The Coronavirus Pandemic and a Story Of Survival: How Planet Fitness, Ulta Beauty, And Kohl’s Changed Their Business Models To Stay Relevant.

“If you want to succeed in retail, you need to fully commit to off-price or online,”-Jim Cramer, Mad Money, March 5, 2020

       Retailers have been struggling for sometime to compete with the giant Big-box stores such as Amazon, Walmart, Home Depot, and Costco, who offer massive discounts, great selection, and an easy shopping experience. Then the Coronavirus pandemic engulfed America this past March, and most retailers, other than essential ones like pharmacies and grocery stores, were forced to close their doors because consumers were self quarantined. After that took place, retailers needed to make changes to their stores to allow for proper social distancing and hygiene so they could open them safely. Brand loyalty gave way to buying whatever was cheapest. Some retailers, including Hertz JC Penney, Neiman Marcus and Brooks Brothers have already succumbed to the virus and have filed for bankruptcy. Others have laid off employees and are looking for potential buyers.

When I looked at the whole retail landscape, I put together some thoughts as to how things were going to play out. One was that no one was going to be working out at fitness clubs for some time; they would be too hard to sanitize and people would find ways to workout at home via a home gym, a DVD, or a YouTube video. Another thought I had was how were department stores going to keep the lights on as so many of them were mall based and everybody was at home and could buy these goods online for less. Finally I believed that beauty supply retailers were going to suffer, because women weren’t leaving their house for socializing or to work, and when they went to essential stores they were wearing masks. Surprisingly to me, I was wrong. Planet Fitness(PLNT), Ulta Beauty(ULTA) and Kohl’s(KSS) all figured out a way to stay relevant and strategically change their business models after taking a massive hit when the pandemic struck. These changes are having a positive impact on how they now do business, and once the pandemic has ended, they will emerge as stronger companies than they were pre-coronavirus. Here are their stories of revival.

If they can’t come to you, then you go to them.

Planet Fitness has taken a big hit this year due to the pandemic. Their stock is currently at 58.81. They hit their 10-year high of 88.77 on February 19, 2020 and their 52-week low of 23.77 just under a month later at 23.77 on March 18, 2020. This just shows you where their stock could return to once COVID-19 becomes under control. YTD Planet Fitness is down 21,25%, but over the past 3 months it is actually up 3.96%. What sticks out is that not only are Planet Fitness’s earnings expected to grow well annually(38.5% per year), but so are their revenues as well(20.1%). Finally, the company’s earnings have grown by a whopping 43.9% per year over the past five years. Unlike Gold’s Gym, who filed for bankruptcy on May 5, I can’t help myself to see a bright future for Planet Fitness after looking at these numbers once COVID-19 is all behind us. And this is why…

       Planet Fitness has rebounded from the pandemic by giving its members a great workout experience in the comfort of their own home. Not only have they allowed members to cancel their memberships for free, but they also have the industry low cost for people who want to become members as well. But for members who wanted to workout while staying at home, and those who preferred doing it after the stay at home orders were lifted, Planet Fitness boasted a vast library of fitness content from company trainers on its app as well as on YouTube. They also offered live streaming classes with instructors on Facebook as well. Stay at home orders led to a 250% spike in app usage for the company, similar to the enhanced user traffic for competitors such as Peloton. The company also put a lot of money into the sanitation and safety of their gyms when they opened, boosting their member’s confidence towards working out in them once they opened. I didn’t take into account when looking at fitness clubs and the virus was how accessible a fitness club would be. Planet Fitness provided a rapid response, and all types of people craved exercise to reduce stress, stay active and feel good. 

       Also, Planet Fitness only directly owns only 5% of its locations. Franchisees pay for most of the other gyms. So while they have over 2000 locations, CEO Chris Rondeau would like to build out another 2000 long-term. With businesses shutting down and office space opening up, the virus may actually speed up his plan.

Beauty is not what’s on the outside, but what’s on the inside.

       Ulta Beauty’s numbers are drastically down, another retailer victim of the virus. But they’ve done a makeover, and what I didn’t understand about how their business model would survive during the Coronavirus. I completely get it now. 

       Currently Ulta Beauty stock price is 203.00. They hit their 10-year high of 368.83 on July 17, 2019, and their 52-week low of 124.05 on March 18, 2020. YTD Ulta Beauty Inc. is down 19.81%, but for the past 3 months they dip only 5.80%. We have another company whose earnings are expected to grow immensely(53.3% per year) along with decent revenue growth(12.1% per year) expected. Finally, when looking at company numbers, their earnings have grown 17.7% per year over the previous five years. Another company I see thriving once the virus is under wraps. And here’s where I got it wrong…

       Ulta Beauty made a couple of key adjustments during COVID-19. One was developing curbside pickup. Because women who shop at Ulta Beauty know their products, know their selection, and have been using the same beauty products for years. One thing I learned about their business was how loyal their customers are to them. Certain beauticians have been working with them on a personal level for years, and the same goes for the salon department. Their customer care is phenomenal. And this will keep women shopping with them rather than finding another supplier online.

