Although many market participants are on the beach this August, some battle lines are nonetheless being drawn in the sand.
Here to offer a rundown is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
And I think that we've talked a lot about how patent wars have become a big thing in the tech world, that companies are buying other companies just to get access to their patent portfolio so they can protect themselves against litigation like this. But beyond that, this trial has been fascinating for the glimpse into the creative process and into the design process of how Apple products and how Samsung products actually emerge. We see them fully formed, but don't see all of the iterations beforehand, and to see the early conceptual work of how the iPhone went through so many different designs before the one that everybody knows, and how Samsung took a look at their old phones, and said, oh, wow, this isn't really working; what can we do better? What's working, what's not working?
I think looking at this process shows just how much R&D it really takes and how difficult it can be to come up with a really successful product, how you build those kind of competitive advantages up in creating that design that consumers are actually going to want. And I think getting this little glimpse has been very interesting with that battle, even more so than just the interest in whatever the damages may be, if there are any, and what the implications could be in terms of patent law looking ahead.
Glaser: The battle lines at Starbucks are usually between people who like their coffee with a very dark roast and those with a very light roast. But recently Starbucks has been planting their flag in the mobile payment space. For about a year they've had an app that allows users to refill their Starbucks debit card and use their mobile phone to pay, instead of having to carry that card around, and this has been very successful for them, and they're kind of extending that mobile payment partnership, and they are doing with Square.
Square is a start-up company that has a little dongle that goes on top of your iPhone or on an Android that lets you accept credit cards, but it also is an app that lets average consumers link a credit card to Square, so that they could just pay with their smartphone and not have to carry around a wallet full of cards, potentially.
I think that this is a pretty interesting partnership. First off, Starbucks is making a financial investment into Square--Howard Schultz will be on the board of Square--but certainly it shows how important mobile payments are going to be and that big merchants really are trying to stake out their mobile strategy sooner rather than later, because consumers are going to start to demand it. They really like the convenience of just being able to use your phone for everything.
I think as new technology develops that will make even the barcode unnecessary--you'll just have to kind of wave your phone in front of a register in order to pay for it--it's really going to be disruptive to the payment space. It really opens up a lot of new possibilities for financial institutions to provide access to credit, to provide access to your bank account, and I think that's a story that we're going to be following and it's going to be a pretty big change in the way the people pay for items.
Stipp: News from struggling big box retailer Best Buy this week drew a line between old management and new management. What are the details there?
Glaser: As has been rumored for a fair amount of time now, the founder of Best Buy has decided to try to buy out the entire company for about $8 billion to take it private, where he thinks outside of the glare of public markets, he'll be able to turn the company around and really help it compete against online threats like Amazon or bricks-and-mortar threats like Wal-Mart, but certainly this is a deal that's far from done.
Our analyst, R.J. Hottovy, has taken a look at it, and really thinks that between some legal ramifications and some financing ramifications and even if the shareholders think this is enough money, that they're actually getting paid enough, it might be difficult for this deal to get done. But I think even if the deal does get done, it's not clear that he is going to be able to magically turn around the business.
There are some articles that his plan may involve trying to ramp up spending on training for staff and having a lot of staff in the store, so that it's a very positive experience, but then also bringing the prices down so that they compete with Amazon, and so people aren't just going to "showroom" by going to take a look at the camera [at Best Buy], but then actually go buy it online. And that's not exactly a strategy for huge profitability to both increase your costs and decrease your prices. It's not clear that's a strategy that's going to be sustainable over the long term for them, particularly when they take on a lot of debt because of the leveraged buyout. So, I think either way this deal goes through, I think Best Buy still is going to have a lot of struggles ahead ,and they're really going to have to think about how to compete in this new world.
Stipp: Also in retail, J.C. Penney is having some interesting lines between the types of discounting that they want to do--the old school bargain-hunters versus some other kinds of discounts they've tried. What's going to happen there and will it help J.C. Penney really enact the turnaround that they've hoped for?
Glaser: I know we've talked about J.C. Penney a lot, probably more than its market cap would probably require, but I think it's one of the most fascinating retail stories, or one of the most fascinating stories in corporate America right now. You have this really hot-shot executive coming off the high of the Apple Stores to try to turn around a retailer that has a great history, but that has struggled in the last few years to really attract a clear audience. And the idea of getting rid of a ton of promotional spending, getting rid of a ton of coupons, and a ton of sales, and replacing them with everyday low prices and then the occasional sale here and there has been a big struggle for the company.
Last quarter--they announced earnings this week--same-store sales were down a staggering 22%, which was worse than almost anyone expected, and that's compared to, let's say, Macy's, which had a 3% rise in same-store sales, which is not exactly off the charts, but other retailers are really kind of grinding it out, while [J.C. Penney is] just in freefall right now in terms of sales.
Our analyst, Paul Swinand, actually did some store visits recently to kind of figure out what was going on, and it seems that a lot of customers still expect there to be lots of coupons. They are going to registers. They are asking, where are the discounts? Why can't I get 50% off this like I used to. And although those younger customers they are trying to attract are slowly trickling in, they are not really buying at the same levels; they are not really buying enough to really make up that gap.
So we still think it's a story that, if given the time, should work out, that consumers will eventually adjust, and will like the better merchandising. They have good locations, they have some brand equity left that they will be able to leverage, but it is going to be an incredibly bumpy ride. It would be interesting to see what happens first, shareholders get fed up with 22% declines or the strategy actually starts to work, and we see the turnaround.
Stipp: Lastly, Jeremy, the battle line between parents' wallets and kids' demands has been around for a long time. Some recent results from Disney, though, might indicate that the kids are getting an edge in that battle?
Glaser: I think they are certainly winning, at least last quarter.
Disney really was firing on all cylinders. They had a really excellent quarter across all their divisions. The Avengers is still a huge success for them in the film division. The cable networks, which is really the crown jewel of Disney in a lot of ways, still continues to do very well, even with the Olympics taking a lot of ad spend away and over to NBC for the summer, they still were able to have decent sales at ESPN. They are still able to command very premium pricing from the pay TV providers in order to carry ESPN, and I think certainly that's been a huge boon for them.
And even the theme park business is doing well. It's an area that people were a little bit concerned about the margins last year, and now all of a sudden, that continues to generate a bunch of cash.
Our analyst Michael Corty doesn't think that the stock is very cheap right now like it was last year, but that if it ever were to sell off, it would be a great wide-moat company, and it really is one that just continues to execute very well.
Stipp: Jeremy, great reporting from the frontlines of these battles. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
