Adidas, Nike and Under Armour: The War for Your Workout

What did you wear for your last workout? (Recuse yourself if you are a couch potato)

The three leading international brands of sports and athletic wear, Adidas, Nike and Under Armour (UA) are in a pitched battle for market share (and profit). They always were, but lately it has become more newsworthy because of the growth of Adidas (>20% growth YOY in the last seven quarters), and the precipitous fall of Under Armour’s stock (-46% in 2017).

Lately, Adidas has become very aggressive with TV advertising in their “Calling All Creators” campaign, featuring super-famous athletes like Von Miller, Karlie Kloss, Carlos Correa, Aaron Rodgers, Lionel Messi and many more. These great athletes and other illuminati seriously discuss their solemn responsibility to create, with closeup and pan on their faces, interrupted only by surreptitious camera shots under the table on their (of course!) shiny new Adidas footwear.

So what have we here? The suggestion that, if you too wear the same shiny new footwear, you may be qualified to be a creator (or a superstar athlete?). This is the stuff of dreams-what has built the sports athletic wear industry since the days of Michael Jordan. The endorser, and the subsequent dreams, much more than the product itself—is the MOAT.

So who will win Battle Workout? Who is your money on? Not as in wager, but as in whose sustainable value creation will induce you to invest. To answer that question, our analysis should follow three trains of thought (in some stream of consciousness):

1.     Merchandising/Marketing

2.     Financials/Stock Price/Value Creation for shareholders.

3.     The MOAT

Let’s look back at the commercial (http://www.adweek.com/creativity/adidas-brings-superstar-athletes-like-lionel-messi-and-aaron-rodgers-together-for-a-feast-in-its-latest-spot/), which is a last-supperish scene where all our revered athletes and musicians speak about what unites them-effectively, the commercial gives a subliminal suggestion that what REALLY unites them is their shoes- not the specific shoe, but the brand-ADIDAS.

What has been the most important MOAT for these companies for years is their star power, not their product. Minus a few innovations over three decades like Dri-Fit and Gel, the product ranges from so-so to remarkably ugly (to me the Jordan basketball shoes, which unashamedly reached out to a certain ethnic and social group, were in embarrassing poor taste). More recently, the UA Curry shoes are unremarkable at best.  (I wear ASICS mainly due to function).

Neither Nike nor Adidas can hang their hat on performance as a barrier to entry. On the other hand, Under Armour got its start from an innovation in FUNCTION, and it grew because it was what the athletes actually WORE on the field, and its merchandising emphasized fabric and function over fashion.  Adidas was just sportswear (still is) and Nike never was credible as a function guru.

So what happened to Under Armour? Reports now point to Kevin Plank’s “lack of focus.” I don’t know Kevin, but I don’t buy that. A man who builds a brilliant and distinguished brand since 1996 doesn’t turn stupid overnight. That being said, companies who are very successful and reach the pinnacle of their industry have a tendency to build a bubble of denial and lose their way.

I believe what happened to Under Armour is they failed to see the huge athleisure trend coming, led and maybe started by Lululemon. As the most function-oriented of the three, athleisure would penetrate their MOAT most severely (Nike and Adidas can easily live in the athleisure space, even if they aren’t specifically targeting it).  Current market capitalization finds Lululemon with $8.78 billion, and UA at $5.23 billion. (https://seekingalpha.com/article/4125069-adidas-continues-impress)

For all three, the athleisure trend lowers their barriers to entry and seriously damages their MOAT.  There is nothing remarkable about Nike or Adidas sewing or fabrics (actually, in some ways I would say they are subpar), that distinguishes them from any new entrant to the business. In fact, new entrants would benefit by a fresh look or just a fresh face in the market. But, no special sewing or fabric techniques are required; basically, athleisure wear is just synthetic sportswear with stretch and elastic.

Only Under Armour, of the three, has serious creds in the world of performance (the logo itself came to stand for a higher level of fabric, fit and function).  So it has a MOAT that the other two do not have. IF I were Plank, I would stop working on workout apps (you will not compete with Fitbit and Apple, and the market is very small at best), and go back to my core values=performance. Despite the trend, there is still a loyal customer (me) for functional and handsome workout wear. Currently (see below), IF you can wear the same workout outfit for workout and shopping, it ain’t workout wear. Period. I don’t care what Lululemon tells you. For UA, whatever part of the market that performance wear commands, it is theirs to dominate and their best MOAT.

