Episode Transcript
[00:00:00] Speaker A: The markets, we just can't get enough of them.
[00:00:03] Speaker B: Markets are the drivers of your wealth and investment strategy.
[00:00:07] Speaker A: Welcome to Magic Markets with your co hosts, the Finance Ghost and Mohammed Nala.
[00:00:12] Speaker B: Together we have more than 25 years of combined experience in the markets.
[00:00:16] Speaker A: For those looking to take their market and business knowledge to the next level, we offer Magic Markets Premium. Our recent shows have included technology giants like Amazon and Microsoft, as well as a smaller tech play like Intuit. We've also covered content and streaming group Disney as well as retailer Walmart. To add to the retail insights, we recently covered Lululemon as well and this is just a taste of what's available. Visit magic-markets.com today and go premium to get these insights. Welcome to episode 207 of Magic Markets. We are now firmly into January, although I still get some out of office replies from people, so some of you are still on leave. I'm not sure how people get that life right, but if you are and you are making time for us, then thank you. If you are listening to this because you are back at work, you're on your way to work, you're dropping the kids at school, whatever it is you're doing. Thank you for making time for us as well. And welcome to 2025. It's going to be an interesting year in the markets. We've already done a show last week that you can go and listen to if you want to get a sense of which themes carried over from 2024 into this year. We welcomed quite a lot of new Magic Markets Premium subscribers, which is really nice to see. So people obviously have a bit of an interest in stock picking this year, which is obviously music to our ears. Mo and today we are going to be talking about something else that is really interesting and a great opportunity for investors and that is retail turnarounds. But before we get into the detail on that, let me welcome you. You are back home now in Canada and I would imagine the weather there is not great.
[00:01:41] Speaker B: Not great. But we're saying retail turnarounds, I guess, or just company turnarounds while the years turned around. Right? And I think you know that uptick in Magic Market subscribers, maybe that's related to something we said on the show last week because some South African markets have kind of underperformed global markets. Maybe that again spurring some interest in looking offshore. Certainly we think the value proposition at Magic Markets Premium is a strong one. At only 99 rand a month, you're getting deep institutional level insights into a new global stock every single week. It's not just a podcast. There's a detailed report that goes with that as well. So if you haven't had a look, go and have a look at that. That might just turn around your investment strategy. Ghost, I think this is officially the cutoff for us in terms of saying Happy New Year to people. It is the second week of January, so I'm going to say it again. Happy New year. Let's hope 2025 is a cracker. Let's jump straight into today's podcast because I think there's so much interesting stuff happening around the world, but quite often, you know, we tend to ignore what's happening on the ground. And I think we've got some interesting stories coming out of retail stories in South Africa. We know in the US for example, the consumer has been so strong, so resilient. The recent employment numbers that came out were just so strong. And that's showing you that US Economic and markets exceptionalism, that REM remains a trend. Yes, there are some risks associated to that. But in today's podcast, I think we're going to get into some of the nuances around. How do you look at companies, how do you look at consumers, how do you look at retail? And what are the key building blocks and ingredients behind a turnaround story? Certainly in Magic Markets Premium this week we're covering a stock. It's called Walgreens Boots Alliance. It's a pharmacy retailer. So think along the lines of a dischem or Clicks down in South Africa. Very interesting story and some insights coming out of that as well. But Ghost, I'm going to pause there, let you jump into this. Let's set some of the context and then I'll jump in after that.
