VIP Trades 

(April 20/ 2017)  


Low Pound, High Fashion

British fashion house Burberry had some bad news for investors on Wednesday: its sales growth declined more than expected in the most recent quarter. The stock dropped almost 6% on the news! According to earnings posted on Wednesday, Burberry’s sales growth is slowing down. While “same-store sales” (which measure changes in sales for stores that have been open for at least a year) rose in the last three months of 2016, they slowed down to 2% in the first quarter of 2017, even though investors expected those numbers to pick up. 

On the positive side of things, Burberry saw sales improve in China and the United Kingdom, but the slowing global sales momentum appeared to spook investors.

What Does This Mean?
The bigger picture: Currency fluctuations can skew reality for international companies. 
As a British company, Burberry reports its sales and profit in pounds – and, in pound terms, global sales rose compared to one year ago. However, the value of foreign currencies like the American dollar has gone up sharply versus the pound over the past year – meaning the value of Burberry’s international sales only appear to have risen sharply (as the foreign currency is worth more in pound terms). After filtering out these artificial gains, Burberry reported much lower sales growth. Whether it’s Burberry, Facebook or McDonald’s, it’s important to strip out the effects of currency fluctuations to understand how an international company is really performing. 

For markets: Burberry might disappoint investors hoping for a revival in the luxury goods sector. 
Last week, after LVMH reported better-than-expected sales in the first quarter of 2017, there’ve been high expectations for luxury retailers to churn out strong earnings reports in the weeks ahead. Burberry’s disappointing results might only be an in-house problem (its CEO is stepping down later this year in, arguably, a tacit acknowledgement of his poor performance). But, perhaps more worryingly, the company’s results might also signal that the luxury revival is not as widespread as hoped.


IBM Struggles To Keep Up

After reporting lower quarterly revenue and profit versus last year, IBM saw its stock slide by almost 5% on Wednesday! Over the last few years, IBM has begun to pivot away from its traditional products like computers and operating systems (where profits are low across the sector) towards newer sectors like cloud computing and artificial intelligence. IBM reported that revenue from these new initiatives bumped up by 12% over the past 12 months, which is a good sign for that turnaround plan. However, it still wasn’t enough growth to make up for declining revenues in the other parts of the company (like its legacy software business, which saw sales decline 22% versus last year).

What Does This Mean?
For the stock: IBM has previously said improving profitability is more important than declining revenue – but investors appear unimpressed. 
IBM has been working to improve how much profit it earns (i.e. increase its margins) by shifting into newer businesses such as artificial intelligence (e.g. Watson) where it has, arguably, built a first-mover advantage. In theory, as an early entrant into the market, IBM can earn high margins before too many competitors enter the market and potentially push prices down. However, Wednesday’s results suggest that IBM still is not improving its profitability quickly enough to keep investors happy. 

The bigger picture: Innovative competitors make it tough to stay on top in tech. 
It wasn’t long ago that IBM was the world’s second most valuable tech company, but it’s been eclipsed by the likes of Amazon, Alphabet and Facebook. The nature of tech is inherently disruptive – far more so than relatively static industries like airlines or soft drinks. With each new competing innovation in the market, IBM has either had to innovate even more or take a hit as lower revenues from its existing products dragged down its overall revenues – and that’s a challenge today’s tech behemoths are already facing.

“I’ve always believed that if you put in the work, the results will come.”
- Michael Jordan 

RE: The British Shock
Brian asked:
“How does the UK snap election potentially strengthen the Prime Minister’s negotiating position with respect to Brexit?”

“Primarily due to the polling data, the market appears to be quite confident that the Conservative Party, led by the current Prime Minister, will increase the slim majority that it currently has in the House of Commons. Among other consequences, this may mute the power of the ‘hard Brexiteers’ (i.e. those wanting to sever ties with the European Union most dramatically). 

An in-depth piece on the uncharted grounds of machine learning, and when machines are used to derive conclusions from models they themselves create (which we often can't understand): Read More



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