Speaking of Lululemon, if I were UA and Nike (to a lesser extent), I would stop going after each other and target the queen (?) of the athleisure market. Imagine the UA logo on a garment that looks great, is really functional for workout, and can be worn to Whole Foods with pride? That would be a triumph, but not something that any Tom, Dick or Lulu could duplicate. Not impossible. And the MOAT gets bigger. Bigger Moat=Sustainable Value Creation.

So who wins Battle Workout? Or, rather, who LOSES? That because, as I see it, there can be two winners:

1.     Adidas, because it was solidly into the world of athleisure before it became a word, and because their marketing and advertising plays best into the stars-in-my-eyes moat right now-despite not having a Jordan or a Curry.  As reported by Seeking Alpha,

It was also recently announced that Adidas has passed Jordan brand in terms of market share and is now the second most popular sportswear brand in the United States, next to Nike (note that Nike owns Jordan Brand). This is an important milestone for Adidas, which just a few years was a distant fourth behind Nike, Jordan Brand, and Skechers (NYSE: SKX). (https://seekingalpha.com/article/4125069-adidas-continues-impress)

2.     Under Armour, IF it gets its performance mojo back PLUS uses the resources currently being used for mobile apps to create an offering to top the athleisure world with unassailable function that cannot be easily copied. UA has a history in fabric/function research. It can do it.

3.     Nike is odd man out, in my scenario. The whole brand, to me and to investors, has gone flat. As has the stock.

Quick look at the financial highlights (you can read endless reportage on Seeking Alpha and other investment sites), and then the final BUY or DON’T Buy decision.

1.     Adidas: Adidas (OTCQX: ADDYY) reported impressive third quarter earnings last week. Revenues were up 12% year/year on a currency neutral basis, and EPS also increased by 30% as the company continues to enjoy significant operating leverage. Sales in North America and China grew by 23% and 28% for the quarter, respectively. (https://seekingalpha.com/article/4125069-adidas-continues-impress)

a.     IF Adidas can become a bigger and bigger factor in the athleisure business, it will have a positive effect on both sales and margins in the short term.

b.     It will NOT strengthen its MOAT playing in the athleisure ballpark.

2.     Nike: The stock is currently trading at $62.55, and the overriding opinion is that it belongs somewhere around $50, because:

a.    

How ugly are these blue things?

b.     Underwhelming revenue growth

c.      Sliding Margins

d.     Out-of-Control SG&A (Selling, General and Administrative) Expense- up 10% in Q2 (that’s a lot of money)

e.     Net Income down 9%, despite the fact that Nike’s effective tax rate already down by half. Therefore the positive impact of Trump tax cut already neutralized.

f.      Price at 27x earnings and EPS expected to drop 7% this year

3.    Under Armour-

a.     Buy Low, Sell High, right? IF UA refocus on what its core strengths and opportunities are, it is a bargain right now. To wit: 1 year ago, the stock closed at nearly $30. Now it is around $15. DJIA increased more than 20% in 2017. So UA is 70% or so against the grain.

b.     What happened?

·       Oct. 31, 2017, the company shares fell by more than 15 percent after its third-quarter revenue was below expectations and its full-year sales and earnings per share forecasts were slashed because of operational challenges and lower demand in North America;

·       Jan. 31, 2017, a decline of 23 percent of Under Armour's share prices after the announcement of the stepping down of the CFO; and

·       Oct. 25, 2016, Under Armour's shares were down by 12.7 percent for ("A" shares) and 13.8 percent for ("C" shares), a fall of more than 60 percent since March 16, 2016, after a release of its third-quarter financial report. (https://seekingalpha.com/article/4133815-analysis-armour)

