00:00 Speaker A
While some companies are feeling the full brunt of inflation and the impact of tariffs, others have been able to weather the storm. So with momentum in the retail space uneven, we’re checking the scoreboard as we approach the new year. In discussion here is Simeon Siegel, senior managing director at Guggenheim Partners. Simon, great to see you here. I’m going to make a Wi-Fi interactive call, and I have a heat map with your coverage on it. I’m ignoring Amazon just because of the size, but we have all the returns so far this year and I’m going to sort them by equal weight and you’ll see it’s a split market here. I and Tapetry and Ralph Lauren had some clear winners and then uh the deck, it looked like UAA Under Armor, Lulu Lemon, those were the worst performers. So what explains the difference here?
00:49 Simon Siegel
This is an interesting heat map. You didn’t tell me we were going to interact here. I like it.
00:52 Speaker A
I love the surprises here.
00:54 Simon Siegel
I like it. So, but I think, listen, I think that’s exactly the point. I think what’s important for retail, for consumers, is to remember that these are market share stories. These are the stories of winners and losers. During the COVID-19 pandemic, we have all become accustomed to the idea that either everyone wins or everyone loses. So if someone slips, it means the world is falling apart, or if someone does well, it means everyone follows suit. But the reality is that truly excellent operators can only demonstrate their value in harsh environments. So what you just saw is exactly the point. There are winners and there are losers. There are winners and there are laggards. This is what the market should be like. This is the fundamentals, this is what business should be like. I think that’s what we’re seeing. I think what’s really important is, you didn’t do it there, we had similar types, we just, I just rebooted, just came back, just started at the Guggenheim, and I’m excited to be here. When we took a closer look at this, we did a similar analysis to look at, okay, where does execution matter? We found that companies selling the exact same product to the exact same people saw completely different results. This is a healthy market environment.
01:46 Speaker A
So is it possible to point to any one stat or some statistics, um, key things in the earnings report that investors should be paying attention to as we enter the new year that might indicate, okay, this is a company that’s going to do well in this particular market, but maybe this company isn’t going to?
01:59 Simon Siegel
Yes, that’s a good point. I think comparing them like you did is a very useful approach. So if you say, okay, let me look at revenue, let me look at revenue growth, let me look at it not in a vacuum, not relative to itself, but relative to the group as a whole. Let me look at gross margin, not in a vacuum, not relative to gross margin itself, but relative to the group as a whole. You’ll start to find that everyone is talking about tariff risk.
02:13 Simon Siegel
But to your previous point, why do some people feel this more than others?
02:16 Speaker A
Yes.
02:17 Simon Siegel
Everyone is talking about tariff pricing. Why do some benefit and let you know we see more revenue growth than others? I think this is absolutely critical. So is there a single KPI? If there’s only one KPI, if it’s easy, it’s not worth doing. But I think it’s important to remember that everyone tells their story, but when the big picture is important, it’s important for everyone. So figure out who is less affected. Tariffs have always been the biggest topic for gross margins. But I want to look at the overall gross margin because I think at the end of the day, almost everyone in my world, for better or worse, feels tariff risk. Some people handle it better than others.
02:47 Speaker A
Yes. You’re talking about numbers versus narrative. So how important is a company’s narrative and messaging, not just to the public, the people who should buy the product, but also to shareholders?
02:54 Simon Siegel
That’s exactly the point. I think the reality is, it’s all marketing, right? We are selling products, we are selling products to you and me as consumers, we are selling products to you and me as investors. This is evaluation. Correct? So the numbers are what they are. Valuation, this, that is more of an art and science. So, in that nice heat map you showed, not every company has the same valuation. TJX is a great business. TJX, the one along the way, I don’t know if it’s your left or my right, I don’t know how the mirror works, the big one. We call this company expensive for a reason. It will never have one again, and I won’t be able to justify its P/E ratio again. Its trading volume is not very high because it is growing. It’s trading at a premium price, so you can rest easy at night knowing it’s a sustained long-term market share capturer. It’s a compound that’s worth paying for, perhaps like one pays for art. This statement sounds ridiculous, but it has scarcity value. Correct? So what happens is, there’s a misalignment of people, and those companies that tell a good story get good multiples. They need substantial support. They need to make sure they can support it or they will get discouraged quickly. But you’re absolutely right, the art of investing ultimately comes down to who can tell the better story to investors and then provide support.
04:05 Speaker A
There does seem to be an issue with scale, however, because one thing that’s ubiquitous with the brands you’re talking about is there’s a saturation zone, and I don’t want to put words in your mouth, so maybe you can explain that a little bit here.
04:15 Simon Siegel
Yeah, I love this, um, because generally speaking, I think when we overgeneralize, we’re usually wrong. So I’m going to overgeneralize now, which means I’ll be wrong, but this keeps happening over and over again. As every second grader knows, too much of something, too much of a single brand makes it, for lack of a better word, uncool. For some reason we then go into business school or whatever we do, we spend a lot of time trying to dissect it. We forget the most basic concept, if you flood the market with something, it stops being cool. It’s really interesting what my team found, because I didn’t find it, didn’t assume that this would exist. We found that 3 to 4 billion is the saturation point for U.S. brands. So what this means is that if your product is very expensive, your unit barrier is smaller before people want to leave. There’s no way a luxury goods company can sell that many goods, right? Very simple point. If your price is lower, your unit threshold will be higher, but your dollars will take longer to get there. This is a strong and recurring theme we see. We’re seeing brands overextend themselves. So it’s not a peak, it’s a saturation. We see them hyperextend and then come back. So the question is, when you overextend, do you have enough awareness, do you believe, okay, I’m going to protect my business and try to make sure it glides smoothly. By the way, then you go international and you find other brands, there are other ways to do it. Or do you believe I’ve gotten this far? So far, every time someone says no, I say I broke the glass ceiling. So this guy Simon told me that I was at my peak. No, I’m not. I will keep going. Inevitably, these are truly exciting businesses. They looked excited at the moment. In your case, they may be telling a very exciting and exotic story. Years from now, we’ll look back on this and say, this was actually a very painful recession. It’s sad because they have something very special to do.
