00:00 Speaker A
As some companies feel the full weight of inflation and tariff effects, others were able to weather the storm. So with uneven momentum at play in the retail space, we are checking in on the scoreboard as a new year approaches. And here to discuss is Simeon Siegel, Guggenheim partner’s senior managing director. Simeon, great to see you here. I’m going to call for the Wi-Fi interactive and I have a heat map that has your coverage here. I’ve omitted Amazon simply because of the size, but we have all the returns uh year to date and I’m going to sort by the equal weight and you’re going to see it’s kind of a bifurcated market here. There are some clear winners with I and Tapetry and Ralph Lauren and then uh deck, it looks like UAA Under Armor, Lulu Lemon, those are some of the bottom performers. So what explains the difference here?
00:49 Simeon Siegel
This is a fun heat map. You didn’t tell me we were going to get interactive here. I like it.
00:52 Speaker A
I love surprises here.
00:54 Simeon Siegel
I love it. So, but I think, listen, I think this is exactly the point. I think that what’s important in retail, what’s important in the consumer is to remember, these are market share stories. These are winners and loser stories. During COVID, we all got used to either everyone winning or everyone losing. And so if someone slipped, it meant the world was falling apart, or if someone did well, it meant everyone was going to go along with it. But the reality is, really good operators don’t show their worth until there’s bad environments. And so what you just saw is exactly the point. There are winners and there are losers. There are winners and there are laggards. That’s what the market is supposed to be. That’s what fundamentals, that’s what business is supposed to be. I think that’s what we’re seeing. And I think what’s really important, you didn’t do it over there, we have a similar type we just, I just relaunched, just came back, just started at Guggenheim, and I’m very happy to be here. And we, as we were looking through that, we did a similar analysis to look at, okay, where does execution matter? And what we found, we found companies selling the exact same thing to the exact same people seeing exactly different results. And that’s a healthy market environment.
01:46 Speaker A
So, is it possible to point to any one statistic or maybe a handful of statistics, uh key lines in the earnings reports that investors should focus on coming into the new year that might point to, okay, this is a company that’s going to do well in this particular market and maybe this one isn’t?
01:59 Simeon Siegel
Yeah, it’s a great point. I think comparing them like you did is a really helpful way to do it. And so if you were to say, okay, let me look at revenues, let me look at the revenue growth, and let me look at it not in a vacuum, not not relative to itself, but relative to the group. Let me look at gross margin, not in a vacuum, not relative to itself, but to the group. You’re going to start finding that everyone is talking about tariff exposure.
02:13 Simeon Siegel
But to your earlier point, why do some feel it more than others?
02:16 Speaker A
Yes.
02:17 Simeon Siegel
Everyone’s talking about tariff pricing. Why do some get the benefit and get you know we see revenue growth more than others? That I think is absolutely critical. And so is there a single KPI? If there’s a single KPI, if it was easy, it wouldn’t be worth doing. But I think the idea of remembering that everyone’s going to tell their story, but when macro matters, it matters to everyone. So figuring out who’s getting influenced less. Tariff has been the biggest conversation vis-vis gross margins. But I would like to look at the whole gross margin because I think at the end of the day, almost everyone in my world, for better or for worse, feels that tariff exposure. Some are dealing with it better than others.
02:47 Speaker A
Yeah. And you talk about numbers versus narrative. So, how important is the narrative, the messaging of the company, not only to the public, the people who are supposed to buy the products, but also the shareholders?
02:54 Simeon Siegel
It’s exactly the point. I think the reality is, it’s all marketing, right? We’re selling products and we’re selling products to you and I as consumers and we’re selling products to you and I as investors. That is what evaluation is. Right? So the numbers are what they are. The valuation, this, that’s more the art versus the science. And so in that beautiful heat map that you showed, not every one of those companies has the same valuation. TJX is a fantastic business. TJX, the that one all the way, I don’t know if it’s your left or my right, I don’t know how mirror images work, the big one. That one is a company that we call expensive for a reason. It’s never going to have, I I’m not going to be able to justify its PE ratio ever again. It’s not trading high because it’s growing high. It’s trading high because you can sleep easy at night knowing it’s a consistent long-term market share taker. It’s a compounder and it’s worth paying for that maybe in the same way people pay for art. That feels like a ridiculous sentence to make, but it’s scarcity value. Right? And so what happened is, you have this dislocation of people that companies that tell good stories, get good multiples. They need to have substance behind it. They need to ensure they can back it up, otherwise that quickly deflates. But you’re absolutely right, the art of the, in the art of investing ends up being tied to who can tell a better story to investors and then back that up.
04:05 Speaker A
And yet, there does seem to be an issue with scale because one of the things you talk about with brand ubiquity is that there is a saturation zone and I don’t want to put words in your mouth, so maybe you can just explain that here.
04:15 Simeon Siegel
Yeah, I love this, um, because again, generally I think when we over generalize, we’re we’re generally wrong. So I’m going to over generalize right now, which which will mean I’m going to be wrong, but this one has been recurring. Every second grader knows, too much of something, too much of a single brand makes it not cool, for lack of a better word. For some reason, we then go into business school or whatever we do and we spend a lot of time trying to dissect it. We we forget the most basic concept, that if you flood the market with something, it’s no longer going to be cool. What my team found, and this was really interesting because I didn’t, there was no hypothesis that this would exist. We found that 3 to 4 billion is a saturation point for brands in the US. And so what that means is if you are very expensive, you have a smaller unit threshold before people want to walk away. Luxury businesses can’t sell as many goods, right? Very simple point. And if you’re lower priced, you have a greater unit threshold, but your dollars, it takes longer to get there. That is a powerful and recurring theme that we see. We see brands overstretch. So it’s not a peak, it’s a saturation. We see them overstretch and come back down. And so the question when you overstretch, are you aware enough, do you believe that, okay, I’m going to protect my business and try to ensure it’s a smooth glide. And by the way, then you go international, you find other brands, there’s other ways to do it. Or do you believe I’m I I got this far. There’s no such I got this far by saying every time someone said no, I broke that glass ceiling. And so this guy Simeon’s telling me I’m at my peak. No, I’m not. I’m going to keep going. And inevitably what happens is, those are the really exciting businesses. They look exciting in the moment. To your point, they’re probably telling a very exciting exotic story. Those are the ones that we look back many years and say, well, that was actually a really painful decline. And it’s sad because they had something really special going.