4.     Analyst and I agree about UA mojo:

The success of Under Armour hinges on multiple critical success factors. Perhaps most critical to its success is the status, image, and identity of the brand, and the ability of the brand to compete and win market share in a highly competitive industry. The company is known for technologically advanced athletic wear that is catered to athletes of all kinds for all conditions. Under Armour must maintain and improve its image as technologically advanced athletic wear in the minds of consumers to maintain customer loyalty and win over new consumers. Each and every product it produces is stamped with their iconic logo in order to increase brand awareness and spread its image. Under Armour has done well to maintain its brand through strategic advertising, sports sponsorships, and most importantly, heavy investment in product innovation. (https://seekingalpha.com/article/4133815-analysis-armour)

5.     Red Flags;

Management effectiveness:

Return on Assets = Net income/average total assets = $256,979 / $3,644,331 = 7.1%

Benchmark: 8% to 12% Red flag? Yes

Quality of Earnings:

2016: Quality of earnings = Operating cash flows/net income = $304,487/ $256,979 = 1.18

2015: Quality of earnings = Operating cash flows/net income = -$44,104/ $232,573 = -1.90

2014: Quality of earnings = Operating cash flows/net income = $219,033/ $208,042 = 1.05

Benchmark: > = 2 Red flag? Yes

So, with UA, it all comes down to whether you believe management will recognize their MOAT and focus on core competencies, or will be dragged further into folly such as fitness watches and $200million to Jordan Spieth (love the guy, love golf, but not worth to put a logo on a uniform, and he is no Tiger Woods-just saying).

If, in the best case, management gets its shit together, UA is the only one of the three with a MOAT that cannot be breached by anyone with a few bucks and some crowdfunding.

So, my recommendation:

1.     Adidas- Buy,take a long position

2.     Nike- Sell and Short

3.     UA- Buy common shares and strike price options. Buy more once it is clear their merchandising and marketing is spot on and they are fortifying their MOAT.

Full disclosure: I don’t own any of these and no plans to buy now (I will watch UA, though). There are better ways to invest now.

Fuller disclosure: IF my focus recently has appeared to bend toward the finance/investing side, it has. There is nothing more important to either potential investors or employees than the financial fundamentals that determine if it will grow, or even survive. But, what is even more important are the merchandising and marketing decisions that underlie and cause the fundamentals to be what they are. So why you should read my articles is because I can offer deeper experience and insight into those areas. Most important, we as financial or marketing/merchandising analysts should focus on the MOAT, as it is the key determinant of-everything.

UPDATE: Target vs Walmart: Who is YOUR Money On?

12/29/2017-

I love being right.

All retail stocks minus those whose moats totally collapsed (like BBBY) are experiencing some bounce. Christmas season number looking like around +5% YOY. 

Yet Target is catching the attention of The Street, just for the reasons I stated below. Excitement about the other notable players like Walmart and Macy’s tempered, but I see nobody who recommends caution or waiting when it comes to Target. Today on Seeking Alpha:

Bernstein fires off a price target boost on Target (TGT +0.9%) to $75 from $65 after factoring in tax reform benefits and store labor investments.

The firm's PT is out in front of the Street average of $62 and reps 15% upside potential. Shares of Target currently yield 3.83% vs. 2.05% for Walmart and 1.07% for Costco.

Retail stocks to watch or buy in 2018….?

Happy Holidays!

Godzilla vs. King Kong- Amazon playing Godzilla and Walmart playing King Kong. We are all watching the ongoing battle with rapt interest. Walmart has Amazon direct in its sights, trying to be all that in the ecommerce world and even spending advertising money to point out that they have free two-day delivery with no membership fee. And Amazon just keeps on keeping on, evolving into a bigger and perhaps invulnerable force.

With all this attention, you might think that these are the only two retailers in America. Left behind in the news lately is Target. Who? The Minneapolis-based retailer is 5^th largest in the US and 10^th in the world.

So which retailer is your money on for the future-if you can only buy stock in one of them? I know what you said-Walmart-right? That’s OK. Let’s take a brief and focused look at the two of them and then let me know if your thinking has changed at all. Spoiler alert: My definitive conclusion at the end.

