The Hour Glass

[dzwm87]

Opinions from MD&A should be cross-referenced with comparable peers.

Cortina's quarterly result should be out soon and digging into their inventory level will be a good comparable check?

As a rule of thumb, if there inventory level is high then perhaps the industry is slowing but if only HrGlass's inventory level persists to be high, then it could be due to (1) stocking up for its new retail store opening, (2) HrGlass taking an aggressive bet on higher future demand or (3) probably HrGlass has inventory build up issues specific to themselves

[d.o.g.]

For those who remember Sincere Watch when they were listed in Singapore years ago - Sincere also keep very substantial stocks just like many other retailers, but somehow they managed to get credit from the swiss suppliers. As the result, they have pretty good ROE.

I keep a peer comparison of the various watch companies.

Sincere Watch (and Sincere Watch HK) keep huge amounts of inventory, typically 250 days (even higher for SW HK). But as the sole distributor of Franck Muller they get a lot of help - their payables are much longer than the other watch companies. And they get better pricing so their gross margins are higher by 5-10% compared to Cortina and Hour Glass. Their net margin ends up 1-2% higher.

Hour Glass is traditionally among the most efficient in terms of inventory management, averaging about 160 days for the last 9 years. So if their inventory rises dramatically I doubt it is by design. More likely, sales have started to slow, but they are stuck with the stocks they ordered a few months ago. They will need some time to work off the stocks. Even in the best of times watches don't sell quickly.

To be clear, this isn't a case of the company being poorly run - the historical data suggests quite the opposite - but that business has probably taken a turn for the worse.

[Musicwhiz]

Regarding inventory days, I think that as investors we should look at the numbers objectively; comparing them both to historical for the Company as well as to peers. At the same time, we should also take into account any company-specific events or initiatives which may explain the number(s).

d.o.g. has made valid points regarding competitors and also looking at THG's operating history. dydx has also made relevant points regarding Management Quality and how well the business is run.

It is now up to investors to balance the facts and figures and arrive at their own conclusions about the business.

(Not Vested)

[shanrui_91]

The opening of 2 new stores will definitely require a significant amount of inventory investment, but the question is to what extent did they account for the $41m increase in inventory?

Looking particularly at the second store to be opened at Hong Kong in November, we need to be aware that it is a Hong Kong store and a mono-brand boutique. Mono-brand boutique will require a higher minimum inventory requirement as compared to a retail store with multiple pos. With regard to Hong Kong, Hong Kong has a much higher sales figure than that in Singapore and Australia. Looking at the segment result - geographical segment 2012, some might not have noticed that its North East Asia segment accounts for 14% of total sales despite the fact that it only represents 2 out of the 21 stores reported (1 in Hong Kong and 1 in Japan). We can easily infer that each Hong Kong store is likely to sell at least 50% more than stores in any other location which is nothing surprising.

Essentially, 2.5 new stores out of the 21 stores that accounted for the inventory will represent an increase of 12% in inventory which based on Fy 2012 figure of $230m will give us an increase of $28m in inventory. That will leave us with another $12m increase in inventory unaccounted for, of which I have no idea to what extent will the mono-brand shop account for it.
(I know they have a total of 24 stores , but the 3 stores in Thailand are only accounted for under share of profit of associate)

How will we then know if it is a deliberate act by the management or that they have been caught unaware by slowdown in sales?

If they have been caught unaware, I believe what we will see is inventory dropping to a more acceptable level next 2 quarters or so assuming that sales stay the same. Or what we might see is that the gross margin shrinks as they attempt to destock.
On the other hand, if it is a deliberate act, I believe that the inventory will continue to remain at such a high level for at least the next 2 quarter as the 2 new stores prepare for full operation in September and November.

