Highlights from February 22nd Retail Roundtable Featuring Mindy Meads and John Kyees

Last week we had a roundtable with Mindy Meads formerly of Aeropostale and John Kyees of Urban Outfitters. The discussion focused on raw materials initially where the cost swings should benefit companies going into the 2nd half. More nimble companies like Urban are in much better shape to absorb these costs. They still though have to be on with their fashion. Speaking of that John was very optimistic on the move to bring Ted Marlow back at Urban and feels it wont take him long due to short lead times to turn Urban back  around. In terms of teen Mindy was impressed by some of Eagle’s newer fashion especially versus other teen stores. Color denim  she feels may last thru the summer but doesn’t know staying power beyond that.

A lot of time was spent on JCP and Ron Johnson’s new store concept. So here’s our take. The key to retail is store experience. Apple is one of the leaders. That is the only thing it has in common with JCP. Urban keeps their average customer in the store for 45 minutes. Mindy didn’t think Aero experience lasts ten minutes. The bear story is Real Estate. Class B and C malls, bad locations, bad destinations and old infrastructure. Not exactly an Apple opportunity. Missing the point we believe. The Real Estate is in high population areas. The fact is there has been little spending or promotion at malls. There is no traffic because there is no enticement . No action. No energy. But there is free parking. If you can create a destination attraction that is worth its weight. The mall is failing at that and has been except for Apple. They get the experience. So how do you create a big box experience? That is where to watch the energy. This is not retail as we know it. People think about what stores will move in. They are missing the point. What new experiences will be there. What new energy and technology, not for sale but to drive traffic and a better experience.

Some other thoughts from the event. GAP might be fixable! Looking more like Banana. Brought back Tracy Gardner their old merchant could be interesting.

Watch Michael Weiss at Express he is very very good when it comes to differentiating style and we are at that point in the cycle. Want to bet the average store stay is moving up?

Roulston Media Partner Mark Ramsey on How Radio Can Learn from Facebook’s Advertising Strategy

Facebook is creating new ads that automatically show users when their friends have already “Liked” the advertiser, which makes advertisements social and more targeted. The company believes that ads involving endorsements from the people they know resonate better with consumers than traditional online advertisements. It is too early to tell how effective these ads have been but it makes a further distinction between advertising with force-fed messaging than creating personalization toward each individual. The radio industry needs to realize that advertising is going in a non-spot direction by co-creating content with their clients and finding more revenue sources from the audience. Mark states, “In the long run we may find at least two types of radio industries: The “distribution channel” kind, fed on the faceless, nameless agency buys, and the local, in-your-community kind, where broadcasters link consumers and clients in the presence of their brands in countless ways across numerous platforms.” To read the full article please visit http://www.markramseymedia.com/2012/02/the-new-facebook-of-advertising/.

Mark Ramsey Media is one of the best-known research and strategy providers to media companies in America. He has worked with several television and innumerable radio broadcasters over his career, including all the biggest names, from Clear Channel, CBS, Bonneville, Sirius XM, and Greater Media in the US to Corus and Astral Media in Canada. Clients from outside broadcasting have included EA Sports and Apple.

Green Plains: EPA Approval of Higher Ethanol Blend Signals Growth

A San-Francisco-based portfolio manager beleives Green Plains Renewable Energy (NASDAQ: GPRE, $11.90) is very undervalued at this level.   Last week’s decision by the EPA declaring a 15% ethanol fuel blend a marketable product is a game changer for the company.  The E15 is a 50% increase versus the 10% blend currently used for cars.  The transition to the new standard should happen rapidly in the presenter’ s estimation, with oil companies spurred by higher profits.  He forecasts the full impact to be reflected in the company’s results in the September quarter.   Investors tend to overlook the company because of its high debt, but there are significant tax offests that will protect 2012 net income and partially 2013.   Projected cash flow should enable Green Plains to become debt free by 2015.  The company’s BioProcess Algae JV where it has a 35% stake can alone be worth the current cap in 4-5 years.  If the four remaining domestic ethanol producers act rationally and don’t increase capacity, the new E15 blend would lead to excellent margins on robust volumes for GPRE and the other companies in the space.