As an investor, I want to look clearly at past history as it may predict future trends-sales, marging, PE, dividends, etc. In this regard, taking the last 5 years as a timeline, Walmart has the edge:

1.     Share Price- Both company’s stock price declined in 2015. Since then Walmart (WMT) has recovered, increasing from $56.42 to $97.11 (12/15/2017). Target reached a high of $84.69 in mid-2015 and closed at $62.61 on 12/15/2017. Advantage: Walmart

2.     Revenue Growth Rate- Neither one has been breaking any records, but Walmart had a modest increase in 2016, while Target declined, due to its decision to close its pharmacy business. Advantage: Walmart. See below chart:

3.     Gross Margin %- Neither company has been growing in this area, mainly due to price panic in retail land. BUT Target’s gross margin % is significantly higher than Walmart. Advantage: Target. See below chart:

4.     Asset Turnover Ratio (how fast goods turn)-  The chart below shows us that Walmart’s is higher than Target’s. But Target’s is growing while Walmart’s is not. Numbers Advantage: Walmart. Trend Advantage: Target.

5.     Earnings Per Share: EPS- You can see from the chart below that this is a wash (Target’s dip from the closing of their Canadian stores): Advantage-None.

6.     Dividend- Despite its tribulations, Target has managed to have a better dividend ratio than Walmart. Advantage: Target:

(Source for all above: “Walmart vs. Target: Survival of the Fittest?,” Ploutos Investing on Seeking Alpha, 9/25/2017, https://seekingalpha.com/article/4109072-wal-mart-vs-target-survival-fittest)

You still awake? This is by no means a throrough financial analysis. If interested, do some more work at the above article and many other statistics available at Seeking Alpha and other web sites.

A couple more statistics before we move on to what is behind them and makes the real difference.

7.     The above report also compares Sales/Square Foot (as of 7/2017). Walmart  $436, Target $290. Since the dawn of time, this has been the bellwether statistic for retailers. The more each square foot pays for itself with sales turnover, the better the health of your store.  This is combined with revenue/employee to give a total health report on your store.

The report and most others say that Target has done a poor job compared to Walmart in advancing its ecommerce business. Granted and this is advantage: Walmart- in the short term.  Longer term, consider this: With the massive size of most Walmart stores, the more business is transferred to online, the less profitable each square foot of store space will be. Conclusion: Walmart has a lot more to lose, and will be a victim of its own success if its online business expands dramatically. No free lunch, it has to come from somewhere.

Target is on point and will have a future advantage in this area due to its move to create SMALLER (wow) stores with its CityTarget program. Where would you even put Walmart in a city. Like King Kong trying to find a seat in Manhattan. And what would a concise Walmart look like?

Both stores have recognized that brick and mortar not only is not dying, it is and always will be a critical part of the mix. People will never stop shopping, just will be more picky about where and how long.

To that end, both stores realize that facilitating customers to shop in store and not have to schlep their goods home is an invaluable service in future. Target has gotten a lot of press for their acquisition of Shipt to offer customers same day delivery of their purchases (don’t get too excited just yet- Shipt has a membership fee and, at least for now, will continue to deliver for other retailers). This acquisition of $550 million acknowledges the critical ongoing role of brick and mortar.

Now let’s get to my favorite topic to compare these two- the Economic Moat. Morningstar rates Walmart a Wide Moat (due to price) and Target as NO Moat.  This means that the barriers to entry for a competitor to take business from Target is much easier than Walmart.

I totally disagree.

Why?

The first and most important reason is Private Label. Target has made an excellent and ongoing effort to develop private brands that would be unique and meaningful to the customer-not just the mass market customer, but the crossover customer as well. They have a serious and credible organization, headed by the talented Michael Alexin, to develop and carry on private label business.  (Read: https://corporate.target.com/article/2012/08/video-michael-alexin-target-as-design-house) Brands such as Cat and Jack (Kids), Merona, Goodfellow (Mens) will earn their validity with product. As I have continued to say, any brand that earns its stripes can win in this market.

Further to this, Target has secured the cooperation of real designer brands such as Marimekko and Mossimo to enhance their product assortment as well as their credibility as an everyone department store, not a mass market destination.

Remember the gross margin chart above? Remember that success as defined by investors is sustainable value creation? Private label is the reason and the best vehicle for this difference; if you have your own design and your own product, you can set your own price (within reason). Result: gross margin.

So what about Walmart? Their entire portfolio of brands is positioned that they can copy name brands at better prices. Not that there’s anything wrong with that. But it sets their image into more stone as a discounter trying to get your money with price deals-not design.