       Ulta’s Beauty’s e-commerce has taken off. They’re up 100%. Through technology, you can take a photo of yourself, use their app to add different lip gloss or eye shadow to it, and the next thing you know a customer is buying new products. Ulta Beauty also has a unique Ultamate Rewards Program that provides customers with a more personalized experience through the use of AI and analytics. 

       Another thing I didn’t factor in when looking at Ulta Beauty was the boom of Zoom. Women want and need to look good when they are on camera. I get that now. The truth is that beauty makes people feel better, allows for stress-release, and provides the opportunity for people to take part in self-care and self-expression. Finally, Ulta Beauty’s diversified business model of many brands, salon services, and locations within local communities ought to position it to come out ahead post-pandemic. 

Expect Great Things.

        The Coronavirus Pandemic hit Kohl’s hard, when they decided to close all 1,110 of its stores on March 19 and didn’t re-open them until May 8. Kohl’s stock is currently at 22.15. Kohl’s 52-week high was 59.28 on November 15, 2019, while its 10-year low was 10.89 on April 3, 2020. YTD, Kohl’s has taken a massive hit, down 56.74%. But over the past 3 months, Kohl’s has rebounded nicely, and is actually up 19.26%. One nice thing about an investment in Kohl’s right now is that it’s a value buy. It’s earnings are also expected to grow tremendously, at a rate of of 101.2% per year. One thing that differentiates themselves from most other apparel retailers who are failing is that it’s debt is well covered by it’s operating cash flow, which gives investor’s confidence that Kohl’s won’t be shutting their doors anytime soon. 

        I am surprised to see a store like Kohl’s back on its feet and growing. I envisioned with so many jobs lost, that people wouldn’t be shopping for new clothes, new bedding, new kitchenware, etc. I envisioned people just using their disposable income on bare essentials such as food, medicine and gas. But I was wrong.

       Outside of auto sales and gas, retail rose a robust 6.7% in June, including more than doubling at apparel stores. I failed to take into account certain things, such as the 2 trillion dollar stimulus package, the desire to look good in front of the camera, electronics people would need to work, use for school, and to entertain themselves. Finally, I didn’t take into account the importance of having a comfortable home that you’d be spending so much time in.

       So how has Kohl’s climbed out of the rubble and forged ahead while so many other retailers remain on life support? For one thing, they, like Ulta Beauty, are free standing brick and mortar stores. This plays in their favor, unlike Macy’s and Neiman Marcus, which are mostly connected to malls. And while many department stores and other apparel retailers have either declared bankruptcy or are in dire straits, Kohl’s will emerge with a larger customer base because of it.

       What Kohl’s has done by teaming up with Amazon to accept their returns and bringing foot traffic into their stores is brilliant. 80% of Amazon customers live within 15 miles of a Kohl’s store. Kohl’s is also leasing space to Planet Fitness (where their push towards athletic apparel should pay off nicely) and Aldi, plus teaming up with in-store Weight Watcher consultants, further emphasizes a visit to its stores that they wouldn’t have seen otherwise.

        Kohl’s has seen an uptick in online sales, with an increase in May of 90%. While the company already boasted a strong presence online before COVID-19, with 24% of its sales coming from there in 2019, this will most likely see an uptick once 2020 is in the books. Furthermore, Kohl’s has always been an off-price shopping store, with great deals offered via their charge cards and coupons. This will help them compete with the Big-box stores when it comes to the more price conscious consumers we see today. Finally, Kohl’s has included a commitment to the in-store shopping experience, and these are all reasons for seeing the company coming out of the virus stronger than it was before it. 

        The Best is yet to come

        The Coronavirus took a massive hit on our economy, and the retail sector took a beating, including the 3 retailers I highlighted in this article. But Planet Fitness, Ulta Beauty, and Kohl’s were either more prepared for the virus when it struck, developed new strategies to help pull themselves up and become profitable again, or had the secret sauce that so many other retailers lacked. What you need to know is that once the virus is contained and our economy makes a strong recovery, these companies will be stronger than they were pre-coronavirus due to how they added on to their business model, and I would expect their stocks to see a steady rise upward. Planet Fitness, Ulta Beauty and Kohl’s can still be considered value stocks if you take into account where they’ve dropped to YTD. You may want to wait until you see what happens to the stock market as COVID-19 continues to surge forward again, because you very well might be able to pick these off at a much cheaper price if the stock market turns for the worse again. But when you see that opportunity come, I wouldn’t hesitate to buy into these 3 retailers. I can’t help but see a ton of long-term growth for all of them over time. 

