engendered meaningful declines in stock prices of major grocers/supermarkets, not just in the US but also in Europe. Kroger, in particular, dropped as much as 17% that day. This brings its YTD performance to -31% as of 29^th June 2017.

Below, we take a brief look at Kroger to see if it is now the right time to consider an investment in it.

 

Introduction

Founded in 1883, Kroger is now one of the largest retailers in the world, with more than $115 billion in revenue in 2016, serving more than 8.5 million customers every day. As of January 28, 2017, Kroger operated, either directly or through its subsidiaries, 2,796 supermarkets under a variety of local banner names. 2,255 of them have pharmacies and 1,445 have fuel centers. They also offer ClickList™ and Harris Teeter ExpressLane— their personalized, order online, pick up at the store services — at 637 of the supermarkets. Approximately 48% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land.

Kroger also operates 784 convenience stores, either directly or through franchisees, 319 fine jewelry stores and an online retailer.

 

Several things stood out in the above description of Kroger:

1. With sales of $ 115 billion, Kroger is the third biggest retail chains in the world. It is also the largest traditional supermarket chain in the US.
2. Kroger’s 2,796 supermarkets are operated under a variety of local banner names.
3. Fuel is a significant contributor to Kroger’s revenue, generating almost $14 billion in 2016. More than 50% of Kroger’s stores have fuel centers.
4. 48% of Kroger’s supermarkets are operated in their own facilities.

 

We will come back to the above points below.

 

Durability and Moat

The durability of demand for food and groceries is very good. Most grocers do not experience significant fluctuations in real sales per square foot over time. This is especially true for a general food and grocery retailer like Kroger, whose store size is big enough for them to have room beyond providing traditional grocery to also sell items that are popular. In other words, they have more room to experiment and adapt according to the latest trends.

For example, 10 years ago natural and organic was not a central focus in their stores because it was not a central focus for customers. 5 years ago Kroger made a concerted effort to make natural and organic the “plus a little” part of their product strategy (Kroger wants their most loyal customers to say “At

Kroger, I get the products I want, plus a little”). Today, natural and organic foods are integral to their business, reaching $16 billion in annual sales in

2016. In fact, this makes Kroger a bigger organic food retailer than Whole Foods.

In terms of moat, supermarkets’ competitive advantage mostly stems from local economies of scale. Kroger uses a 2 to 2.5 mile radius to define its local market for each …

Read more

Under Armour (UA): A Peek at 2037

Overview

 

Under Armour (UA) was founded in 1995 by Kevin Plank, then special teams captain of the football team from University of Maryland. Frustrated by the increase in weight traditional cotton T-shirts incur after heavy sweating, Plank set out to develop T-shirts using better materials. After a year of fabric and product testing, he settled on a compressed synthetic shirt that can be worn beneath an athlete’s uniform. The product provides a snug fit, while wicking sweat away from the body and remaining light.

 

Fast forward 20+ years later, UA has seen its product offering expanded to a wide variety of apparel, footwear, accessories and so on for both men and women. UA also now sells its products globally. In 2016, UA’s revenue has reached more than $4.8 billion, becoming the third biggest sports brand in the world after growing revenue 38% p.a. since 2002. They have also started cracking the lifestyle sportswear market in 2016 by introducing a new product line called UAS.

 

Despite, the diversification of product lines since its inception, it’s important to remember UA is still a performance wear company. All its products are designed to have an aspect of “performance”, including the new UAS line.

 

Business Description, Quality and Moat

 

It’s probably most helpful to understand UA in the context of its two biggest competitors.

 

Both Nike and Adidas started out as sports footwear companies. As of 2016, both of them still generate the majority of their revenue from footwear, 53% for Adidas and 65% for Nike.

 

And as brands with longer histories, both Nike and Adidas are more established internationally, generating more than 50% of their revenue outside of their home markets, i.e. Western Europe for Adidas and North America for Nike.  

 

On the other hand, UA is much less reliant on footwear while much more reliant on its home market. With its roots in performance apparel, apparel still represented 67% of revenue for UA in 2016, with footwear at just 21%. UA’s reliance on its home market is more extreme. North America accounted for 83% of their revenue in 2016.

 

Despite the above two major differences, UA has displayed a remarkably similar financial profile when compared to either Nike and Adidas. First of all, all three of them have stable gross margins in the mid to high 40%. In fact, UA’s gross margin has been higher and more stable since 2002.

 

Stats for Gross Margin since 2002:

Company	Average	Median	S.D.	Coefficient of Variance
Under Armour	48%	48.2%	1.6%	0.033
Nike	44.1%	44.5%	1.9%	0.042
Adidas	47.1%	47.7%	1.7%	0.036

 

 

 

 

 

A similar picture can be found for EBIT. This time, UA’s performance has only trailed Nike.

 

Stats for EBIT since 2002:

Company	Average	Median	S.D.	Coefficient of Variance
Under Armour	10.8%	10.8%	1.7%	0.160
Nike	13%	13.1%	0.9%	0.070
Adidas	8%	7.8%	1.4%	0.177

 

The major reasons why these three companies can have high and stable gross margins are: 1) They are in the business of selling a brand, 2) they engage in …

Read more