What analysts are seeing in retail ahead of December holiday season

Retail names have been one of the better performing groups so far in November, especially important that it is ahead of the critical December holiday season. The XRT retail ETF is up 8% year-to-date, more than double the S&P 500’s 3.7% return.

And while Amazon is up 41% YTD, the broader retail group has more momentum heading into the holiday season. Since the end of October, XRT is up 4.2% compared to Amazon’s +0.2%.

See also: Tearing down and building up: Amazon wants Deliveroo, opens 4-Star store

See, retail isn’t dead.

So what do Wall Street analysts think?

Analysts have pointed out a few things paying into the retail’s recent run:

  • Consumers: strong consumer spending heading into the holiday shopping season. Last quarter’s GDP growth was driven by consumer spending (outpacing income gains, which means people are pushing their purchases forward). That’s probably a positive for this upcoming holiday season
  • Weather: It’s cold. But not too cold, where people don’t want to or can’t go out in a Polar Vortex. So those fleece vests and Patagonia fleece pullovers are probably selling well.
  • Extra holiday shopping day: Christmas is on a Tuesday, which means there’s an extra shopping day between Thanksgiving and Christmas compared to last year. That’s a bigger deal than you think. An Adobe Analytics study (Reuters) said that extra day will provide a $284M sales boost. To just online retailers. And online retail is only about 10% of all transactions.

You would be bold to push all your chips toward Macy’s and away from Amazon over the long-run, but people are actually out buying stuff at physical stores. Retail has a little more life than it gets credit for.

Cover photo: Lukas Schlagenhauf, Flickr Commons

QUICK REVIEW: Last week’s Apple Q4 earnings

I just wanted to follow up with a few points from last week’s Apple Q4 earnings report.

See: FOUR THINGS to know ahead of Apple fiscal Q4 earnings: An EPS-less preview

I wrote that Apple would hinge on a few things. Let’s recap:

One) iPhones

While current quarter sales were decent, the outlook for the all important Q1 was decidedly weak. That was also compounded on reports yesterday that the company will scale back production of the Xr (WSJ). That’s bad. Like I said, almost everyone who wants an iPhone (at least in the US) has an iPhone. The company is at the mercy of the upgrade cycle now.
Luckily ASPs bounced back, buying Apple a little more cushion to soft iPhone sales.

As CNBC noted, “Apple’s average selling price was $793, crushing analyst estimates of $750.93.”

See also: Product review-less review of the Apple September 2018 launch

Two) Services

Again, Apple’s future is in services. That’s why the company is now going to start reporting margins instead of unit sales.

The lesson so far? Despite the fancy product rollout events, Apple is now a services company, not a hardware company.

Three) China

China sales held up relatively well, especially compared to other struggling emerging markets like Brazil and Turkey. If this says anything about the Chinese consumer, that’s good news not just for Apple, but for the global economy.

Now if Apple can start increasing market share in China, it’s a new ballgame.

Four) Tariffs and trade

Not much on this out of earnings. However, the company’s 10K (filed November 5th) said,

International trade disputes could result in tariffs and other protectionist measures that could adversely affect the Company’s business. Tariffs could increase the cost of the Company’s products and the components and raw materials that go into making them. These increased costs could adversely impact the gross margin that the Company earns on its products. Tariffs could also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit the Company’s ability to offer its products and services. Political uncertainty surrounding international trade disputes and protectionist measures could also have a negative effect on consumer confidence and spending, which could adversely affect the Company’s business.

Emphasis mine. Apple investors have mostly shrugged off the tariff impact, but that has the potential to turn into a much bigger problem than softening iPhone sales.

So there it is, a quick recap on Apple earnings. Definitely an interesting story of a company in transition. Stay tuned for more…

Is Instagram listening to your through your phone? In our Echo/HomePod/Google Home world, does it matter?

There has been a big debate about whether apps like Facebook and Instagram are listening to you through your phone.

In a “things that make you go hmmm…” moment, The Verge recently wrote a story, Apple says its T2 chip can prevent hackers from eavesdropping through your MacBook mic. It said Apple’s hardware has “a rather clever hardware-specific defense against mic eavesdropping that can’t be tampered with using remote software controls.” Why do you need a security chip if apps say they aren’t listening to you?  This follows a  2016 article in The Independent, that cited a University of South Florida professor who believes Facebook picks up ambient conversation for ad targeting.

