The Black Edge →

Recently finished Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, a fascinating recap of the SAC Capital and Steven Cohen case that involves Preet Bharara and his 76-0 record against insider trading cases. The book includes 3 years of investigative research and is quite a compelling read. The entire story is based around the definition of the black edge:

Karp’s third category of information was “black edge,” information that was obviously illegal. If traders came into possession of this sort of information, the stock should be restricted immediately—at least in theory. In the course of doing their work, analysts inevitably came across this type of information—a company’s specific earnings numbers before they were released, say, or knowledge that the company was about to get a big investment—although the vast majority of what the traders trafficked in was gray.

For an overview of what else I'm reading you can click here.

Netflix & Utter Domination

"By the end of this year, unless somebody mounts a tremendous counterattack—which is getting increasingly harder—Netflix will have utter domination of one of five or six genres that exist," comedy-special producer Brian Volk-Weiss

David Letterman on Current State of Retail

David Letterman with New York Magazine. Was it hard to adjust to civilian life?

It’s still hard. I have trouble operating the phone. That’s the God’s truth. I needed a pair of shoelaces. And I thought, Hell, where do you get shoelaces? And my friend said, there’s a place over off I-84, it’s the Designer Shoe Warehouse. So I go over there, and it’s a building the size of the Pentagon. It’s enormous. If you took somebody from — I don’t know, pick a country where they don’t have Designer Shoe Warehouses — blindfolded them and turned them loose in this place, they would just think, You people are insane. Who needs this many shoes? It’s sinful. It’s one of these places where there’s no employees and every now and then there’s just a scrum of shoe boxes. I’m not finding the damn shoelaces, and finally I think, Maybe it’s one of those items they’ve got at the counter. I go up there and I’m nosing around the counter and, by God, there’s shoelaces. This is after about an hour. So now I’m waiting in line and the woman checking people out says in a big loud voice, “May I help our next shoe lover, please?” I just started to tremble. Nobody else seems to have a problem with going to a store! You don’t want to have painted yourself into some elite position where it’s “Bob, go out and get me some shoelaces.” It makes you feel stupid. Here’s where I’m comfortable: There’s a bait-and-tackle store near my house. They’ve got guys in there, and you can buy live bait, you can buy artificial bait, they’ll put new line on your reel. You can talk to them about rods. They’ll tell you where to go for a largemouth bass. That’s exactly where I want to be.

Anonymity Isn't Helpful

A 2013 study determined that ninety-five per cent of individuals could be positively identified based on just four locations they’d visited. “Just show me where your phone is between midnight and eight o’clock, and I’ve pretty much figured out who you are,” one veteran location-data analyst told me. “There’s no such thing as anonymized data,” the technology writer Clay Shirky, Crowley’s former professor at N.Y.U. and a mentor from his Dodgeball days, agreed. “There’s only useful and non-useful data.” At the moment, individualized data isn’t that useful to marketers. But that could easily change, especially for those peddling big-ticket items. Moreover, Foursquare’s user information is now its most desirable asset, and would be acquired by a third party if the company were sold.

Ariela Ross isn’t among them. Although she hasn’t used Foursquare for years, she told me recently that she didn’t mind sharing her own location with companies “if it makes my life better and more efficient.” Industry experts believe most of us will take the same view, if we haven’t already. “It’s happening,” Albert Wenger, a Foursquare board member, said.

The Upstarts: Uber & Airbnb are Dominant Corporations

Recently finished The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World by Brad Stone. I have been a fan of Brad Stone since I read The Everything Store: Jeff Bezos and the Age of Amazon. This latest book is entertaining for those interested in Uber and Airbnb as it weaves through the history of both startups along with the characters and funding sources that drove them to the goliaths they have become today. The book provides quite a bit of detail on legislative fights, competitors that emerged along the way and a peek into where they are headed for the next leg of growth.

What I found most interesting and prescient given the spate of negative Uber news recently was the author's casting of Airbnb and Uber in good guy bad guy roles. It was particularly evident within this passage:

The abundance of company worship at the Airbnb Open was tough for any hardened journalist to handle. But the hosts themselves, walking around the Grande Halle and attending speeches and seminars with whimsical names like “Hospitality Moments of Truth,” were disarming and inspiring. They were Airbnb’s most persuasive evangelists. Here was a group that loved the company and what it stood for, demonstrating a kind of loyalty and passion that Uber, for example, would never see from its drivers. 

