The Hour Glass

[Temperament]

hm.. they holding so much inventory for what reason?
usually for such watches, in the long term does the value of the inventory go higher or lower?

Management state that their reason for holding large amounts of inventory is that they expect the prices for Swiss watches to move higher over the coming years.

To me (all things being equal) usually go lower because of newer models in the market.

[d.o.g.]

Management state that their reason for holding large amounts of inventory is that they expect the prices for Swiss watches to move higher over the coming years.

The management can say what they want, but what they have been doing is reducing inventory levels. Inventory days has been declining for 4 consecutive quarters. That suggests that they are not trying to hoard watches, but rather the opposite i.e. clear the shelves. They are making progress, but it is slow.

The watch business is tremendously capital-intensive because you need to show it to sell it, but you have to pay for it within 1 month while it takes 5-6 months (or more) to sell it. So the more you grow, the more capital you need. Very limited free cash flow in this business, unless you stop growing.

In the last 12 financial years, Hour Glass reported $297m of cumulative profits. But after changes in working capital, the cumulative free cash flow was just $67m.

[Temperament]

Again understanding the nature of the business operation is paramount to understanding the AR's jigsaw puzzle. We just can not figure the AR of every company the same standard way.

[felixleong]

too much inventory can be a worry to me
especially like special situations like SARS, where fixed cost must be paid yet business is very slow
at such times holding cash is far more important having a lot of inventory
do hope they can slowly clear those inventories at a profit

[dydx]

Is THG over-stocking? While above-average profits and profitability continued to be recorded at the GP, OP and PBT levels in the last 2 FYs, has THG been managing its stocks well and properly?

In FY13 (ended 31Mar13), THG as a group booked a total GP of $143.657m and achieved a GP Margin of 23.87% on a total Revenue of $601.936m, against and based on an opening stocks position of $230.954m (as at 31Mar12) and a closing stocks position of $265.742m (as at 31Mar13) - i.e. a simple average stocks position of $248.348m. Against the COGS of $458.279m charged to the P&L, the average stocks turn was 6.5 months if we use the simple average stocks position of $248.348m; the average stocks turn would be 6.05 months if we use the opening stocks position of $230.954m. This is quite a feat! I mean to generate a humongous total GP of $143.657m within a 12-month period based on an average stocks position of $248.348m - how many retail enterprises have done it?

I think we should also bear in mind that the Tays and Chans as the controlling shareholders with a combined majority total stake of close to 63% in THG naturally should be watchful over the all-important stocks position and turnover of the business. A direct comparison with Cortina Holdings based on the same operating statistics would show how much better is THG in managing stocks and the merchandising aspect of the business.

In FY13 (ended 31Mar13), Cortina Holdings as a group booked a total GP of $83.823m and achieved a GP Margin of 22.8% on a total Revenue of $367.448m, against and based on an opening stocks position of $179.908m (as at 31Mar12) and a closing stocks position of $223.783m (as at 31Mar13) - i.e. a simple average stocks position of $201.846m. Against the COGS of $283.625 charged to the P&L, the average stocks turn was 8.54 months if we use the simple average stocks position of $201.846m; the average stocks turn would be 7.61 months if we use the opening stocks position of $179.908m.

Quite clearly, THG has prevailed over Cortina Holdings in stocks management by a big margin, and this together with smarter merchandising have contributed to its higher profits and margins and other profitability measurements like ROE and stocks turnover.

[sahara]

Management state that their reason for holding large amounts of inventory is that they expect the prices for Swiss watches to move higher over the coming years.

The management can say what they want, but what they have been doing is reducing inventory levels. Inventory days has been declining for 4 consecutive quarters. That suggests that they are not trying to hoard watches, but rather the opposite i.e. clear the shelves. They are making progress, but it is slow.

The watch business is tremendously capital-intensive because you need to show it to sell it, but you have to pay for it within 1 month while it takes 5-6 months (or more) to sell it. So the more you grow, the more capital you need. Very limited free cash flow in this business, unless you stop growing.

In the last 12 financial years, Hour Glass reported $297m of cumulative profits. But after changes in working capital, the cumulative free cash flow was just $67m.

You're wrong. Inventory days have been increasing. They are very high compared to historic levels. Current FCF figures are depressed by this excessive build up of inventory.

[6040]

Good Morning All :-)

Re: INVENTORY

Cortina vs THG
I hear you Dydx. I am actually looking at THG more on an absolute basis rather than a relative one. Given that their NAV is essentially inventory, I thought their inventory valuation process warranted additional due diligence on my part.