So, back to the Moat- Price is an open battlefield. Costco does and will continue to kill Walmart on price. Now you don’t even have to leave home to get Costco-type deals, courtesy of Boxed.

In the grocery business, private label has become a major battlefield.  First grocers Trader Joe’s/Aldi, as well as Lidl are killing everyone (maybe RIP Kroger) on credible private label goods at an incredible price. Now Costco, ever the smart one, who has always had great credibility for their Kirkland brand, now has gone into the wine and liquor business. Come on folks- a Kirkland Chianti Classico Riserva with the Gallo Nero (DOC) on the label for 6 bucks? 1.75L of Vodka made in the Grey Goose factory for $20? I don’t care who you are- you are trying this one.

IN the food area, Target currently trails Walmart, averaging 15% higher prices on grocery items. BUT if they follow the same trail of establishing credibility as they are doing with their apparel and home brands, that 15% may not matter. Or if they decide to be a category killer like Lidl and Aldi..

Now- please tell me- whose Moat is wider for the future-Target or Walmart?

And please don’t tell me about ecommerce, Jet.com, etc. Sure it matters, but about 90% of business is still brick and mortar.  Walmart is more vulnerable as they have played their chips on price-which, as I have always said, is the easiest area to defeat. Again-unbridled growth of ecommerce at the expense of brick and mortar has a downside, which shows up in two critical retail metrics- $/square foot and $/employee. Who is more vulnerable here?

Finally, I have said and I believe everyone has agreed that brick and mortar shopping today is about the experience. That agree, let’s talk about the shopping experience of walking into a Walmart Superstore-OMG- I don’t care who you are, you are absolutely not considering taking more time to absorb the experience at Walmart. Even Sam’s Club vs. Costco is a totally different experience. I can’t wait to get out of Sam’s and I can’t get myself out of Costco. Key metric of Experience-what tempts you once you are in a store, even if it is something you didn’t come for.

Those who have been tempted by other than price at Walmart, please share your experience.

IF brick and mortar shopping is about experience and value, and Moats are about barriers to entry, Walmart is not in an commanding position and has a lot more to lose. What is more, there is a long road ahead until Walmart becomes and exciting-and simple-shopping experience.

My general observation about Target is that management manages carefully and thoughtfully, and makes the tough decisions when needed. For now, Target passes my bubble test.

As you might have guessed by now-my advantage: Target.

Merry Christmas and Happy New Year

Merry Christmas and Happy New Year to all of you who have read my blog during this year.

May your 2018 bring prosperity and peace.

Special shout out to readers in Poland and Ukraine. Say hi back and let me know what's going on with you!

Cheers!
Mike Serwetz

UPDATE: What’s in YOUR Economic Moat? BBBY (Bed, Bath & Beyond) Q3 Earnings Call 12/20/2017

On 12/20/2017, BBBY held it’s quarterly conference call. Based on the remarks of Steven Temares, CEO, following is an update with highlights and my comments (in black):

(Remember, I am focused on their MOAT and the fact that Amazon is the invading army.)

Temares broke down their efforts into four areas:

1.     Assortment

2.     Services and Solutions

3.     Experience

4.     Internally Focused Initiatives

Regarding Assortment-

·      Emphasis on key categories for growth. He mentioned rugs, furniture, lighting and home office. Good. Areas where you might not be secure to buy from Amazon and may need more help.

·      “Treasure Hunt  Shopping Experience” What’s this?

·      Lower prices, drive margin up. Vendors are paying, if this doesn’t mean reduction in quality I hope.

Regarding Services and Solutions:

·      Look at “core life stage businesses.” Wedding, baby, college, moving, decorating services. Yes. Make a difference to people who need help. This is either unavailable or typically expensive on Amazon.

Regarding Experience:

·      “New Store Format.” Mentioned food and beverage. I am not sure this is the way to go as it is low-priced, low-margin and takes up space that should be producing more GM$.

·      Here he elaborates a little on the “Treasure Hunt Shopping Experience.” Refers to items that are “new, fresh, or limited availability.” Good, if this means that assortments and store space of everyday stuff you can buy on Amazon will be reduced and space will be devoted to interesting and new merchandise you didn’t know about or know you wanted. I frankly don’t like the term “Treasure Hunt” because it implies spending a lot of time looking for something small.