During the agm in July, the management has said that an estimated $40m in capex + working capital will be spent for the latest FY in preparation for the opening of 2 stores. What I understand then is that the industry is stocking up in preparation for a tightening of supply should the recovery in Europe resumes next year. And with cost of capital at such a low level, the management believes that it is a wise decision to invest in inventory. In fact, Mr Michael Tay admitted then that inventory will increase further this year as they are preparing for expansion.

As for whether it is a wise decision if it is a deliberate act, I think only with hindsight can we rightly judge their decision of piling up inventory at this point of uncertainty. If one gets uncomfortable with it, the right thing to do will be to take profit at current price instead of being tormented by it.

Btw, according to the latest retail sales index, retail sales of watches & Jewellery has dropped by 9.2% in June 2012 as compared to in June 2011

(vested)

[shanrui_91]

In a rare move by Gems TV, they issued a dividend of 0.95 cents which is equivalent to nearly all their cash. THG will probably get around 380k which is still far away from recouping their initial investment.

Commentary:
"The Group is searching for a suitable candidate for a possible Reverse Take Over. At the same time we are focused on monitoring the progress of MMCG as well as encouraging them to do an Initial Public Offering as soon as market conditions allow."

http://info.sgx.com/webcoranncatth.nsf/V...200224F4E/$file/GEMS_FullYearResults_22082012.pdf?openelement

(vested)

[dzwm87]

The opening of 2 new stores will definitely require a significant amount of inventory investment, but the question is to what extent did they account for the $41m increase in inventory?

How will we then know if it is a deliberate act by the management or that they have been caught unaware by slowdown in sales?

You can do a backdate test to see if the amount increase in inventories is justifiable. Look back in recent years to see if HourGlass has launched any new stores and see if there was an inventories spike and whether it is a good leading indicator.

Some adjustment to take note is the size of shop launched in the past as compared to the upcoming ones.

*not vested*

[dydx]

I walked past the THG outlet at Tangs Plaza on Scotts Road at the Orchard Road junction this afternoon and noted it is undergoing renovation. Upon a closer check I realised the outlet will be revamped to carry mainly the Rolex and Patek Philippe lines of watches.

I thought it is a good move, as Rolex is a popular and high-volume brand, and Patek Philippe is a high-price and likely also a high-margin brand.

[crabcrab]

Swiss watchmaking in July 2012
Within a whisker of two billion francs

The value of Swiss watch exports almost attained two billion francs in July. Strong growth (+15.4%) resulted in a particularly high level for this period of the year. The sector therefore shows no obvious sign of losing its momentum in terms of exports, despite what was expected. This trend will be monitored closely at a time when some market segments have already registered a slowdown.

Gold watches generated the highest value, buoyed by a sharp increase compared to July 2011. Steel timepieces also contributed to the rise in export sales. The total number of timepieces fell by 3.8%, while remaining at a high level. The category of other metals (mainly aluminium) recorded a significant decline which weighed on the overall result.

The downturn in volumes was concentrated in the segment of watches costing less than 200 francs (export price) which recorded a result of -8.3%. This decline was partially offset by other categories. Timepieces priced at between 200 and 3,000 francs saw their value increase by 4.6%. As in previous months, growth in value was concentrated in the segment of watches costing more than 3,000 francs, where the monthly increase was 24.1%.

The geographical distribution of exports reflected sales data from the markets. Hong Kong recorded another slight slowdown in growth with a zero variation in July. The United States maintained its position, although sales here were quieter. In fourth position, China recorded a second month of decline, slowing its pace further. Europe overall followed a contrasting path, with strong increases on its main markets.

Source: FHS

[dydx]

Today's (24Aug12) BT has a huge 56-page supplement "The Business of Time" on branded watches. Do get hold of a copy if you want to learn more about the luxury watches trade.

[shanrui_91]

Today's (24Aug12) BT has a huge 56-page supplement "The Business of Time" on branded watches. Do get hold of a copy if you want to learn more about the luxury watches trade.

woah, 56 pages must have been tons of information. I guess it is too late to get it now.