[00:03:32] Speaker A: Yes, there's been a few retail turnarounds on the market, obviously. I mean, we covered one in Premium a couple of weeks ago, which was Nike. That's not all. It's retail because they're also selling directly. It's a little bit of a hybrid, obviously, because Nike's a brand. But a lot of the same concepts that you see in a retail turnaround are actually also applying there. As mentioned, we're doing Walgreens this week. That is a retail turnaround story. There are a couple of them in South Africa. The obvious one is pick and pay, which by the way, in the past year is up 72%. So it just shows I have avoided it entirely because I just am very bearish about the long term prospects of the business. And that's the thing you've got to get to A point in the markets where you have the maturity to understand that you can't get every single one. And I can tell you I feel a lot less irritated having missed out on something that went up versus going and buying something because of FOMO and then watching a tank 50%. I'd rather, you know, not to make money than take my money and lose it somewhere. So that's just a personal thing and I think it's a good thing for your sanity in the markets, to be honest. But it also shows you the turnarounds can work. But before we get into the details on that, I also saw some pretty interesting headlines in the past day about some of the retail sales updates coming out of the US over the festive season. It looks like, generally speaking, a little bit ahead of expectations, if not necessarily amazingly so. But the share price that got smacked was Abercrombie and Fitch, which is another turnaround that we've covered before on Magic Markets. And again, I think it just speaks to valuation. Right? I mean that thing has done some incredible growth in recent years. Go and draw a share price chart, will include it in the transcript of that business. It is quite extraordinary. I think it's up like 600% or something in the past five years and it is now sitting and looking quite dire. Now obviously it's probably not. Well, not obviously, nothing obvious about it. It probably won't return to those levels that we saw five years ago. But it does show you that turnarounds can also run out of steam and when they do, then the share price corrects quite heavily. So, you know, that's the joy of the markets. If you're going to make money in a turnaround story, you've got to time it pretty well. And that's part of what makes it difficult as opposed to taking a nice long term view.
[00:05:38] Speaker B: Indeed, Ghost, I mean, you touch on such an important point and that is sentiment, because we often look at sentiment in the market. You know, what's investor sentiment look like? But the same applies when you're doing a bottoms up look at a company that is exposed to the consumers. What is consumer sentiment doing? So I'm going to just maybe give a couple of headline pointers in terms of what are the macroeconomic building blocks that you look at in terms of informing a longer term, a trend. Maybe that's for this quarter, the next quarter, the next five years, whatever it might be. Where are we in the cycle? What does that momentum look like? I mean, you mentioned Abercrombie and Fitch, but go and have A look at. If you want a story of the US consumer, go and have a look at two stocks. Go look at Walmart and go look at Costco, because they've really been growing so strongly. I mean, I laughed a little bit this week. I saw Walmart talking about a brand refresh. You know, they've done this brand refresh. It reminds me of when Standard bank did a big, massive rebranding exercises probably about 20 years ago. And they spent months and months and months on this. And eventually what we ended up with was a slightly different font in terms of how they write Standard bank. And they rounded off that little shield and flag logo of this. And I mean, so when you look at Walmart, you're going to chuckle as well because literally all they've done is they've brightened up the colors and they've literally just made the font bigger. And that little, whatever it is, it's like a little asterisk or a star or a sun, whatever it is, they made it a little bit bigger on a much brighter blue background. So I laugh a little bit at that.
[00:07:02] Speaker A: I would, I would remind you, I would remind you that Jaguar has recently shown us that rebrands do not always go well, so be thankful for little curly fonts here and there in a different shade of a color. That's a, that's a good outcome because Jaguar has shown us what is possible.
