The Hour Glass

[brattzz]

The Hour Glass ($0.70) - It was once a $1.00 - $1.20 share with only about 120million shares issued and had dropped to around $0.40 cts per share during the financial crisis in 2006 before it rose to about $2.00 a few years back. Then, there was a share split of 2 for 1 shares and the share price again rose to about $2.00 subsequently. The no. of shares issued was around 240 million shares. Subsequently, a 3 for 1 bonus shares split was announced and the no. of shares issued was tripled to around 720million shares. Share price had dwindled from around $0.85 to $0.70...

However, net profit was pretty flat for the last 2 years with a possible declined this year. Unless one had bought THG before the first or second share split, THG is currently considered to be fully valued at current price level.

It is just plain lucky that a cash rich American fund is buying aggressively into this THG at this juncture. Else we will not get a buyer who is able to support the selling of such large quantity of THG from those shareholders stuck with large qty of THG shares for years and had waited for the opportunity to cash out and exit THG in the last few month at this price level amid the downturn. The trading volume of married deal in millions simply explained that.

Today's THG price is already equivalent to about $4.20 a share before the first share split but let's be reminded that its profit did not actually yet climb five fold. However for those who are cash rich and with a longer time horizon, this is still a good company with a prudent management team that is worth consider to invest in.. good luck.  (Caveat emptor)

Thanks crab2 for the short summary,
it's a nice reminder, personally i think THG and the FMC fund is of similar nature, smart-money at work!

[Choon]

Sharing my views and analysis on The Hour Glass. Comments are greatly welcomed. 

Choon 
http://commonMcommonS.wix.com/wisdom

I like your simple report but in-depth enough to think. Using Earning Yield Target is a new way of thinking to me. I need some time to digest. thanks for keeping me to think.

Earnings yield is copied from Warren Buffett. He explained it as seeing a stock as a bond, but with growing dividends instead of stagnant coupons. His target earnings yield was the long-term US bond interest rate. When long-term US bond interest rate falls too low, he then utilised a fixed 8% or 9%. Online, you can read about how he used this valuation method to value and buy See's Candies. 

Choon 
http://commonMcommonS.wix.com/wisdom

The key i think is the last page.

Assumption 1 : Estimate average net profit over 10 years
Assumption 2 : Deciding Earning Yield Target to Compute Market Cap Target

Stock Value = (Avg. Net Profit/Target Earning Yield)/Total Shares

Just wondering how practical it is.

I think one thing people constantly miss out is that OPMI cannot eat Earnings Yield one, no doubt it is important. The fuller picture to understand See's candy contribution to Berkshire is to see the cashflow to Berkshire. There is company cashflow; there is shareholders' cashflow. They are different.

“Last year See's sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See's has given birth to multiple new streams of cash for us. (The biblical command to 'be fruitful and multiply' is one we take seriously at Berkshire).”

In the past five years, THG delivered about S$50mn net profit each year. But dividend to shareholders was always much lower at about S$14mn each year. From my reading of its cashflow statement, the heavy investment in additional inventory each year had reduced cash flow available for dividend distribution. I imagine (and I hope my imagination is correct) that the heavy investment in additional inventory was due to new store openings. 

Implicit in my 30% downward shift in net profit over the next ten years, is that there will not be any business growth. For valuation purpose, I project THG to stagnate. And thus earnings generated need not be reinvested into additional inventory, but theoretically, can be fully distributed in dividends.  In this case, in my view, net profit is a good proxy for dividends. Conversely, if earnings were projected to increase, and reinvestment would be necessary, then net profit would not be a good proxy for dividends.

[donmihaihai]

Inventories turn in worksheet tells a story. 2.2X to 1.7X.
With increasing outlets, what is the reason for this?
Is the company stocking up because cost of stocks is low?
Is same store sales doing down for old outlets or new stores are not doing well?

In short base on those numbers in the worksheet, investment by the company is going up just as the return is going down.
A 30% drop in net profit without considering investment needs by the company mean profitability is down. If investment is needed just like last few years, profitability down even more.

The company has never distribute all earnings as dividends so it is illogically to think that the future will be the case let alone there is a need for reinvestment.

Lastly WB has repeated twice in last 10 yrs(I think is twice) on see's candy story. None has touch on how he use earning yield to value See's. In fact he has never say - use earning yield to value a stock. But he did say he want a certain rate of return. There is a different.

