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Jeetil Patel | Red Ink Diary

Posts tagged “Jeetil Patel”.

Corporate Values

Two corporations contrasted. First the dog eat dog world of ex-Bain CEO John Donahoe’s eBay.

I read with interest Ina Steiner’s article on eBay’s fourth quarter 2011 report in EcommerceBytes. Several points in that article should make both the micro-seller still trying to sell on eBay and the would be investor pay attention.

“eBay’s growth in the number of global active users on its Marketplaces remained flat at 6% despite a television advertising campaign in the U.S. that promoted eBay’s “buy it new, buy it now” message.”

So, (as we say on eBay,) it does not appear that the undoubtedly expensive TV campaign produced a visible boost although it may have contributed to an invisible one, possibly the numbers would have been worse without it. We shall never know. What we do know is that thanks to eBay’s manipulated search, traffic to the site does not translate to sales for small or micro-sellers.

Much was made that GMV was up 10% year over year, the 4% drop in GMV from the previous quarter for what should have been the highest selling period of the year, well, not so much. However, some points to ponder:

  • The way to beat Wall Street expectations is to estimate low.
  • As Auntie May says “You can fool some of the people some of the time but you can’t fool all of the people all of the time, just ain’t nobody that dumb”
  • An increase in GMV does not necessarily equate to an increase in profits; for example according to Bloomberg, in 2010, GSI Commerce Inc earned less than a penny for every dollar in sales.
  • Approximately 1% of growth is attributable to the addition of sellers shipping costs to eBay FVF. Doesn’t sound like much until you realize how big the numbers are.
  • What percentage of the earnings gain for the fourth quarter came from the $8.5B sale of eBay’s stake in Skype to Microsoft?

The biggest shocker

(Donahoe) then made the surprising statement, “Over the last 3 years, I have replaced 75 of the top 100 people in this company,” making it particularly jarring later when he joked about using a hammer as a “new people management tool.” (An analyst from UBS jokingly asked if it the hammer was something Bain had taught him about management.) EcommerceBytes

My favorite analyst, Jeetil Patel of Deutsch Bank reiterated his ’sell’ rating on eBay,

“underlying weakness at the company lies ahead in 2012, especially as the U.S. dollar strengthens and comps get tougher in March and beyond.” He adds that with gross merchandise value and profit growth likely to slow ahead, “there is growing risk to Street expectations.”

although he was a little off in his pre-results crystal ball gazing, if I still had any eBay shares I would take his advice.

Costco

In the January issue of Costco Connection the cover story is “The Building of a Dream, the empire built on values” . As I read the article I was struck by the contrast in corporate philosophy between eBay and Costco, particularly when it comes to ‘people management’. No hammers.

Many of the C-level executives at Costco started their careers as box boys or cart pushers at now defunct FedMart. Outgoing CEO Jim Sinegal began his career unloading mattresses and dropped out of college, new CEO Craig Jelinek started as a box boy and maintenance worker at age 16.

Costco has been criticized by Wall Street for it’s generous employee benefits program. Jim Sinegal’s responses -

“Wall Street is in the business of making money between now and next Tuesday. We’re in the business of building an organization, an institution that we hope will be here 50 years from now.”

“Taking care of your employees and turning inventory faster than your people is good business. In the final analysis, that’s what it comes down to. You can have the loftiest goals in the world, but they’re meaningless if you don’t make a profit. If you can’t deliver on the bottom line, you’ll disappear.”

  • average pay for a Costco worker is $17 an hour with health insurance including dental even for part-time employees who have been with the company over six months.Hourly workers receive twice-yearly bonuses based on length of service and hours worked.
  • Turnover is highest in the first 180 days and approximately 6% thereafter compared with an industry average of 59 percent.
  • CEO Jim Sinegal’s 2010 salary was $350,000 - his 2009 bonus was $200,000. He is on record saying he considers himself well rewarded by his stock options.
  • Costco promotes from within, about 90 percent of management jobs are filled in-house and most managers work their way up from the warehouse floor.

Not everything is sunshine at Costco, a gender discrimination lawsuit was filed in 2004. At the time Sinegal maintained that Costco had not done anything wrong, and would not settle. At the same time, he admitted that the presence of women in manager and assistant manager jobs was low,16.2% and 17%, respectively.

“We don’t let ourselves off the hook on that,” he said. “We think we can do better. We know we can do better.”