[00:07:16] Speaker B: I'm not going to comment on the very strange Jaguar rebranding. Again. I was just looking at Walmart and I'm like, the share prices run too hard. If you're going to spend whatever, millions of dollars just to change your font and brighten up your colors. They haven't even bothered to change the colors. I get sidetracked. Go and have a look at Walmart and Costco and that tells you the story of the US Consumer, because the US Consumer has been running hot for a long time. You following the pandemic, they got free money, they got checks in the mail, a lot of them kind of saved that. And that gave consumers a massive buffer to sustain this momentum in consumer spending that is just so important to the US Economy. Now, looking at those macroeconomic building blocks, you mentioned retail sales. Yes. That's obviously a direct measure in terms of what's happening in the retail sector. And what's nice about that data print is quite often you can drill that down and you can go and have a look at it on a kind of micro sector by sector basis to see what retail is actually doing. Well, what's not Doing well. The standout trend for me globally has just been the massive rise and I guess sustained market share gained by E Commerce. I mean we've seen that. We mentioned Nike for example, and they tried the D2C, their E commerce offering as well and it kind of went well and then not so well. So in aggregate, yes, you can even get it wrong if the Megatrend is in your favor. But E Commerce has been quite strong. But I talk of sentiment because there's also another indicator which is the consumer confidence index. Go and have a look at that because it kind of surveys a broad swathe of consumers out there and it says how are you feeling about the future? You know, what are you, what are you thinking about your spending plans? Are you keen on spending on durables or non durables? So that gives you a reasonable indicator in terms of consumer intent. And that is a nice forward looking indicator. If you want something that's slightly ahead of retail sales, then another important point is go and have a look at the jobs market. Now I know in South Africa it's a little bit, it's kind of different to the US because your jobs numbers come out quarterly in South Africa it's not as high frequency. Remember in the US you're getting jobs numbers all the time and there's an assortment of them. There's non farm payrolls, there's the official unemployment numbers, you get, you know, job openings, you get. There's a whole bunch of job indicators you can go to have a look at. But go and look at that in terms of a litmus test of what's the jobs market look like. And in the US the jobs market has been remarkably strong. The most recent nonfarm payrolls number shot the lights out well ahead of market expectations. And again, be very careful of what it's telling you because where we are in the cycle right now, the market was pricing in cuts from the Federal Reserve. They said if the economy slowing down and inflation's low, guess what? The Fed can actually cut rates. Well, what's happening right now is that inflation's kind of bottomed. We've seen it tick up on the most recent data prints and at the same time the jobs market's running very hot, which means the economy is running hot. And if that happens, it means the Fed doesn't have to cut rates as aggressively. So what we saw on the markets over the last week or two is that the market actually recalibrated. We saw yields on the US 10 year moving sharply higher. And that's obviously weighed on share price performance. So be informed in terms of one informed sentiment, the other informs valuations. And then a last point goes that I just want to raise is, is just in terms of the mix of prices because you've got to look at income, but you also got to look at prices. And what do I look at here is I look at energy and food costs because those are non discretionary items. If you want to just wrap this up, those are non discretionary items. You can probably throw shelter in there as well. And if those costs are rising a little bit more than you're seeing overall inflation rise, that starts to choke off disposable incomes, which then becomes a forward indicator in terms of expectations for consumer discretionary spending. So that wraps up the kind of macro view of what are some of the key indicators you would look at and how you would interpret that in informing an outlook for the retail sector with the backdrop that companies, some of them have done really well, some of them have struggled, and now we can jump into what does it take to actually build a turnaround for those that have done poorly.
[00:11:13] Speaker A: Yeah. And what does it actually look like? And it's really interesting to track a few retail turnarounds and just see a lot of the common themes. So I've made some notes here on how the typical turnaround goes and I'll kind of just run you through what I usually see. So first and foremost, change of management like that is step one, new year, new me, new management. I'm out of that broken old relationship, you know, here's my new partner and we are now in love and off we go. So change of management is pretty much guaranteed, almost always at the same time as the release of really bad earnings. So inevitably the earnings come through. The board has now had enough kick out the CEO. At least they ask the CEO to politely go away. CEO politely goes away as a good leaver and gets all the share options. You know, they always seem to make money anyway and this is always around the time of bad earnings. And then typically there is a replacement CEO already announced, essentially. So they release earnings and they say, right, change of management, here's a new CEO. It's a lot worse for the share price. Now that's already bad for the share price. It's a lot worse for the share price. If they don't have a replacement CEO already lined up, then it is just all bets are off on where that share price drops to.