Regardless of role, one thing is certain. These two startups gained the scale and impact no legacy hotelier or transportation company has in the history of the world. These two companies have worked to disrupt the largest companies in the world and in turn have become them. As Brad Stones notes and implies how the name upstart was given:

And if they can’t meet their own lofty goals? Or if the intensity of competition pushes them further toward a ruthless, win-at-all-costs mentality? Then Uber and Airbnb risk validating the worst claims of their critics—that they used technology and clever business plans merely to replace one set of dominant companies with another, amassing a staggering amount of wealth in the process.

We can no longer call either company a startup. Uber and Airbnb are dominant corporations.

Related: Airbnb vs. Hotels, Airbnb Gains Coveted Business Customer

Q4 Retail Sales Comps: Off Price & Warehouses Strong

Q4 comps are complete for the majority of retailers. Highlights include:

• Off price continues to aggressively steal share.
• No department store posted a positive comp.
• Warehouse clubs continue to rebound.

Q2 Retail Earnings Recap can be found here. 

Q3 Retail Earnings Recap can be found here.

App Overload?

 Indeed, Adobe’s latest global mobile report found double digit declines in both app installs (38%) and launches (28%), over the past two years.

With domestic Web traffic plateauing, marketers are also looking overseas. The massive smartphone growth in China, India and Brazil is responsible for driving over 400 million new people online, according to Adobe.

Stateside, the report also found that Google’s Accelerated Mobile Pages is being increasingly welcomed by consumers. In fact, it now accounts for 7% of all traffic for top U.S. publishers, which represents 405% growth over 2016 levels.

JC Penney: Sacrifice the Few for the Many

I applaud JC Penney's management on pushing through with store closures as they realize the current trend doesn't require an annual grooming...but something a bit more drastic to return to the more profitable days. Many of the legacy retailers need to face reality and close the long tail of stores driving low returns or negative returns. Sacrifice the few for the many.

Penney said Friday that it will close 130 to 140 stores as well as two distribution centers over the next several months as it tries to improve profitability. The company said that it would also initiate a voluntary early retirement program for about 6,000 eligible employees.

The stores it is closing represent about 13 percent to 14 percent of its current store count of about 1,000, but less than 5 percent of total annual sales.

Retail Apps Dead?

Surprised we are still debating this as both are arguably needed. Your most willing and loyal customers need an app. Everyone else, needs the mobile web.

Is the app dead? It has certainly been written off in conference speeches over the year as well as the occasional alarmist headline, but what we've all pretty much known all along really does now appear to be coming true. Consumers just don't want a mobile phone packed with screen after screen of apps. They don't want to scroll through page after page of icons, looking for an app that only allows them to interact with one brand.

The research also showed that the majority of retailers are focusing on mobile Web marketing. They are putting money into mobile advertising, content and search that will be discovered through a browser, not by swiping right and left a few times before their app logo comes into view. People are accustomed to searching online for relevant content, and the retailers' reaction to apps would suggest they are happy to search on mobile too.

January Retail Sales & 2016 Recap

January sales were up 5.6% to January 2016. The top 3 growth businesses were gasoline, internet retailers and health & personal care stores:

• Gasoline posted a 14.2% increase year over year as price increases have set in.
• Non-store/online retailers posted a strong 12.0% gain over last year. 
• Heath and personal care stores posted an increase of 8.5% year over year monthly gain.

One point to note is the food services (restaurant and bars) now exceed the general merchandise category of warehouses and department stores. 

On the downside, the bottom 3 included:

• Department Stores multi-decade decline continues but was muted vs. previous months only down 3.2%.
• The Electronics vacuum of sales to online continues with a decline of 1.3%. 
• Sporting goods, hobby, book and music stores saw a decline of 0.8%. 

Overall a very strong report even when excluding the massive spike in gasoline. Traditionally weak categories even saw muted weakness compared to last several months. When looking at the recap of 2011 through 2016, the overwhelming themes remain:

1. General merchandise struggles with the department stores
2. Non-Store internet retailers and Restaurants/Bars continue to ascend and gain at the expense of others and capture the overwhelming majority of growth.

December Retail Sales were posted here.

