Neev Capital's Rahul Sharma on H&M, Inditex & Emerging Market Retail

Rahul Sharma of Neev Capital recently sat down with Bloomberg Television to talk about consumer trends, emerging markets, and retailers like H&M and Zara.  We wanted to flag this interview as Sharma is on our recently released alpha list of the top finance people to follow on Twitter.

He says that Hennes & Mauritz (HMSB), known as H&M, is a turnaround story as the company 'gets its mojo back' because they had dropped the ball in terms of pricing and they've struggled in Europe where the economy has been problematic.

To curb this, the retailer has focused more on fashion and to be more conscious about price.  Sharma points to the company's geography as very compelling.

Sharma sees Zara as an even bigger winner than H&M.  Zara falls under the Inditex (IXD) umbrella of brands.  We've noted that Steve Mandel's hedge fund Lone Pine Capital has held a stake in Inditex.

It seems as though traditional 'popular' brands in emerging markets such as Esprit have been supplanted by the likes of fast fashion movers such as H&M and Zara.  Esprit seems to be struggling as both the CEO and CFO left within a month of each other.


Retail in Emerging Markets

One of the trends many hedge funds have been playing is the rise of the emerging market consumer.  Sharma touches on this by noting that these consumers are very aspirational so premium retail brands do well in these environments. 

He says that pricing power is high and barriers to entry are high, mentioning Richemont (RITB) as a big player with their Cartier brand.  Louis Vuitton Moet Hennessey (MC) also comes to mind.

The Neev Capital man thinks the mainstream retail market does well in emerging markets due to the rising wage dynamic, and he also feels that premium brands do well due to the wealth effect.


Embedded below is Sharma's video interview with Bloomberg:

Activision (ATVI): A Bright Light in the Dark Consumer World?

I am long a specialty retail play. I had to slap myself out of the stupor for owning one in an environment I have dubbed as a consumer recession. What am I long? Well, how about some Activision Blizzard (ATVI). I was fortunate/unfortunate enough (we'll know later) to get filled on some of my orders in the $10.xx region and I had a few more orders down in the $9.xx that did not get filled.

So, why am I long a retail name, much less a specialty retail name. Well, first and foremost, it is mainly as a hedge to some of my other retail shorts. So, let's make that abundantly clear. I am bearish on the consumer and the economy. But, such bearishness must be given protection to any rampant rallies that might occur and I've selected ATVI, as they are currently dominating competitors such as Electronic Arts (ERTS) and THQ (THQI).

Secondly, I would propose that video games are by no means recession resistant, but they are less affected by a recession than other types of specialty retail. Why? Gamers are hardcore. Many are addicts. A game costs a measly $40-60 bucks and gives you hours upon hours of entertainment. And, ATVI has some of the best titles out there right now, including the Guitar Hero franchise, Call of Duty (4th installment out for the holidays), World of Warcraft (new expansion pack out for the holidays), among many others. They offer relatively cheap products and this benefits them in an environment where the consumer is struggling. When that new game hits, most people gotta have it, especially if its an installment in an already proven franchise such as the games mentioned above.

Thirdly, in addition to the strong products set to hit for the holiday season, ATVI has some very highly anticipated games in the pipeline for the future as well. If anyone is a fan of Blizzard's games (now a part of Activision Blizzard), then you already know what I'm talking about: Diablo 3 and Starcraft 2. These are highly proven franchises and are long awaited sequels (especially Starcraft 2). The entire nation of Korea will probably pick up a copy of SC2, I'm not even kidding. The game's prequel, Starcraft, was that big of a hit over there. So, future revenue streams are well in place.

Fourthly, even in a weak consumer environment, ATVI was still able to deliver solid earnings and stick to their forecast. And, they even announced plans to buy-back $1 billion of stock. After all, they have $3 billion in cash. Some takeaways from the quarter,

"For the September quarter, Activision Blizzard had two of the top-10 titles in dollars on all console platforms in the U.S., according to The NPD Group. For the September quarter, Activision Blizzard had two of the top-five PC titles worldwide -- Blizzard Entertainment's World of Warcraft: Battle Chest(R) and Call of Duty 4: Modern Warfare, according to Charttrack, Gfk and The NPD Group."

And, some data from the recent quarter courtesy of Barron's Tech Trader Daily,

"For the quarter, the video game company posted non-GAAP revenue of $770 million, well ahead of the company’s previous forecast of $620 million. ATVI posted non-GAAP EPS of 7 cents a share, better than the company’s forecast of 4 cents. For Q4, the company sees non-GAAP revenue of $2.2 billion, with profits of 29 cents a share."

So, as you can see, the company is holding up fine so far in this environment. Yes, the consumer should theoretically weaken as we move forward, but ATVI has solid titles, is selling cheaper items, and is selling to a consumer who is not likely to give up their products, despite the recession. If you want any evidence that ATVI has a comparative advantage in titles, then simply compare ATVI's most recent quarter to rival THQ's quarter. Yea, that wasn't pretty.

Lastly, I want to highlight that $10 billion hedge fund Caxton Associates ran by Bruce Kovner was out adding ATVI as a new position in their portfolio last quarter. And, not only did they just 'add it,' they really loaded up. They brought it up all the way to their 3rd largest portfolio holding. I wrote about Caxton's purchase earlier, where I detailed their portfolio holdings. Caxton is one of the many hedge funds I track on Marketfolly.com.

ATVI is best of breed in the gaming space and I am happy to be long the name as a hedge to my other specialty retail shorts. (See my post on the deteriorating consumer environment for short ideas). But, more importantly, the company definitely has a bright near-term future with all the anxiously awaited titles they have lined up.

I would be remiss if I did not end this piece with a 'proceed with caution' label. Specialty retail is easily going to be the hardest hit in the retail space. This is simply going to be a case of "who loses the least." If you do not want to take on the risk involved with this name, I would highly suggest checking out cheap retail plays on the "trading down" of the consumer to cheaper alternatives. These names include the masters of the cheap domain: Walmart (WMT) and McDonalds (MCD). And, you can read my thoughts about MCD's dominance here. Apart from those, playing retail names from the long side will be a very uphill battle.

A Discretionary Retailer Trending Higher: Quick Chart

Just wanted to take two seconds in this bloodbath of a day and point out a chart that is trending higher. And, surprisingly enough, it comes from the consumer discretionary sector: Aeropostale (ARO). While ARO might be one of the few discretionary retailers actually performing well in this environment, there are plenty of names that are not. So, set up a pairs trade or just play the channel straight up; your choice. The chart really speaks for itself. Stop out on a downside break of the channel.(click to enlarge)