Often the replacement is an old exec that they've gone and basically dusted off in the cupboard. So Nike's just done it with Elliot Hill. Pick and Pay did it with Sean Summers. These are ex executives who have now come back to the group. But it's not always the case. Sometimes they really do get some fresh blood. Someone who's maybe in a different industry or maybe adjacent, who brings a new lens. Especially where there's a need for disruption or response to disruption, they'll often get someone outside. If they feel like the business lost its way and just needs to get back to what it used to be, they'll often bring someone back who was there in those good old days of, you know, what it used to be. And then there's inevitably a period of just getting to grips with what actually needs to be done. So the new CEO comes in and inevitably they ask the market for, say, 30 or 60 days to wait for a formal plan. Fair enough, Makes sense. At that point, the share price has probably dropped quite sharply because, you know, now the market understands how bad the earnings are and just how rough things are going to be. And then we get to an important point that will determine in all likelihood just how bad it's going to get for the share price. So if the balance sheet is decent and you don't need an equity capital raise, it's a change of management, it's a change of plan. This is Nike, for example. Nike definitely does not need to do a rights offer. They're gonna be fine. It's not so bad. It doesn't mean the share price can't drop severely. Just go draw a Nike share price chart. It just means that the market is not gonna start pricing in. You know, is this thing still gonna exist? But if there's a big hole in the balance sheet and it happens often, we saw it at pick and pay, then you're gonna need an equity capital raise. It's probably gonna be a rights offer. Sometimes it's actually a strategic investor who comes in and saves the day and invests a whole chunk of money. But that is usually the case for smaller listed companies. The bigger companies do a rights offer, they go and tap the entire shareholder base. They go and line up a few institutional investors to come in and underwrite the things. So it definitely goes ahead. It doesn't fail again. Often the underwriters are the lenders. So weirdly, when you're looking at these turnarounds, the ones that have a better chance of success are actually where lenders are in so deep that they almost have to allow this thing to survive. You'll see them underwrite the equity raise, et cetera. In some respects, it's almost better. And you can also almost certainly see management giving themselves optionality around this. They'll use language like initiatives to address the balance sheets. They will only say rights offer when there is a rights offer. Occasionally a management team is more honest than that. And I must say, pick and pay telegraphed their rights offer way ahead of time. For better or worse, other management teams try and hide it until the last minute, actually. And it's just different styles and often it's the lenders into the business who will drive whether or not that thing happens. Then, with all said and done, we get to a turnaround plan and that is usually some kind of return to the core DNA of the group. Or as I said earlier, it's just this wholesale change to what they're actually doing. They've been disrupted, they need to do something else. I would argue that the former is less risky. So if you've just lost your way and you need to get back to your core, I think the execution risk on that is lower than if you've genuinely been disrupted. You know, if you've had your Kodak moment in the worst possible way, or BlackBerry, that is a much bigger problem than if you are Nike and you just stuffed up your channels to your customers. You know, these are not the same thing at all. Along with the presentation of the plan, you will also probably see the kitchen sink being thrown at the numbers. They will get all of the messy stuff out of the way. A lot of that is actually happening at Nike as well. They'll clear out old inventory, they'll blame the old management team and what they did. And, you know, we've got all this messy stuff, we've got to clear it out. Legacy issues, that's another word that you'll see a lot. Basically, it creates a clean base off which to grow. It gets all of the rubbish out, they take all the impairments, they have a terrible, terrible year of losses. And then in three or four years time, the management team can say, look, we grew from this huge loss of billions of rands or dollars into what we have today. And of course the management team will go and negotiate their equity incentives off that base. This is just how this game works. Love it or hate it, that's how the game works. And I think Mo just I'll hand over to you now. But if the company survives the initial chaos, so that period of like, we've burnt a lot of money, we have a hole in the balance sheet, we need to do A rights offer, that's a choppy time. I would stay right away personally in that time, I think if they get the capital raise out of the way and when it looks as though that's going to be successful, it starts to become more interesting to put a speculative lawn on the board with that. Just look at pick and pay last year. But I can't stress this enough. It is speculative. There is so much risk and I think when you assess the amount of risk, a lot of it comes down to understanding why this thing broke, how badly it's actually broken and will the situation change in future. So can they make a few changes and go back to former glory? I believe that Nike can and that's why it's so firmly on my watch list. Or are they going to have a scenario where what broke them is still a problem and actually investors might be throwing good money after bad and this is just a dead cat bounce before this thing starts to drop again. I'm still personally very skeptical on pick and pay. Carving out an attractive market position versus the likes of shoprite, for example. They've been thrown a huge bone by the gnu. The removal of load shedding, all that kind of stuff helped them tremendously last year. That share price performance is not just because of the new management team. And you know, that's when you then decide, are you going to stay long this thing? Are you just going to play the turnaround? It's very interesting and it happens over and over again in the markets locally and abroad.