The financials in brief

Notes: Costco’s financial year is different from eBay’s, eBay Q4-11 = Costco Q1-12. Costco operates on a paid annual membership plan which increased by 10% November 1st 2011. This provides a high degree of accuracy in ‘user numbers’. Unlike eBay Costco pays a a quarterly cash dividend on Costco Wholesale common stock; The dividend Q1-12 was $.24 per share or $.96 per share on an annualized basis.

  • Renewal rates were 89% in the U.S. and Canada and 85% worldwide. New member sign-ups in Q1 were also up 15% year over year.
  • Net sales (not gross) rose 13 percent to $21.18 billion, excluding membership fees
  • Earnings over the period were $320 million, or 73 cents per share, compared with $312 million, or 71 cents per share, a year earlier.

Thoughts to take with you on advertising and customers.

“Customers come first. Integrity is the cornerstone upon which we must build consumer confidence that creates customer loyalty.” Sol Price

“Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you.” Sinegal (about Costco employees)

Y’all come back!
Henrietta!


Full disclosure: I am an ex-eBay (1999 - 2008) seller by choice, currently selling on Bonanza and my own website. I no longer own stock in eBay. I have been a Costco member since 1994. I have never owned stock in Costco.

The PayPal Question

Since our discovery of the intertubes both Auntie May and I have become a lot less respectful of pundits, self proclaimed gurus and almost all stock market analysts except Deutsche Bank’s Jeetil Patel who is awesome. Some of our very best previous idols have proven to have feet of clay and as our farrier says “no foot, no horse” What earthly use is a footless horse? Rhetorical question there, that.

Seriously folks, stock market analyst opinion is very much like the Bible. You can find a verse or stock analysis to fit every position.

What is going on at eBay?

Randy Smythe posted a video clip on June 2nd of eBay CEO John Donahoe giving an interview to CNBC at the All Things Digital conference last week.

John seems to have developed a number of tics. He has always waved his hands around, now he also noticeably rocks back and forth and periodically does something weird with his mouth. Some of his statements defy rational analysis, nothing new there. The interview got really interesting around the 2.30 mark when CNBC host Scott Wapner pushed the Amazon question. Overall

  • JD is pleased with progress on his turnaround
  • iPod applications, clothing, shoes and accessory applications really give a hint as to where eBay is going
  • last year’s mantra “we’re focusing on providing the best marketplace for  secondary market items both new and used”
  • eBay is driving towards being one of the winners in eCommerce
  • “and so, our Marketplace grew double digits in transactions in the first quarter of this year”
  • Around the 5 minute mark we hear that there is “still a strong synergy between eBay and PayPal. eBay makes PayPal stronger…”

Pretty much the normal BaySpeak and the interview closed with the standard PayPal question.

Event Horizon 1984 has an interesting post on that line of speculation. Auntie May and I both agree that spinning off PayPal as a separate company (before someone succeeds in regulating it) and filing for an initial public offering is the most likely scenario. Without PayPal eBay is soggy toast.

Facts & a little time line:

  • March 31st 2008 eBay closed at $32.94. Whitman Era ends. Donahoe Era begins.
  • The DE low occurred March 9th 2009 when eBay closed at $10.27.
  • April 14th 2010 one week before Q1-10 financial results would be announced eBay stock closed at $27.04, volume of shares traded was 14.7M.
  • April 21st eBay Q1-10 financial results announced after stock market closed, as usual, eBay stock closed at $26.29, volume of shares traded was 26.9M. eBay claimed double digit transaction growth in the quarter. Beat earnings estimates of 0.41 by 1c and revenues estimates by $8 million.
  • April 22nd eBay stock closed at $24.78, volume of shares traded was 56.7M.
  • June 4th 2010 eBay closed at $21.99 this is a loss of 16.4% over the approximately 6 weeks since Q1-10 announcement

Analysts

Susquehanna forecast $31 and added eBay to their list of “best ideas” this week but on June 1st Marianne Wolk lowered her second-quarter earnings estimates. Are we going in two different directions here?

Kaufman Bros. Aaron Kessler has maintained a hold rating and $31 price target since April 22.

Tim Boyd of MKM Partners, who downgraded the stock from hold to sell April 22nd saying “Growth decelerated despite the fact that Q1 was the easiest of all the ‘recession comps, we believe acceleration was expected.”  Last week MKM Partners upgraded its investment rating on the stock to neutral from sell, saying it is hard-pressed to identify a near-term negative catalyst that might drive the shares below its $20 fair-value estimate. Think about that one for a moment why don’t you.