It’s clearly still an ongoing debate (Sam Sheffer recently discussed it on his podcast). But as NYU’s Scott Galloway said in his book The Four, “If you carry a cell phone and are on a social network, you’ve decided to have your privacy violated, because it’s worth it.”

Privacy is so passe

I agree with Galloway, but I’m also skeptical of the claims Facebook and Instagram is always listening to you.

You always hear the stories about some friends talking about a certain beer, then voila, they start getting ads for that beer in their Instagram feed.

First, Instagram has a massive treasure chest of data. It knows if you’re likely to buy some very specific product because. You’re just a nameless profile, but you’ve been put into a bucket with a lot of people just like you.

Second, we all suffer from recency bias. It’s like when you see an actor in once commercial. Then you start seeing her in a bunch of other commercials, television shows, and random movies.

If you talk about a relatively obscure beer with your friends, your eyes and ears are perked up at all sights and sounds of that beer for the next few months. That beer is more prevalent than you think.

The point of all this is, does it really matter?

 Should we get freaked out about whether apps are or aren’t listening to you? Because we are all more than happy to put an Amazon Go or Echo, or Google Home, or Apple HomePod into our homes – knowing damn well those devices are listening to us.

Many might be a bit too freaked out by smart devices to keep one in their home. Count me in that category. But the rest of us still use these apps and products on a daily basis, giving up SO MUCH MORE data and information about ourselves than anything Instagram can glean by listening to my inane conversations with my friends. “Did you see Derrick Rose put up 50 the other night?! Can’t get much from that.

Even worst, our ISPs are allowed to collect all data we send through their pipes and to turn around and use them for marketing purposes. Before 2017, this wasn’t permitted. (See: The Verge, Congress just cleared the way for internet providers to sell your web browsing history). That seems to me to be a much bigger deal than apps. It’s more invisible, but a lot more intrusive.

I’m not arguing whether it is right or wrong for apps to spy on us. We should all just recognize it is happening one way or the other. Cortana on your Windows devices? Bixby on your Samsung devices? Your Comcast voice-activated television remote? Your TV itself (The Intercept: Wikileaks Dump Shows CIA Could Turn Smart TVs Into Listening Devices)? It may or may not be happening on these devices.

But if that is true, then I don’t mind getting rosé vodka ads or thermostat ads served to me on Instagram because I talked about it recently. I’ve got other, bigger privacy things to worry about.

UPDATE: Is CBS starting to act like a digital-first operation?!

I recently wrote that CBS should somehow figure out how to hire YouTube’s Susan Wojcicki to lead the company. I still think that she – or somebody else who has 100% digital experience and 0% traditional media experience – is the right person for the job.

See: What makes YouTube’s Susan Wojcicki such a compelling name to lead CBS?

CBS reported earnings last week – the first of the post-Moonves era. It wasa pretty standard fare:

  • Revenue growth up 3%
  • EPS growth up 12%
  • More content creation, with 76 series in production, up from 65 last year.
  • NFL ratings up 3% after falling for two consecutive years

But the biggest news was the announcement of the launch of DNA (Data n’ Advertising. Ok…), which will help the company better target advertising (the company also launced ET Live last week, its third over-the-top offering. But what good is OTT if you haven’t put in the infrastructure to target ads?)

With DNA, the company will work to move toward a personalized ad targeting system, using data from set-top box providers and smart TVs.

The company’s SVP of investor relations, David Bank, said, “Advertisers can target people who like to eat out and drive SUVs rather than just buy the broad demographic of adults between the ages of 25 and 54.”

CBS gets it! The future of TV isn’t piping in content through your Comcast box, or grabbing over-the-air signals from your flat wall antenna. It’s over-the-top, and the company can make a lot more advertising dollars by serving up targeted ads.

There was no word on how long it will take to put the platform in the action, but at least we know CBS is channeling its inner-Wojcicki.

FOUR THINGS to know ahead of Apple fiscal Q4 earnings: An EPS-less preview

Apple reports Q4 earnings on Thursday, November 1st, after the bell.

Here’s a Google Sheets link to the data and charts used below.

Here are a few things to watch for:

1. iPhones? iPhones

iPhones are it. They are the brain of Apple, making everything else go. iPads? Macs? Accessories? Inconsequential. The company will live and die by iOS.

Here’s why. The company has built the massive product, and gotten in the hands of millions of users. It is THE mobile platform, even if it doesn’t have a dominant market share.