[00:18:04] Speaker B: Ghost, I'm glad you highlighted that because, you know, I think in this show you said, you know, you'd rather actually keep your powder dry in some instances. You don't want to lose that money. When you buy a turnaround, you want to see the turnaround actually taking effect before getting involved. Which is somewhat different to what you had said on the Nike show. I'd said, you know, don't catch a falling knife. You had said, well, you know, you can look at getting involved at certain levels. I think the delta, the difference here and again it comes through in the discussion and what you just said is that you've got to look at the company's competitive positioning, you've got to look at some of those macro indicators I mentioned to you, but also the company's competitive moat. And it's very different looking at a company like Nike, which has a competitive moat to a degree, but also a very, very strong balance sheet versus maybe a player like a pick and pay, where that balance sheet didn't really exist. You mentioned the rights offer. Yes, they were successful in getting that across the line and well done to them in terms of that. And I think that changes the needle in terms of when you look at getting involved, I'm still quite risk averse. I like to actually start seeing some semblance of that turnaround taking root before getting involved. I'd rather lose the first 10% of an updraft in a stock, but then know with a high degree of conviction that yes, we're on the road to recovery. The other thing that I think we need to maybe mention is that when companies go through these turnarounds and some of the distress and certainly some of the work we've done on other companies in magic markets Premium, another feature that comes through quite strongly is where companies have maybe lost their way. It's not as though they've been completely disrupted. Those divestments are also a very important part in terms of repairing the balance sheet. Right. You look at them spinning off non core operations and to the extent that they're able to do that at reasonable prices, they can repurpose that capital in terms of bolstering the balance sheet. So it doesn't always have to be a rights issue. If for example, a company has a number of underlying businesses and we saw this in pick and pay, you know, the Boxer ipo that went reasonably well certainly when I had a look at it. And again, that goes a long way in terms of mitigating some of the impact of needing to shore up the balance sheet with, let's call it unconventional means, like a rights issue. The other point is also companies that pay very juicy dividends and when you go through a turnaround, quite often in terms of their capital allocation decision, you see companies look at either suspending or seriously cutting that dividend, that also just giving them a little bit more flexibility in terms of the capital allocation and where they actually direct the cash flows as the turnaround starts to take root. And I think those are important things to look at as well because quite often, you know, investors would look at a company, they feel confident that yes, it's got a high dividend, this gives the company a lot of flex. That's not necessarily the case, but it does give them an additional tool once they do the hard work in terms of reorientating, restructuring the company in terms of reallocating their capital allocation priorities.
[00:20:53] Speaker A: Ghost? Yeah, absolutely. I mean, this is a fun space and in the markets people should look out for turnaround opportunities. You can play them in a whole lot of different ways. And I think don't be shy to also box yourself in as long term or short term. You don't have to be both. You really don't. Not everyone is a trader, not everyone is an investor. Recognize where you play. If you want to do both and it's something that you can do, then you know, absolutely go for it. But don't bully yourself and say, oh, I missed out on this very, very speculative profit. Like that's okay. If that's not your style and that's not where you play, then that's fine. Because the survivorship bias in this is huge. For every single one of those speculative plays that went up and did beautifully, well, I promise you, a whole bunch of them did really badly because otherwise they wouldn't be speculative. So read as much as you can. Go and listen to podcasts. Not just ours. Go and find others. There's lots of really good stuff out there. And if you are interested specifically in global markets, with definitely a tilt towards the US but not exclusive, we do look at other stuff as well. Then check out Magic Markets Premium. We have covered some retail turnarounds. We did Walgreens this week, we recently did Nike. There have certainly been others. Lululemon is another thing that we've covered from time to time. I've made some decent cash on that. So, you know, go and figure out your style in the markets. Make that your mission in 2025. And if you feel like you are up for some speculative plays, then they are out there. Just be careful of chasing something that already made all the money. The smart traders are gone by then and you may well be left holding a business that actually is just not very good. It just happens to be not as scary as it was a year ago. But that doesn't mean you'll get great returns from it. And maybe that's a good place for us to leave it.
[00:22:30] Speaker B: Indeed. Ghost, I think it was an interesting show, but what do you think as our listeners, as our subscribers, hit us up on social Media, it's at MagicMarketsPod, one word @Finance Ghost and Muhammad Nala, all on X or go and find us on LinkedIn. Pop us a note on there. We hope you've enjoyed this. Until next week. Same time, same place. Thanks and cheers.
[00:22:46] Speaker A: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