Amazon's Growth Breakdown

Amazon recently provided a bit of granularity on their growth rates by business that helps to illustrate total size of Amazon Prime (65 million members) and the rate at which Prime subscriptions are growing.

View fullsize

View fullsize

A few points to note:

1. Retail products are growing at a slower rate due to law of large numbers but still accelerated in 2016. 
2. 3rd party is growing at a 40% clip and continues to be the 2nd largest revenue category.
3. Other which includes advertising and co-branded credit cards remains small but has exploded as Amazon has focused on providing 3rd party sellers with tools to sell more through keywords and banner ads.
4. Prime and AWS growth rates have slowed but remain above 40% and 50% respectively.

Bezos on Alexa In Relation to Shopping

Billboard: This is about more than just music, isn’t it? If you succeed, you’ll have placed an Amazon cash register in every house in the country.

Bezos: It’s not about that. For sure, if you have a 2-year-old and you see that you’re running low on diapers, we want to make that easy for you. But voice interface is only going to take you so far on shopping. It’s good for reordering consumables, where you don’t have to make a lot of choices, but most online shopping is going to be facilitated by having a display. Alexa is primarily about identifying tasks in the household that would be improved by voice. Music is one. Another is home automation. So, you can say, “Alexa, turn off all the lights in the house.” “Alexa, turn the temperature up two degrees.” That’s really an amazing thing to be able to do.

Why Amazon Won't Buy Macy's

Olivia Chen of Cowen & Co. recently outlined why she believes Amazon should buy Macy's. Her reasoning consisted of a few reasons:

1. Tremendous vendor/supplier scale: Macy's would give Amazon access to a whole bunch of new apparel brands and help expand its first-party seller relationship.
2. Speed: Amazon could take advantage of Macy's vast number of physical stores and warehouses to improve delivery speed.
3. Big data meets retail: Amazon has the "best" predictive analytics technology in retail, so it could help Macy's make better decisions across inventory and pricing, and potentially lead to higher sales.
4. Merging physical and digital retail: Amazon would gain foot traffic from loyal department store shoppers and get to utilize Macy's physical presence to showcase products and have customers return products easily.

None of what she says is wrong but the idea of Amazon buying the largest department store chain doesn't make a whole lot of sense. Amazon isn't interested in the high legacy costs burdening the old guards of retail leading to their downfall. Amazon isn't interested in stores that are 150,000 to 250,000 square feet in prime real estate locations. Amazon has historically bought businesses with similar models to their internet pure play mentality. Examples being Quidsi/Diapers.com, Zappos, Shopbop. Macy's is none of those and requires extensive cost cutting and store closures to ready itself for the type of business consumers are demanding. 

Bottom Line: Amazon isn't willing to pay for the price of history and would prefer to continue building a leaner business with marketplaces and small format stores. Whose to say that Macy's won't be half the cost it is now in 2-3 years?

Amazon's Q4 Gift

Q4 is always the largest quarter for Amazon due to the overwhelming majority of spending coming in Q4 for the gift giving holidays. This past Q4 continued to show a strong growth number without the law of large numbers setting in just yet. Amazon matched the growth rate of 22% from last year to drive just under $44 billion in Q4 total net sales. AWS posted its' weakest growth rate yet but was still strong by growing over 47%. As mentioned in previous reviews, nothing to worry about here, the growth story is intact and I personally am buying more Amazon shares as the post earnings weakness is a gift. 

View fullsize

View fullsize

View fullsize

PayPal Earnings

PayPal released earnings this past week. Growth in users continues at 10% with transactions per user growing 13%. All of this is driven by Venmo and Braintree while the rest of the business seems to struggle to grow at the same clip of previous years. Because the large percentage of Venmo transactions are free P2P transfers, PayPal has been seeing lower transaction margins in every quarter dating back to Q1 2015. Cause for concern? Well, growing revenues on a declining margin is never a good thing. However, the business continues to generate strong cash flow and is establishing itself as one of the key payment platforms. PayPal has stated margins should be flat year over year but keep a close eye to see how well PayPal is converting P2P users into paying users.

View fullsize

View fullsize

Apple Pay Growth

I recently called Apple Pay and other mobile wallet services as the stealth growth story of 2017 and 2018. As more and more merchants adopt the technology and more importantly "train" the customer and employee on mobile payments, we will see a steady increase in brick & mortar. On the ecommerce side, I am nothing but bullish as mobile sites join the apps already accepting mobile wallets.