*Numerical Analysis sourced via SimplyWallSt and CNBC. 


IBM: Is “IT” a Good Investment?

Bob Schless Insider Monkey June 29, 2020

For over 100 years IBM has been one of the most quintessential technology giants in America. Over the past few years, the company has been transitioning from a computer manufacturer to a leading cloud platform and cognitive solutions company. IBM, the common name of International Business Machines Corporation, is one of the largest technology and consulting companies in the world, employing over 350 thousand employees worldwide. IBM achieved a net income of 9.43 billion U.S. dollars in 2019, an increase of just over half a billion U.S. dollars from 2018. IBM has been a disappointment over the past decade, due to lagging revenues, stock performance, and slow to change. The company is in the middle of a major transition in which it is discarding big segments of their business (like building computers) and moving into new, growing areas like cloud computing, artificial intelligence, and quantum computing. Due to a decline in revenue from the old businesses, and the fact that their new businesses aren’t fully developed yet, IBM’s financial outlook has been one in a slow decline for years. When looking at IBM’s transition to the cloud, they just weren’t fast enough. And because of it, the company is now having to play catch-up in this fast-growing market segment, dominated by Inc (NASDAQ:AMZN)’s AWS and Microsoft Corporation (NASDAQ:MSFT)’s Azure.

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ibm, closeup, delivery, corporation, white, cyberjaya, mesh, corporate, business, server, sign, symbol, msc, corridor, gdc, technology, building, computer, wall, pc, center,

Many on Wall Street were optimistic about the incoming CEO Arvind Krishna succeeding Ginni Rometty in early April. But that was before the coronavirus put the global economy to a halt. IBM’s stock price is currently $117.19. Year-to-date it is down 12.57%, and in a year it’s down 15.40%. The company hit a 52 week low as well as a 10 year Low on March 23, 2020, at $90.56. A little over a month earlier, IBM hit a 52 week High at 158.75 on February 6, 2020. Knowing this, I ask myself, “What’s changed with the company, other than the coronavirus?” But that’s for later in this article. IBM’s stock has basically dropped twice the amount of the S&P 500 Index since January 31. Regarding the coronavirus pandemic, the demand for IBM’s services fell due to their customer base needing to focus on their most crucial needs. Here’s how chief financial officer Jim Kavanaugh spoke on the effects of COVID-19 on the Q1 earnings call, “As we got into March…we saw a noticeable change in client priorities. With that, there was effectively a pause as clients understandably dealt with their most pressing needs.” He later added, “For those clients that did engage at the end of the quarter, there was a noticeable change in priorities where focus very quickly shifted to the stability of their operations and preservation of cash. They moved ahead with spending that addressed immediate and essential needs, including running mission-critical processes and securing a remote workforce.”

Other factors hurting IBM because of COVID-19 include having over 75% of its revenue coming from the United States and Europe (hardest hit by the virus), and that their costs of products and service is generally on the high side. Because of all of this and the uncertainty surrounding COVID-19, IBM opted to withdraw its full-year guidance for 2020. And on May 22, soon after Arvind Krishna took over, announced layoffs across multiple divisions, due to the outbreak. It was said to have been one of the largest rounds of layoffs in the company’s history.

Unfortunately for IBM, analysts covering the company on Wall Street are expecting it to slump in the coming year, and to lag behind its competition. Revenues are once again expected to fall 3.9% next year, which is an area IBM continues to struggle with. On the other hand, companies in the wider industry are to grow by 9.6% during the same period. Out of the four largest cloud service providers, IBM is growing at the slowest rate and has the smallest market share as well. Simply Wall Street sees IBM’s earnings growing 6.9% per year, while the U.S. market will grow 22.6% per year. They also see the company growing earnings, but not significantly, It’s earnings growth over the past year is 4.4%, underperforming the IT industry’s earnings growth at 15.4%. At the current valuation, IBM has a forward price to earnings ratio of around just below 10, compared to the S&P 500’s average forward Price to earnings ratio of just above 15. After looking at these numbers, you’re forced to ask yourself, “I see IBM as a potential value stock, but can I also see it as a growth stock as well?” If not, there may be other companies to choose to invest in that are both cheap and will bring you more profits during this volatile stock market we’re presently in. Let’s take a look.

Is Big Blue A Stock For You?