Roulston Energy Partner on Safety of Hydraulic Fracturing

A new study released by the University of Texas found that there is no direct evidence that fracking itself has contaminated groundwater. 16 researchers of the school reviewed the scientific literature and regulatory documents for three major areas of fracking in Texas, Louisiana, Pennsylvania, and New York. They found no evidence of drilling fluids leaking deep underground and saw no need for new regulations specifically for fracking. This is great news for the domestic oil and gas industry where the use of hydraulic fracturing in underground shale formations has driven growth. The study did find that some contamination did occur near the surface when gases and drilling fluids escaped from poorly lined wells or storage ponds. Therefore, they recommended better enforcement of regulations currently on the books, such as those covering well casing and disposal of wastewater from drilling, instead of instituting new regulations. Fracking has come under fire recently for its potential connection with earthquakes and other environmental risks so this study is positive news for the industry and the companies heavily involved such as Devon and Chesapeake Energy. To read the full article please visit http://www.instituteforenergyresearch.org/2012/02/23/new-study-finds-that-hydraulic-fracturing-is-safe/.

Thomas J. Pyle is the president of the Institute for Energy Research (IER). In this capacity, Pyle brings a unique backdrop of public and private sector experience to help manage IER’s Washington, DC-based staff and operations. He also helps to develop the organization’s free market policy positions and implement education efforts with respect to key energy stakeholders, including policymakers, federal agency representatives, industry leaders, consumer entities and the media. To read more about the Institute for Energy Research and their mission please visit http://www.instituteforenergyresearch.org/.

Denny’s: Improving Under New Management

A Boston-based PM likes Denny’s (DENN: NASDAQ, $4.19) at this level.  The company has been executing much better under the new CEO.  The new management team, including the new COO and CMO, has over 25 years of industry experience each, a rarity for a small market cap name like Denny’s.  The company has been transitioning to a 90% franchise-owned model and it’s had a postive impact on the cash flow.  Denny’s has been paying down debt, with leverage now at below 3x versus 5-6x just a couple years ago.  There is plenty of room for expansion in both domestic and international markets.  A low franchise start up fee, great brand recognition and craving for “American” food outside the US will help the company’s growth plans.  The stock is undervalued on historical multiples and price to sales, and the company is in a much better shape now financially. The presenter also mentions recent buyouts in the space, a major competitor Friendly’s in bankruptcy, and well-known value investors on the top shareholder list.

Roulston Retail Partner Dick Seesel on How Unseasonably Warm Winter has Affected Retailers

The 2011-2012 winter season has been unseasonably warm which has been good and bad for retailers. It has allowed consumers to travel to the stores unimpeded but retailers that sell winter clothing and footwear have struggled. Deckers and Abercrombie were two apparel companies that were negatively affected by the weather while companies such as Home Depot benefitted from the mild winter since homeowners and construction professionals never had to shut down projects due to inclement weather. Dick Seesel has seen heavier pockets of seasonal inventory in apparel retailers than last year while looking at stores levels of same-store inventories. However, the good weather will probably drive February comparable sales as people look to get a jump start on the spring season. To read the full article please visit http://www.retailwire.com/blog-post/84702f10-5b96-4693-bfcf-be47971973a3/youve-got-to-love-this-weather-but-some-retailers-dont.

Richard Seesel is the Manager and owner of Retailing In Focus, LLC. He was most recently a Senior Vice President and Divisional Merchandise Manager at Kohl’s Department Stores. Dick is proud to have helped Kohl’s grow from 18 stores to a national retail powerhouse, during an era of change and consolidation throughout the retail industry.