·      Reduce space of core merchandise- “Show more, carry less”

·      Selling improvement

·      Improve online experience-“shop ability.”

·      “Transforming the store operating model.”

This is it. The key to improving their MOAT is to emphasize the differences between them and Amazon. Number one- they have lots of stores and Amazon doesn’t. So if they successfully integrate the online and in-store experiences, people will think twice before ordering on Amazon.

The one concern I would add and emphasize here is that all of the above moves seem defensive. What is missing from the remarks is how they are going to be disruptive. What are the elves working on in the castle which will change the way the business is done?

But, overall, seems like they are paying attention. Really, what choice do they have?

Their sales were down .3%.

I hope, a lot of crocodiles and piranhas (That’s a good thing, read on please).

I learned something recently. Researching exactly how the financial world had evaluated the winners and losers in today’s world of business (especially retail), I learned about the moat.

Following all the financial analytics, I came to wonder what the investment community looked at that told them what was behind the numbers.  It seems that all things product, marketing, supply chain, etc. are captured in the concept of the moat.

What is a moat? It is a body of water that traditionally protects a castle from invaders. Are you starting to see it now? We can see any business as a castle, with a moat around it. How effective the moat is determines in protecting the castle, both short- and long-term, its vulnerability to competitors and barriers to entry of its market share. Warren Buffett first coined this term and explains:

What we refer to as a “moat” is what other people might call competitive advantage . . . It’s something that differentiates the company from its nearest competitors – either in service or low cost or taste or some other perceived virtue that the product possesses in the mind of the consumer versus the next best

alternative . . . There are various kinds of moats. All economic moats are either widening or narrowing –even though you can’t see it. (Credit Suisse, “Measuring the Moat,” 2013)

To the investment world, the bottom line of Invest or No Invest is a firm’s ability for value creation-SUSTAINABLE value creation. So whatever the analytics tell you, the most important thing to take into consideration is the moat-what is the firm’s ability to withstand and stay a step ahead of its competitors? How easy will it be to take a piece of the firm’s business either by competing on price or product? How vulnerable is the firm to disruptive innovation?

So let’s take an example of an investor’s losses due to miscalculating or ignoring the moat.  Daniel Schonberger writes in Seeking Alpha on December 7^th, “Lessons From 2017: Bed Bath And Beyond - The Worst Investment,” explaining why his investment declined about 50%:

• The first mistake was focusing too much on revenue and earnings per share and paying less attention to the different profit margins.
• The second important number, I didn't really consider, were the declining comparable sales.
• The extremely bearish sentiment is a third point I ignored a bit.
• And a last and fourth point that should have played a bigger role in the analysis is the missing moat of Bed, Bath and Beyond.

OK, he really blew it, but note that he admitted that the moat should have played a “bigger” role. Damn right-The castle can be bright and shiny one day and rubble the next. The barriers to entry that define that housewares industry have fallen-to Amazon. Think about it-shower curtains, towels, sheets, rugs, etc. Any need to trek to BBBY today? What is different and better about their product that you shouldn’t buy on Amazon? Is the only reason to buy on Amazon price? No.

Could BBBY have done more than they did about it? I will always answer this question with a YES. As a consumer, I could see that BBBY went nuts with all form of coupon and discount-so after a while the only reason to go there was the challenge of how to manipulate the dozens of coupons you had to achieve the maximum savings.

Remember we said “sustainable value creation.” Price ain’t the way. Maybe BBBY could have made efforts to distinguish its product from Amazon, increased online penetration, or both. Or maybe not. In this case, the barriers to entry became pretty much zero for Amazon.

How will incumbents typically respond to disruptive innovation? Credit Suisse reports on a study by Christensen, who is famous for studying disruption, that

“For low-end disruptions, the motivation of incumbents is generally to flee…In the short run, fleeing helps profit margins by encouraging the incumbent to focus on the most lucrative segment of the market. In the long run, it provides resources for the disruptor to build capabilities that allow it to penetrate the mainstream market on a cost-effective basis.” (English- run away from your disruptors by focusing on your mainstream, most profitable, business, thus opening the door for the disruptors to do something new and great without interference)

Or,

“Incumbents are typically content to ignore new-market disruptions.”  (This is my “living in a bubble of denial.”)

