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Kuby’s Commentary


Jun 4, 2018

Last Week:

Definition of Resilient from Merriam-Webster:

a: capable of withstanding shock without permanent deformation or rupture.
b: tending to recover from or adjust easily to misfortune or change.

I’m not so sure about “misfortune”, but there has certainly been and endless flow of “shock” and “change” in the world, and like the Energizer bunny, the S&P 500 keeps on ticking. Or was it Timex, that takes a licking and keeps on ticking (clearly, I have watched too much TV). The trade war appears to no longer be “on hold”, as President Trump said he would impose $50 billion in tariffs on Chinese goods and lifted the exemptions on aluminum and steel tariffs from Mexico, Canada, and the European Union (aka “our friends”). As should be expected, all our trading partners responded by proposing tariffs on U.S. goods. Meanwhile, Italy seems headed for a crisis, leading to a surge in rates and the increased likelihood of leaving the euro. In Brazil, a trucker’s strike is crippling their economy, while to the north Venezuela is collapsing. Not to mention the real hot spots capable of creating a shock at any time, such as North Korea, Iran, Syria, Russia (aka “our enemies”), where the news flow continues to be concerning (I’m not a believer that Kim Jong-un and Trump will accomplish anything if they meet).

On Friday morning, the Department of Labor released the employment report for May, which showed a stronger than expected payroll growth of 223,000 and a slight uptick in wage growth. In response, the market rallied, erasing the losses from earlier in the week, to finish up 0.49%. I believe this reaction is meaningful, because it underscores the change in the mindset of traders. Four months ago, this strong of a report would likely have cause a sell-off in the equity markets over concerns of rising interest and inflation rates. Now the short-term concern is over the potential of an economic slowdown. The yield on the Ten-Year Treasury got as low as 2.75% on Tuesday and settled at 2.89% down 4 basis points for the week.

This Week:

Trade talk will likely dominate the narrative unless there is a surprise from one of the numerous hot spots. The economic calendar is light, with Tuesday’s release of the ISM nonmanufacturing index for May and the Department of Labor’s JOLT survey for April as possible highlights.

Stocks in the News:

Movado Group, Inc. (MOV) +23%: First quarter net sales increased 28.1% to $127.1 million, or 22.2% on a constant dollar basis, and adjusted operating income grew to $8.9 million versus adjusted operating income of $2.7 million in the prior year period. The Company also raised its outlook for fiscal 2019. Efraim Grinberg, Chairman and Chief Executive Officer, stated, “We are very pleased to report a strong start to the year with sales and earnings surpassing our expectations. Sales grew 22.2% in constant currency fueled by our powerful portfolio of owned and licensed brands, including the addition of Olivia Burton, which was acquired in July 2017. Our first quarter results reflect the team’s consistent ability to bring innovation to market that resonates with consumers around the world, which was further enhanced by the execution of our strategic growth priorities. We saw sales strength across regions and channels, generating strong results in our international markets as well as our outlet stores and e-commerce business. This topline momentum combined with gross margin expansion allowed us to deliver an increase in adjusted operating income of over 200%. We delivered these results while continuing to invest in our strategic growth initiatives including an increase in digital marketing and beginning to build out our digital center of excellence. Given our strong first quarter performance, we are raising our outlook for the year.” Movado Group designs, sources, markets and distributes fine watches. Its brands include Coach Watches, Concord, Ebel, ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado, and Tommy Hilfiger Watches. MOV is a 4.3% position in the North Star Micro Cap Fund.

Build-A-Bear Workshop, Inc. (BBW) -15.4%: Total revenues were $83.2 million compared to $91.2 million in the fiscal 2017 first quarter; and net income was $0.4 million, or $0.02 per diluted share, compared to $2.6 million, or $0.16 per diluted share. Sharon Price John, Build-A-Bear Workshop President and Chief Executive Officer, commented, “In the first quarter, as we previously shared, we expected to see a sales and profit decline versus the prior year due to adoption of the new revenue recognition standard and the recent closure of our largest, most productive store located in Anaheim, California. Separately, with a less robust movie lineup for the year, we anticipated softness in licensed product performance. And, while we expected continued traffic declines, this headwind was further exacerbated by the unexpected Toys“R”Us liquidation, which according to our analysis eroded sales in nearby locations. Ms. John continued, “At the same time, we saw ongoing improvements in operational aspects of the business and progress in key areas of our diversification strategy. Specifically, we generated improvements in conversion along with record high levels in both dollars-per-transaction and units-per-transaction while continuing the transformation of the business from that of a traditional in-line, mall-based retailer to a multi-faceted consumer brand. In addition, sales of proprietary product increased, ecommerce business grew at a double-digit pace, and international franchise revenue benefited from our recent China expansion. We also remained focused on rebalancing our store base toward more productive formats and locations. I continue to be encouraged by the overall strategies we have in place that are designed to capitalize on the power of our iconic brand by increasing the lifetime value of our guests and adding margin-enhancing revenue streams to our Company.” Build-A-Bear Workshop is a specialty retailer which offers “make your own stuffed animal” interactive entertainment experience in which guests visit a variety of stations to make and customize a stuffed animal. BBW is 2.3% position in the North Star Micro Cap Fund.

Daktronics, Inc. (DAKT) -19.4%: Reported fiscal 2018 fourth quarter net sales of $138.2 million, operating loss of $5.4 million, and net loss of $3.8 million, or $0.09 per diluted share, compared to net sales of $143.7 million, operating income of $1.7 million, and a net income of $0.9 million, or $0.02 per diluted share, for the fourth quarter of fiscal 2017. Reece Kurtenbach, chairman, president and chief executive officer, stated, “While the overall results of fiscal 2018 were below expectations, we remain optimistic for the future. We proactively increased product development activities during fiscal 2018 and introduced additional narrow pixel pitch solutions and control features to our broad array of offerings. Our development spend increased $6.4 million year over year. Warranty charges were approximately $10 million more than our forecast. Additional spends related to warranty were targeted at preserving customer relationships, as well as a few isolated site issues. Warranty as a percent of sales was 3.5 percent as compared to 2.5 percent last year. Sales increased slightly and included completion of more Transportation business unit projects and premier global installations like the Mercedes-Benz Stadium and Piccadilly Lights. We also sold our non-digital division assets for a gain. The new U.S. tax law negatively affected fiscal 2018 net income. All taken into account, we were profitable for the year and our balance sheet remains strong. We generated positive free cash flow for the year and invested over $18 million into our manufacturing capabilities and information systems infrastructure. Investments made in product development in fiscal 2018 will provide on-going benefits well into the future.” Daktronics along with its subsidiaries is engaged in the design, manufacture and sale of electronic display systems and related products for Commercial, Live Events, Schools and Theatres, and Transportation. DAKT is a 1.4% in the North Star Dividend Fund.

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