TXN recently released a study providing a bit of insight on that growth. A few takeaways:

1. The study is based on 3 million payment cards of their consumer panel. Keep the small size in mind when reviewing. 

2. Growth in transactions year over year is 50%.

3. Mobile only service providers like HotelTonight and Caviar saw the highest percentage of transactions using Apple Pay at just over 3%.

4. Retailer websites such as Boxed and Raise were just under 2% in total transactions that were paid with Apple Pay.

5. Brick & mortar players such as Duane Reade and Whole Foods were just under 2% of total transactions using Apple Pay. 

Bottom line: While none of these statistics are mind blowing, I believe we will see a steady increase over the course of the next few years. Nothing but optimism for this space.

eBay Snoozefest

eBay released earnings earlier today for Q4 and the full fiscal year. Overall, the auction house posted tepid growth in users, listings and overall merchandise sold via site. Earnings per share largely showed a decent growth rate due to $1 billion in shares repurchased. While I don't expect eBay to ever return to blockbuster growth, I am hopeful the site changes in product hierarchies will provide a better organized site allowing for a return to double digit growth. A couple of highlights:

• Active buyers were up 3%
• Sold items were up 5%, GMV in US up 3%, GMV in International markets up 7%
• Stubhub saw a sharp deceleration in growth rates to 20% down from 40% and 32% in prior two quarters
• Earnings per share were up 8% but largely a result of a $1 billion share repurchase paid for by the sale of the $1.3 billion MercadoLibre stake
• Q1 revenue guidance of up 2-4% with EPS growth of -2% to up 2%

Airbnb vs. Hotels

STR released their latest findings on Airbnb's impact on hotels in various markets. Findings aren't entirely new but definitely worth registering for the quick read. Here is summary of findings and takeaways:

1. Airbnb exceeds total room nights of all legacy hotel chains but not all room nights are comparable to hotel nights. On an apples to apples basis, Airbnb is #2 to Marriott International.
2. Hotels occupancy rates exceeded Airbnb's each day of the week.
3. Hotel nightly rates exceeded Airbnb's each day of the week.
4. Airbnb's share grew in each major market but currently only sits in the 3-5% range in market share.
5. Airbnb stays are significantly longer in length and hotels continue to dominate business travel. 

Bottom line: When tides rise, all boats rise. Hotels remain strong while Airbnb continues to growth on a much smaller base. Major impacts have yet to be seen specifically within the business market but traction continues for the mobile app offering the 2nd most room nights in the industry.

Cadillac Launches Subscription Cars Direct to Consumer

Cadillac launches an innovative program that brings monthly car subscriptions to customers for $1,500 a month:

A member pays a flat monthly fee of $1,500 (there’s also a one-time $500 initiation and processing fee).  For all this, the member gets unlimited access to several Cadillacs – from the V Series, XT5 and CT6 to an Escalade – for as long and whenever wanted. These same cars would cost between $60,000 and $100,00 if purchased outright, according to a Reuters report. The car is home delivered and the fee includes registration, taxes, insurance and maintenance costs. There’s no mileage limit and if you want out of the program you just have to give 30 days’ notice.

Keep in mind that this model completely eliminates the dealer and is the car industry selling direct to the consumer. Program launches in NYC February 1 and should be interesting to see if other manufacturers follow suit.

December Retail Sales

December sales were up 4.1% to December 2015 due strong auto sales with aggressive year end promotions. 

The top 3 growth businesses were internet retailers, health stores and restaurants/bars:

• Non-store/online retailers posted a strong 13.2% gain over last year. An acceleration from the last few months.
• Motor vehicle dealers posted the second largest growth rate with 7.2% year over year growth.
• Heath and personal care stores posted the third largest (excluding gasoline) increase 6.2% year over year monthly gain.
• One point to note is the positive yet declining growth rate trend in food services & drinking places.

On the downside, the bottom 3  remained the same:

• Department Stores multi-decade decline continued with a sizable 8.4% decline.
• Sporting goods, hobby, book and music stores saw a decline of 3.6%. 
• The Electronics vacuum of sales to online continues with a decline of 2.4%. 

Strong auto sales brought rosier sales than expected, nothing new here in terms of shifting sales to online but the degradation in restaurant sales growth is a trend worth noting.