Roulston Technology Partner Rob Enderle on Amazon Expansion Opportunities

Amazon recently announced that they have agreed to a licensing deal with Viacom to add dozens of shows to their streaming lineup. This is in addition to the previously struck deals with CBS, Fox, PBS, NBC-Universal, Sony, Warner Bros. and Disney-ABC Television and brings their total Prime Instant Videos to above 15,000. The streaming video content is part of the $79 Amazon prime service which includes free shipping on several items available for purchase and access to the Kindle’s lending library for digital reading among other things. The Viacom deal puts Amazon in position to be a direct challenger to Netflix who has been struggling to hold membership after the failed attempt to separate their streaming and rental businesses. Rob Enderle believes, “The bigger strategy is to create what amounts to a content loyalty program for Amazon and increasingly turn the Kindle Fire and following tablet offerings into a dedicated store front in every home. This is a very unique attempt to effectively corral Amazon’s growing set of services, which would increase customer retention and effectively lower the cost of customer acquisition as well.” To read the full article please visit http://www.newsfactor.com/news/Amazon-Adds-TV-Shows-from-Viacom/story.xhtml?story_id=0200029Q4JH8&full_skip=1.

Rob Enderle is President and Principal Analyst of the Enderle Group, a forward looking emerging technology advisory firm. He specializes in providing rapid perspectives and suggested tactics and strategies to a large number of clients dealing with rapidly changing global events.

Roulston Technology Partner Keith Mallinson on Challenges for Expansion of Mobile Broadband

Data traffic already exceeds voice on many mobile networks which has led companies to get rid of the flat-rate unlimited data pricing models that existed when operators were trying to get people to use 3G. The new 3G and upcoming 4G and LTE challenges are that escalating demand must be economically balanced with supply. The old model fails to extract higher expenditures from those who are willing to pay more, excludes price sensitive users who would be willing to pay lower prices for limited usage, and subjects operators to an extremely high usage from a small proportion of customers. New networks that have excess capacities still use the old model to accelerate subscriber acquisition, which eventually leads to slower speeds due to traffic congestion. Wireless broadband provides the most economical option for voice and Internet access over the next 15 years for nearly half of the world’s population. Most of the competitors have already changed to this multi-pricing strategy but it will be interesting to see how they will be able to deal with the excessive demand in this competitive industry over the coming years. To read the full article please visit http://www2.alcatel-lucent.com/enrich/en/v5i1/mobile-operators-respond-to-global-trends/.

Keith Mallinson is founder of WiseHarbor, providing expert commercial advisory to technology and services businesses in wired and wireless telecommunications, media and entertainment serving consumer and professional markets. He is also regular columnist with Wireless Week, FierceWireless Europe, and IP Finance. Prior to forming Wise Harbor Mallinson led Yankee Group’s global Wireless/Mobile research and consulting team as Executive Vice President. He currently forecasts the long-term outlook in mobile operator services, network equipment and devices to 2025.

EnPro Industries: Overlooked Name with Significant Upside

San Francisco-based portfolio manager likes EnPro Industries (NYSE: NPO, $37.11).  This manufacturer of industrial sealing products, bearings and diesel and gas-fired engines holds leading market postions in all of its businesses.  Repeatable, high-margin business accounts for 55% of total sales.  The company has made a number of small, niche acquisitions at very reasonable multiples in the last few years to complement existing lines.   One of its largest subsidiaries filed for Chapter 11 in 2010 when asbestos-related claims began to pick up.  The claims process shoud be resolved favorably with the final liability likely reduced to around $200 million from $460 million on the balance sheet.  The stock screens poorly due to the filing, and investors are overlooking EBITDA generated by the subsidiary.   In the meantime, NPO is trading at 30% discount to the peer group.  New coverage was initiated in December.  The presenter’s target is $53 with the downside at $33-$34.

Silicon Image: Presenter’s Update Following Earnings

New York-based portfolio manager continues to recommend Silicon Image (NASDAQ: SIMG, $5.42) as a Buy. 

Q4 a good quarter for the company (slight beat and raised guidance) and his thesis is playing out as expected. Mobile (MHL – mobile high-definition) continues to grow rapidly and is now the largest seller for the company. We should begin to see more TV’s rolling out with the MHL technology imbedded this year, which will only help accelerate the adoption of the MHL ecosystem.  The presenter is expecting to see some announcements from device manufactures at the Mobile World Congress which should help continue the momentum. CE products, (read DTV market in general, not company specific) is still struggling.  However, the presenter believes there is room for surprise to the upside in both Q2 and Q3 as the company will be comping depressed results.