And it’s a cash cow. If you have an iPhone, you’re likely to be buying subscriptions, apps, making in-game purchases. And Apple gets a cut of all of that.

It’s also really the only phone the young folks will consider using. You know, the consumers who really matter.

However, most people who want an iPhone have an iPhone. It’s mostly upgrades from here. So how many people are actually upgrading? Or are more people with older models holding out?

As I wrote a few months ago (Samsung Note 9 vs Apple iPhone X vs You’re probably not going to upgrade anyway), people are waiting longer and longer to upgrade. And that hurts Apple. We used to upgrade every two years, then the phones got better and we could stretch it out to three. I’m still using my four-year-old iPhone 6+, and with iOS 12, it’s running better than it has in two years.

Sample of one, but I’m just part of a larger trend.

Second, any comments on Xs/XsMax/Xr sales?

See also: Product review-less review of the Apple September 2018 launch

The company rolled out the new devices this month, so there won’t be able sales figures for Q3 yet. But the company is definitely going to provide some updates on the new slate of iPhones, especially with the crucial Q4 coming up.

But look for comments on the Xs Max – will the up-to $1500 price tag turn off buyers? What about the Xr, which a bunch of reviewers called the best iPhone for your dollar ever?

iPhone ASPs have been slipping in recent quarters. The people who wanted the X last year bought the X, then everyone else who just needed to replace their iPhone 4 just seemed to buy the cheaper models.

Q3 is a down quarter traditionally, but look for some expectation setting.

2. Services growth

Services are the future of Apple, not the iPhone. For so long, the company buttered its bread with the iPhone.

But since almost everyone who wants an iPhone has one, it’s not all about services. Apple’s iPhone sales as a percent of the company’s revenue has only fallen over the past few years, from over 66% in 2015 to an expected ~60% in 2019.

Services, on the other hand, has more than made up that gap, growing from just under 9% in 2015 to an expected 16%+ in 2019.

On a rolling four-quarter basis, iPhone sales growth has rebounded from around -5% in mid-2016, but is only expected to be around 1% – or less – through 2019.

Services, on the other hand, has grown nearly 7% over the past few quarter, and is expected to keep chugging along at 5% quarter-over-quarter or so through next year. That 20%+ growth makes services THE focus for Apple’s future.

To top it all off, Services margins are much higher than device margins. This is only going to be a bigger and bigger story around Apple’s future.

3. China

China sales have clawed their way back in the past few quarter. On an annualized, rolling four-quarter basis, sales in China hit a low in the June 2017 quarter, but have since snapped back, hitting the highest level since the September 2016 quarter in Q2.

However, Apple’s sales in China – as a percent of all sales – has continued to fall since peaking in Q2 2015. For Apple, this is a dual-edged sword. China is obviously the biggest growth market in the world, and Apple is losing market share, falling to the number 5 spot earlier this year (CNBC). On the other hand, Apple is becoming less reliant on China as a growth driver – probably good given the trade tensions between the two countries.

Still, Apple made a deal with China Mobile, which has a subscriber base of 900 million people. Clearly they’re still trying to break through in China.

But speaking of trade uncertainty…

4. Tariffs and trade

The company has posted four consecutive quarters of sales growth in China, but can for how long? Apple was exempted from tariffs for most products, including the Apple Watch and AirPods back in September (WSJ), but the White House is threatening tariffs on all imports from China, depending on how the talks between Trump and Xi play out at next month’s G20 (Bloomberg).

If all Apple products are covered by tariffs, that’s a massive, material risk for the company.

The New York Times wrote in June that the Trump administration said it would spare Apple from tariffs, and the Tim Cook has been lobbying both the US and Chinese governments through the escalating trade spat. But that may not be enough.

WSJ noted recently that “In the U.S., the proposed tariffs of 10% would have added more than $11 to the import cost of about $115 for a Chinese-made Apple Watch Series 3, according to market researcher IHS Markit. Analysts say Apple would either eat those costs on the device, which retails for $269—and similar costs on other products such as AirPods—or pass the costs on to retailers and consumers.”

If an iPhone Xr, at $750, is around three times that amount, that could work out to an extra $33 per phone. And that’s with a 10% tariffs. A 25% tariff has been thrown around, which could make that $750 iPhone Xr suddenly cost around $83 more, or $833.