Qualitative vs Quantitative?
Inventory turnover days tells me lots about THG's stock movement on a composite basis (roger that Dydx and Sahara), but I guess it doesn't shed much light on my main area of concern, which is whether any portion or specific pieces of existing inventory have "aged excessively" and should be written down further.

Mathematically, a fast inventory turn could be a result of new purchases in the year flying off the shelves. Existing inventory of 266M however might not have budged.

Correction
67M and not 56M of inventory is carried at NRV. Apologies.

In a nutshell
Don't think investor relations at THG will shed any light on their "aged" inventory list, so I guess I will risk looking like a fool at the AGM and ask MD Chan and CFO Ng for a crash course on how they value inventory.

[d.o.g.]

You're wrong. Inventory days have been increasing. They are very high compared to historic levels. Current FCF figures are depressed by this excessive build up of inventory.

I stated that:

"Inventory days has been declining for 4 consecutive quarters."

Their last 4 quarters of data from their financial statements show:

FY13 Q1:
COGS 105,246
Stocks 272,626
Inv Days = 236

FY13 Q2
COGS 107,109
Stocks 274,353
Inv Days = 234

FY13 Q3
COGS 117,988
Stocks 281,593
Inv Days = 218

FY13 Q4
COGS 127,936
Stocks 265,742
Inv Days = 190

So the data series for Inventory Days is: 236, 234, 218, 190. This is a decreasing trend, which is what I referred to.

On an annual basis of course the picture is different, inventory days has been rising since FY10. But a once-a-year snapshot does not tell the whole story.

Switching to a quarterly view shows that the Group usually keeps between 150-180 days of stock, at least since 30 Sep 2007. They got caught in a slowdown in the quarter ended 30 Jun 2012 and were stuck with 236 days of stock (versus just 182 days the previous quarter). Since then they have been trying to clear stocks, and inventory days has been coming down.

Another hint of stock clearance comes from gross margins. In the 3 prior years gross margins spike in the March quarter (Q4). For FY13 Q4 the gross margin is not only lower than FY11 Q4 and FY12 Q4, it is even lower than FY13 Q3.

If holding on to watches allows the Group to benefit from price appreciation, their gross margins should be going up, but the evidence does not provide strong support for this thesis.

[Temperament]

Is (Beginning Inventory+End Inventory)/2 more accurate. Whatever it is only insiders know how much of the inventory going to be obsoleted. Is there a way for outsider to know?

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Obsoletion of some of the inventory of watches?
i think i won't worried too much if the brand is "ROLEX". (i am not sure of other brands) After very longtime then they have new models. And usually the older models are still in production. And who knows the older models may be still sought after by "olddy fuddy" like some of us. It may still sell as well as the newer models. High-end watches are designed as "Timeless" pieces. If the models keep on changing like fashion in clothing, i don't think people will buy. People buy because of the "Timeless" idea-as a lifestyle? NO?
And you know something. Rolex watches (regardless of models) prices only goes up never down. True?

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[dydx]

Is a Rolex or Patek Philippe watch going to become obsolete? My own simple view is that there is always a fair market price range for new or used Rolex or Patek Philippe watches. We should all get to know more about these iconic watch brands.....
http://www.rolex.com/?s_kwcid=TC|1028879...2137394269
http://www.patek.com/contents/default/en/home.html

Before we simply jump into conclusion that THG will lose a lot of money in its stocks, we should bear in mind -
(1) THG's brand watch stocks are in a way 'protected' by a good retail GP Margin - the difference between (a) the recommended retail selling prices set by the brand owners adjusted by the usual discounts given to consumers, and (b) the cost of purchase which is subject to trade discounts based on volume, credit terms, relationship consideartions, etc.) - which averages 23.87% on their average retail sale prices achieved in FY13, or 31.35% on their average COGS charged out to P&L in the same FY.
(2) It is a proven fact that Swiss manufacturers of high-end branded watches adjust their selling prices to wholesalers/distributors/retailers upwards on a regular basis to cover their increasing costs (mainly for specialist manufacturing labour and R&D personnel).

I think the easiest way to know about this trade is to pay a visit to one of THG outlets and talk to the supervisors/managers there about the different brands and their features, and their clientele. I discovered recently that Patek Philippe only produces approx. 50,000 pieces a year for the global market, and most pieces are distributed to the authorised retailers on an 'allocation basis', very much depending on the retailers' sales performance and relationships with Patek Philippe's senior management. Some Patek Philippe models take as long as 2 years to make and are usually sold based on pre-booking, and the sale of some special Patek Philippe models are subject to the approval of Patek Philippe's senior management on the name/background of the prospective buyers. This may sound crazy but it is true!