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Tuesday, August 11, 2009

Bidz / Retail Update - Sales Under Pressure, Preserving Profitability

We will continue our "Bidding on BIDZ" (BIDZ, $4.80) posts later this week, but decided to comment briefly on the company's 2Q09 report Monday. As indicated in our post yesterday, we've been buying shares of Bidz with full knowledge that consumer conditions and forecasting remain challenging.

Normally we avoid companies with high revenue variability and negative fundamentals. We prefer to own businesses with positive/improving fundamentals, consistent free cash flow, and growth (e.g., please see prior posts on PETS, UBET). Still, in this case, we're focused on a business model that we believe has enduring franchise value with a margin of safety relative to near- and long-term earnings power.

Unfortunately, Bidz's 2Q09 revenue of $26.9 million (down 51% Y/Y) fell short of already low expectations (Wall Street consensus $30.0 million), indicating the particularly difficult retailing environment for anything non-essential such as jewelry. On the positive side, the company managed to stay profitable, delivering GAAP EPS of $0.03, at the low-end of its $0.03 - 0.05 guidance range but below a consensus estimate of $0.05. Better gross margins helped offset lower revenue -- 30.6% compared to 27.9% in the year ago period.

Forward guidance also came in lower than expectations as summer seasonality may be even more pronounced at the present time. However, management pointed to a 4Q09 return to growth in the press release:
  • "... The combination of our extensive brand name product assortment, recent partnership initiatives, careful expense management and enhanced focus on customer experience gives us confidence that we will be able to successfully execute our strategic plan. As we look ahead, we expect to resume year over year revenue growth in the fourth quarter and throughout 2010."
We agree the Y/Y comparisons will become easier in 4Q09/2010 and it's possible that international efforts will gain traction following local language site launches in 2008. On the conference call, management cited strength in Saudi Arabia, Egypt, and Spain, with Middle East customers often interested in higher priced items. That said, per the 10-Q also filed yesterday, 2Q09 international sales still declined 33% Y/Y to $9.2 million (34.3% of sales versus 25.1% in 2Q08).

Key operating metrics from 10-Q (click to enlarge):
Management believes the company's inventory position -- while admittedly slower moving than desired -- is preparing Bidz for the upcoming holiday season:
  • "Our inventory currently includes a variety of branded merchandise and many at higher prices in preparation for the holiday shopping season in the fourth quarter of 2009. The current abundance of closeouts has allowed us to stock up on merchandise that would offer good value to our customers."
Clearly, execution and discipline remain critical for the company navigating through the current environment.

Elsewhere in retail, an 8/6/09 Financial Times article summarized July same store retail sales. Even some retailers of consumer staples are showing declines and luxury remains notably weak:
  • "Kohl’s, which operates more than 1,000 discount-style department stores, also reported a 0.4 per cent increase in same-store sales, its first gain since April last year. Its rival JC Penney said its comparable sales fell 12.3 per cent, while Target, the discounter, reported a 6.5 per cent drop, and Macy’s was down 10.7 per cent.
  • Costco, the warehouse club, reported a 2 per cent fall in comparable sales at its US stores, excluding petrol, as lower prices for food and large electronics items including televisions offset continued gains in transactions. Costco’s unit sales of TVs were up 30 per cent on July last year.
  • Luxury retailers continued to struggle during the month, with Neiman Marcus and Saks department stores reporting comparable sales down 27 per cent and 16 per cent, respectively."
Happy investing,

Jeffrey Walkenhorst

Disclosure: Long BIDZ, PETS, UBET.

© 2009 Jeffrey Walkenhorst
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