So the choice of flee or ignore is based on whether the disruption is a better way to do things (such as Tommy John, Zara or Uniqlo) or a totally new idea (such as the bralette).

This is really the sum total of all I have been saying for more than the last 8 months, but translated into the simplest concept of why companies will or won’t survive-their moat. I believe that a. in all cases they could have seen the invasion coming and b. their bubble gave them no inspiration to be disruptive themselves, whether for protection or not.

One of my favorite walk-of-shame stories, L Brands, whose key unit, Victoria’s Secret, has not only lost their way and their mojo, but has thrown away their moat by walking away from the most important concept to arise in years-the bralette (see my earlier article, “Bra or Bralette,” http://www.isourcerer.com/2017/08/bra-or-bralette-know-your-dinosaurs.html) and capped off by their undifferentiated  and price-oriented approach to Black Friday (see my article, “Living in a Bubble of Denial” http://www.isourcerer.com/2017/11/living-in-bubble-of-denial.html

Yet, Morningstar, after documenting the really poor performance of the company highlighted by the decline of Victoria’s Secret, (http://news.morningstar.com/articlenet/article.aspx?id=795357), said:

We continue to think that L Brands has a wide economic moat with brand strength in a category characterized by high levels of consumer brand loyalty and prioritization of quality and fit over price. That said, we have been and remain concerned about execution strategies, specifically promotions and store growth plans.” (What I said-read my articles)

I disagree- they gave up the moat by paying more attention to their fashion show (and spending who knows how much) than what their consumer was doing at their competitors-namely, buying bralettes- and figured, arrogantly, that their brand was enough to get their customers to ignore a trend that put money in their pockets (lower cost of bralette, fashion right).

Folks, brand loyalty is BS in today’s market. With so many new brands popping up every day, whether on Amazon or by themselves, consumers have NO REMORSE about switching to Brand X if a. the price is lower, b. the styling is more innovative, c. the in-store or online experience is better and easier. Especially in the case of Victoria’s Secret, as bras and underwear are repeat items, the enemy at the gates is-or should be-a constant concern. Not ignored or fled from.

So how is your moat? This is a mission-critical way to think about your business. IN considering your moat and your vulnerability to invasion and annihilation, here are a few items to think about:

You are in the business of adding sustainable value (oh, I also talked about that,  repeatedly, in this blog).

So what are the  sources of added value?

1.     productive advantages

2.     Consumer advantages

3.     External factors

(You should have already evaluated all three tirelessly, and renew your assessment daily.)

Your moat is a barrier to entry. What are the barriers to entry for your business model? Better, Cheaper, Faster- this protects you.

What distinguishes your product from your competitors does NOT have to be anything as dry as price, fabric, or crotch length. NYU Stern’s Scott Galloway, in his new book, “The Four: The Hidden DNA of Amazon, Apple, Facebook and Google” talks extensively about ladders and moats, and gives the example of Apple’s “romance, connection and general awesomeness”:

 So, Apple, recognizing that ladders will keep getting taller, opted for more analog (time/ capital expensive) moats. Google and Samsung are both coming for Apple. But they are more likely to produce a better phone than to replicate the romance, connection, and general awesomeness of Apple's stores. So, every successful firm in the digital age needs to ask: In addition to big, tall walls, where can I build deep moats? That is, old-economy barriers that are expensive and take a long time to dredge (and for competitors to cross). Apple has done this superbly, continually investing in the world's best brand, and in stores. 

Where can I build deep moats? Do you ask yourself that question every day? Do you know what is your moat and how vulnerable it is? Are you ready to take the attitude of not only building deep moats (defenses with a crystal clear picture of your competitors AND where you are vulnerable, no matter what your company name or your brand) but also of building “big, tall walls? (offense-product differentiation, innovation, awesomeness, romance, etc.)?

(BTW, this requires you to leave arrogance and attitude at the door.)

You better be ready, and willing to change anything and everything that needs to be changed to be a sustainable value creator. OR, you will cease to be a destination for investors OR customers.

So, what is your story? Tell me about your walls and your moat.