Using earning yield which is inverse of PE is as good as saying you are using PE to value the company.

Take a step back, re-look at the story and numbers as it these are not The Hour Glass. The result might be surprisingly different. Good or bad.

The company cashflow is only meaningful to OPMI when measure against how much OPMI paid to get the cashflow. WB paid 25M to get 1.35B pre tax over 32 years.

[dydx]

I have just discovered a nice Financial Snapshots page in THG's website.....
http://www.thehourglass.com/investor-rel...snapshots/

The 6-year track record clearly shows consistent business performance and financial prudence.

[Wildreamz]

http://bgr.com/2016/04/26/apple-watch-sales-vs-rolex/

Well, here’s another simple comparison for you to help gauge just how badly the Apple Watch flopped: According to estimates, Apple Watch sales in its first 12 months totaled about $1.5 billion more than Rolex’s total revenue last year.

Google Ventures general partner M.G. Siegler tweeted a link on Monday to the same Wall Street Journal article we discussed yesterday. In it, the Journal noted that estimates peg Apple’s Watch revenue during the device’s first year of availability at $6 billion. We used Apple’s original iPhone launch in 2007 as a frame of reference to put that $6 billion figure in perspective, since it was double the sales Apple enjoyed during the iPhone’s first year on the market.

Not sure how much of Apple's Watch revenue actually derives from luxury watch makers. In my opinion, like all traditional industries, luxury is/will not be spared from disruptions. Disruption can come from new entrants (smart watches), new delivery channels (eCommerce; http://www.mckinsey.com/industries/consu...ping-point) and changing consumer patterns (http://luxurysociety.com/articles/2016/0...ds-in-2016). How will the industry look 10 years from now? How will The Hourglass look 10 years from now? Are they nimble enough to adapt to changes? At the current price, will the stock outperform or underperform the broader market 10 years from now?

(vested in Apple)

[Wildreamz]

Continuing the theme...

[Image: US-retail-nonstore-sales-2016-07.png]

http://wolfstreet.com/2016/08/12/non-sto...-retailer/

Expensive and luxury products[edit]

B&M increases the fixed cost for any business, therefore the products sold in physical shops tend to be more expensive compared to online shops. For stores selling expensive products or services in a B&M format, customers expect beautiful window displays, fine decorating in the establishment and well-dressed salespeople who earn high commission on their sales. Some high-end hair salons and luxury car stores even offer conveniences such as free espresso and bottled water, all of which add to the overhead of selling these products and services. Online shops, even those for luxury goods, do not have to pay for high-end retail stores and salespeople. [13] Nevertheless, high-end online stores typically incur higher costs for their online presence, because they need to have leading edge Web 2.0 functions on their website, a professionally designed site, and in some cases, staff available to respond to phone calls, e-mails and online "chat" questions.

https://en.wikipedia.org/wiki/Brick_and_...y_products

Due to an intensive network expansion plan over the past five years that saw us opening 16 new boutiques over that period, our rentals as a percentage of sales have risen 60% from FY2012 to the latest financial year. The momentum in which cash is being absorbed back into the business is decelerating. This is a good thing and it is a key management goal to ensure we continue enhancing both the productivity of our assets and our cash conversion cycle. With 6 new store openings in the last 12 months alone, it has meant that we deployed $36.2 million into capex and working capital to broaden our inventory base. This resulted in stock turn ratios declining by 11% to 1.7 times (our target is 2.0 times). As we reach the end of our 5 year network developmental cycle and transition into an era of slower expansion, we are confident that we will be improving the quality of our free cash flow generation. This is already evident in FY2016 as our free cash flow turned positive from the prior year, producing $10.5 million in free cash.

http://www.thehourglass.com/web/app/uplo...16_SGX.pdf

Will the rapid expansion of their brick-and-mortar presence pay off? Or will it weigh down on The Hourglass as retail digitization continues? Or will brick-and-mortar see a resurgence in relevance?

Perhaps words from the Chairman can shed some insights:

From The Hourglass Annual Report 2016:

A New World Order

In this new order we see three things occurring. Firstly, as the demand equation rebalances, so will the brand’s production output and distribution as both wholesale and direct owned store networks will be rightsized. Whilst certain watch brands continue to advance their intentions to go the last mile and engage end clients, others have begun the painful process of consolidating their presence and retreat from the problems of over-distribution in markets. In the case of Hong Kong and China where there have been an excess of both multi-brand and monobrand boutiques, we anticipate networks may contract by up to 40% with some historic retailers exiting the market completely.