IBM, for all the disappointment it has given its shareholders over the past decade, actually has a lot of things going for it during the coronavirus pandemic. Remote-work and video conferencing are a friend to IBM, the transition into hot tech growth areas such as 5G networks, artificial intelligence, the cloud, and quantum computing plays into IBM’s strength. Their 34 Billion dollar Red Hat acquisition in 2019 has started to positively impact IBM’s 2020 1Q revenues, and the architect of the deal, Arvind Krishna, became the new CEO for the company at the beginning of the year. Finally, IBM is a solid value buy for a giant tech company that pays a very nice dividend. So while IBM trails Amazon, Microsoft, and Google significantly in the cloud space, the company has the potential to gain some ground and earn some respect on Wall Street under Krishna’s forward-thinking guidance.

The coronavirus forced companies to have their employees work from home. Many are going to continue once the pandemic is over. IBM has been leading a giant effort to help its clients transition to and manage remote work operations. There is a shift in spending to cloud providers and security and away from PCs and servers. Those companies on the cloud most likely will emerge stronger as their employees work from home. IBM’s effort to expand its AI and cloud expertise to its clients during this period of transition should accelerate its growth in the space. “The key area of focus is to ensure that IBM leads into two major transformational journeys our clients are on, Cloud and AI,” CEO Arvind Krishna said in IBM’s first-quarter earnings call. “I believe that what we are going through today with the shift to remote work, automation, application modernization will accelerate our client shift to hybrid cloud. This gives me immense confidence in our future.”

Growth for IBM will likely rise further as Krishna seeks to de-emphasize or sell lower-performing divisions. The global hybrid cloud market is estimated to grow in size from $36.14bn in 2017 to $171.93bn in 2025. David Parker, global partners and alliances for IBM at Red Hat, sees IBM and Red Hat is a great fit by, “Teaming together to deliver mutual clients open hybrid cloud solutions that leverage the industry expertise IBM has had for years combined with Red Hat’s proven technology and platforms.” I feel this gives IBM a competitive edge as a cloud provider. And with the coronavirus onset, their merging paths come at a better time. Also, The global artificial intelligence market size is expected to reach USD 390.9 billion by 2025, and IBM has been developing this technology longer than any other tech company. In the 5G arena, the market size is expected to reach 58.17 Billion dollars by 2025. IBM entered the segment in May, announcing that it is releasing new edge computing solutions and services, powered by Red Hat, designed to help enterprises roll out, deploy, and manage 5G networks. Finally, Quantum computing may represent early-stage technology, but the market potential is enormous. And IBM has been a major force towards pushing this next-generation computing development into the spotlight. Actually, they have been focused on this for some time. So, as I’ve laid out, IBM is right at the forefront of the hottest tech segments out there today. I definitely see them as a growth stock, because they have an abundance of knowledge and expertise, a strong free cash flow (reaching 11.9B last year) to support all of their endeavors, and seems to be thriving under Krishna’s new leadership.

In times like these on Wall Street, where huge gains are paired with huge losses, it helps to find a stock that pays their shareholders a great dividend. IBM is one of the few big tech companies that do. This means that it doesn’t matter if the market is up or down for the day, you’re guaranteed to make money on your dividends. And IBM pays the 4th highest dividend of all Dow Jones stocks. On top of that, it has recently become a Dividend Aristocrat. On April 28, the company announced it would be increasing its dividends for the 25th year in a row. The $0.01 means that investors will be earning $1.63 per share every quarter. At a price of around $117, that means the dividend yielding 5.56% per year. Josh Peters said, “Dividends may not be the only path for an individual investor’s success, but if there’s a better one, I have yet to find it.” Checkmark, IBM.

Finally, because of IBM’s checkered past, along with a current balance sheet that raises some red flags, IBM can be bought right now at a nice discount. IBM’s stock hasn’t shown a lot of volatility since early April, which is nice. The company is trading well below its fair value, and it’s PE Ratio is much lower than its industry average, both good signs. Finally, when do you find an iconic tech giant trading at 27.5% below its fair value? I feel that IBM is re-positioning itself as an industry leader in cloud services, which is so vital in businesses moving towards a remote-work model. The company is also at the forefront of other emerging tech segments as well. Wall Street tells a story of IBM as being a stalled business, left behind by the trail-blazing companies named Microsoft, Amazon, and Google. But inside this battered business lies a fantastic long term growth story developing beneath the surface. Because of it, the dividend you receive, and the price you can pay right now, I’m all in on IBM.

Disclaimer: This material should not be considered investment advice. After Further Review…The Stock is Reversed or Bob Schless are not registered, investment advisors. Under no circumstances should any content from this blog, website, articles, videos, seminars or emails from After Further Review…The Stock is Reversed or Bob Schless should be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for speculative purposes only.

Bob Schless Blog writer for After Further Review…The Stock is Reversed Facebook: After Further Review The Stock Is Reversed Instagram: bobschlessafr Twitter: @schless_bob LinkedIn: