Potential Purchases for Mom From an Investor's Point of View

By Ronald Thomas, CFA  MAY 09, 2012 3:50 PM

How musing about Mother's Day can lead to questions about Whole Foods EPS estimates.


MINYANVILLE ORIGINAL If you really feel that you can buy something personal for your mom, why not go to a Coach (COH) store and buy her a purse? Nice gift if she never owned one.  Hopefully she is not one of the market overhang of people that already has two or three in her closet.  On the other hand, maybe she would welcome another? 

Where should you buy this purse?  Well, if you want to pay as little as possible for the Coach name you should go to an outlet mall; after all that’s where half of Coach’s US business comes from.  While you're there you can look at the clientele and make a decision on how upscale you think they are and how well you believe their purse buying might hold up, if the economy stumbles from here.  Also you could speculate on how many of them will continue to buy an expensive item like this when they have two or three already. 

If you're close to Woodbury Commons Premium Outlets in the Central Valley, New York, you could see an especially big selection of different styles. However, especially if it is her first Coach purse, do not tell her that most all of what is sold there is made for outlets only -- she might draw some comparisons with Nordstrom (JWN) and Nordstrom Rack, for instance. And if she spends time at Woodbury Commons, try to make sure that she doesn’t see all of the young Chinese tourists in long lines outside the Coach store very early in the morning on Black Friday.  She might look around and see little going on at the nearby Kate Spade store, and at Dooney and Bourke, and ask why.  Then you might have to tell her that the average Coach customer in China is 28 years old and makes $24,000 per year (per Coach’s marketing people) -- bad for the cache of the purse you bought her on mom’s day.  Of course you might want to remember that Coach was early into China with critical mass, something that some other luxury handbag companies have not yet done.
If you really called the market bottom late last year, why not buy her, or her and dad, a cruise?

Carnival (CCL) is giving some real deals, based on analysts’ earnings estimate recent cuts. That would be great, unless mom is too freaked out by watching the news on Carnival and its subsidiaries.  Then the question arises: Are you going to pay for the trip only and let mom pick up her own booze bill? That could be substantial. OK, just kidding!  But how about the Carnival recommended tip to your restaurant servers at the end of the cruise?  They could be rude to Mom on the breakfast of the last day before she gets off if they do not get Carnival’s recommended amount.  Interesting thing, that recommended amount.  I once figured that it was 18 - 20% of the value of similar meals at a restaurant in the US. And that's for employees who are not US citizens, meals that are not served in the US, and on board ships not registered in the US. The cruise lines are obviously having you pay a part of their food service employees’ remuneration via a tip that's way higher than you would pay at restaurants in Mexico, Belize, etc.  At this point you might want to temper the growth of the cruise industry that is implied by analysts and the Cruise Lines Industry Association (or CLIA) based on the figures that are always presented on the cost of cruise vacations versus other options.
If you're going to spring for the cruise, you need to tell mom one more thing. Let her know that she should get up early and stake out a deck chair, hopefully one near a set of stairs to walk down to a lower deck not open to the sun.  Do you remember when the cruise lines were telling potential cruisers about the wonders of all of the newer and ever more humongous ships they kept bringing out?  Well at the same time they were telling investors about all of the margin enhancement they were going to get from the bigger ships.  Mom will find out, as I did when I went out on the newer 105K-ton Triumph (having experienced the now ancient 70K-ton Sensation), that part of the margin enhancement comes from smaller common areas in the bigger ships. That means mom may have trouble finding an open deck lounge chair, and when the person with the book left on her towel comes back three hours later to see mom in her chair, things could get awkward. It also means that much more of the deck space is taken up by chairs, and walking a straight line down the sundeck can be challenging (it was for me.) Mom might break her hip going back and forth. (Royal Caribbean management told me about 11 years ago that this reduced-deck-space-per-passenger issue on larger ships does not apply to their fleet.)
But really, all good moms would be very happy just to have you spend time with them on Mom’s Day. Go to mom’s place, stay for the day, and you and mom can do the food shopping.  If you're within driving distance of a Wegman’s (81 stores in upstate New York and in the New Jersey to North Vermont corridor), tell mom you have a really fun shopping experience for her. (I think Wegman’s is outta sight, personally.)  You can tell her that Consumer Reports just named Wegman’s as the top supermarket in the US.
While you are at Wegman’s and Mom is squeezing the produce you can ponder some interesting questions. Why does Whole Foods (WFM) at $90 and using consensus earnings per share (EPS) estimates discount a 25% five-year EPS growth rate when the sell side consensus growth rate, which is almost always optimistic, is only 17%?  And that's using a 6% risk discount rate equal to Lowe's (LOW) and Home Depot (HD), which have something approaching a duopoly in home improvement.  You won’t have to spend much time on that one.  Another better thought is, even if a 5% risk discount is used, how can the stock discount a 22% five-year growth rate, again still higher than the sell side average?

When you have moved on to the canned goods, you might think about the most interesting piece of Whole Food’s valuation. That is, to make the stock efficiently valued at the sell side’s average 17% five-year EPS growth rate projection, you would have to assign a 4% risk discount, which is equal to that of the food companies (who have about the lowest risk discount for any industry).

After you and mom check out of Wegman’s, be sure to keep the receipt. You can compare prices on your next visit to Whole Foods, especially as you ponder that 4% risk discount.
As for my mom, she's thin enough that she can be very happy just eating a whole box at a sitting of whatever boxed candy I bring her from Costco (COST). (I like the prices.)
Happy Mom’s Day, all.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.