Secondly, we need to recognize that there is a generational shift in the status quo. As has been repeated time and again to our senior team, there will be more of them (the millennials) and less of us (Baby Boomers and Gen Xers). Anecdotally, this is also reflected in our organization’s composition where millennials make up 40% of the team, Gen Xers 45% and Baby Boomers 15%. Within five years, millennials will constitute over 45% of the team. So the basis is that we cannot expect the younger generation to adapt to us, it is us who must adapt to them. This transition will have a profound impact in the manner in which we engage our future clients. At both the brand and retail levels, the watch industry still exist in a pre-digital era and most have not fully embraced the challenge head on. Physical showrooms alone are no longer the final retail solution and our watch retail business model will begin to alter form. With the internet of things, how traditional brick and mortar retailers deliver an integrated online-offline service to their clients will determine the winners in this new world order. ‘Disrupt yourself before someone disrupts you’ has never been a more appropriate maxim.

Lastly, every luxury consumer today is a global shopper. And as technology continues to discombobulate shopping in the form of online category killer classifieds, online marketplaces and price comparison apps offering enhanced object recognition software, we believe that brands will trend towards ensuring that there is less retail pricing dissonance globally and advance towards a higher degree of pricing parity between markets. External factors that will also have to be closely monitored are how exchange rate fluctuations contribute almost immediately to the flow of shoppers to the lowest priced markets. We witnessed that when both the Yen and Australian Dollar depreciated against the US Dollar and the Hong Kong Dollar. Overnight, tourist spend in our boutiques in Japan and Australia rose to 40% of overall sales. So how a brand sets their prices in each capital city will have to take account such flows as the sophisticated Asian luxury shopper traverses the world seeking arbitrage. 

http://www.thehourglass.com/web/app/uplo...16_SGX.pdf

[dydx]

2Q (ended 30Sep16) result just out.....
http://infopub.sgx.com/FileOpen/THGL_1H_...eID=428611 [3Q result announcement]
http://infopub.sgx.com/FileOpen/THG_Medi...eID=428612 [Press release]

THG's well-managed and proven regional watch retail/distribution business has again proven its resilience in the prevailing weak market conditions. Let's hope for better performance in the seasonally stronger 3Q (Christmas shopping) and 4Q (post-Christmas sale, year-end bonus and CNY shopping).

[Big Toe]

The current weak economic environment will hit all retail sectors hard.
It's all about managing cost and trying to maintain volume and selling margins now.
It is a downward spiral where the weaker retailers will offer huge discounts(often below cost) just to get the cash flow going.
The downward spiral is expected to last a while. THG still still strong and have plenty of room to manoeuvre but I dont think there will be any growth. Those that expand too quickly without the customers/or the cash to back it up will perish. Those without a strong business moat will perish.

[pacyfiq]

The current weak economic environment will hit all retail sectors hard.
It's all about managing cost and trying to maintain volume and selling margins now.
It is a downward spiral where the weaker retailers will offer huge discounts(often below cost) just to get the cash flow going.
The downward spiral is expected to last a while. THG still still strong and have plenty of room to manoeuvre but I dont think there will be any growth. Those that expand too quickly without the customers/or the cash to back it up will perish. Those without a strong business moat will perish.

Agree with you. I will love to have numbers about Ladurée, seems to me a very smart diversification. In Bangkok it's very popular and i was surprise by the quality of their restaurant in Paragon (Bangkok). Diversification will be a Key for the future of HG in my opinion.

[Big Toe]

If THG can manage to have their net profit for the 2nd half(Sep to Mar) that is within the 20-25% decline from the corresponding period last year, it would be quite remarkable. Retail sales of Watches and jewellery registered a huge hit in sales year on year/month on month and it looks to be getting worse(at least in Singapore).

if we look at companies within the SGX. Those that registered strong growth are the turn around stories, those that got battered badly previously that any swing to profitability translate to a big movement up. (did not study much on semi con but I guess that sector seems to belong to the category described). You cant really find any solid growth companies, especially those that is headquartered here or relies a large part on the local market.

Sadly for most part, the local stock market will be a boring place to be, because even the strongest will be hit somewhat during a receding tide. The time to sell into strength has passed(much like the property market). Of course there is actually value in some, and potentially good candidates for privatisation, for the smart major shareholder(s).