Jeetil Patel, of Deutsche Bank who seems to be the only analyst not recycling eBay press releases said “The core eBay business has been deteriorating on an operating profit basis, only to be masked by performance from acquired and other business segments.” He also noted that eBay’s operating profit fell to $467 million in the first quarter, down from $472 million a year ago, and from $549 million in first quarter of 2008 excluding PayPal, Skype and Gmarket.

So, (as we say on eBay) with apologies to both William Shakespeare and Hamlet, Prince of Denmark “To be free or not to be? That is the question for PayPal. What do you think?

Y’all come back!
Henrietta!
Full Disclosure: I am an ex-eBay seller & no longer own eBay stock.

Earnings Q2-09 eBay vs Amazon

eBay Inc
reported Q2-09 earnings late Wednesday 22nd July. The Silicon Valley Mercury News reported it succinctly.

“San Jose online auction powerhouse eBay said its profit in the latest quarter plummeted 29 percent from a year earlier to $327.5 million. Revenue dropped 5 percent to $2.1 billion. The weak economy hurt sales on eBay’s main online-commerce sites, although it partly made up the decline with growth in its PayPal payment and Skype communications businesses.”

I do not buy into the “weak economy” theory for eBay. Sure the economy has some effect, you could probably gauge (def.#2) the effect fairly accurately by looking at the decline in Amazon’s results year on year for the quarter. I say ‘fairly accurately’ because Amazon does not sell the product that should be selling like hotcakes in a depressed economy, used clothing, used baby items, ‘needs’ rather than ‘wants’.

Amazon
reported second quarter earnings a day later, Thursday 23rd July, their earnings dropped 10% to $142 million from $158 million a year ago but sales climbed nearly 15 percent to $4.65 billion. This is impressive because Amazon’s sales numbers were helped last year by a $53 million non-cash gain from the sale of European DVD rental assets.

Amazon took a $51 million charge to operating expenses Q2-09 to settle a lawsuit with Toys R Us. Adding that $51 million back to earnings would show increased earnings in the second quarter of $193 million, representing a 22% increase year over year.
Some more Amazon second quarter facts:

  • books, CDs and DVDs up 1% to $2.44 billion
  • electronics and general merchandise sales up 35% to $2.07 billion.
  • North American sales up 13%
  • International sales up 16%
  • third-party sellers made up 30% of total unit sales, up from last year.

Market Analysis

There was a time when I thought market analysts knew what they were talking about. I have always known that watching share prices was no indication of value, only which direction the herd is stampeding today.

The shining exception to the rule of analyst mediocrity is Deutsche Bank analyst Jeetil Patel. His opinion? Amazon was showing the fastest profit growth in the Internet sector and he raised his price target on the stock to $101 from $95. “It now looks as though Amazon is having its cake and eating it too,” he said, given that the company lowered its prices for consumers and still improved profitability. He added that the ($850M) acquisition of Zappos could help Amazon gain market share in the online shoe space.

In summary, using the reported numbers:

eBay declined 29% comparing Q2-09 to Q2-08
Amazon declined 10% comparing Q2-09 to Q2-08

Opinion

John Donahoe has been blaming the recession for a year. “Clearly we’ve been operating in an almost unprecedented external environment. There’s no doubt that eBay was impacted by the macro economy, and our results reflect this.”

I contend his theory is hogwash. eBay’s results reflect the direct consequences of eBay’s actions since February 2008 which have created a micro environment limited to the shrinking eBay microcosm. Categories which should reasonably be booming are sparse. eBay is impacted by its own Management, the ‘unprecedented environment’ is internal, not external. eBay will continue to dig itself into a deeper hole while pinning its hopes of salvation to PayPal.

Slowly, inexorably, eBay has created an intolerable climate for both micro-sellers and small to medium sellers, most of whom have diversified to other channels. The supply of eager Video Professor driven newbies is finite, and fickle. (def.#2)

Look for more hostile policies, tighter small seller regulation (the diamonds are exempt) and accelerating implementation of the PayPal rolling reserve program in the second aggregation (def.# 2) of policy changes scheduled for announcement later this week.

Y’all come back!

Henrietta!