2014 in review

The WordPress.com stats helper monkeys prepared a 2014 annual report for this blog.

Here’s an excerpt:

A New York City subway train holds 1,200 people. This blog was viewed about 4,400 times in 2014. If it were a NYC subway train, it would take about 4 trips to carry that many people.

Click here to see the complete report.

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2013 in review

The WordPress.com stats helper monkeys prepared a 2013 annual report for this blog.

Here’s an excerpt:

The concert hall at the Sydney Opera House holds 2,700 people. This blog was viewed about 9,100 times in 2013. If it were a concert at Sydney Opera House, it would take about 3 sold-out performances for that many people to see it.

Click here to see the complete report.

Portfolio Management

The relationship between risk and rate of return

The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified time. In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept more risk unless the potential rate of return is greater than the risk-free rate.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.

The Modern portfolio theory attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently lower risk for a given level of expected return, by carefully choosing the proportions of various assets.

The assets in an investment portfolio should not be selected individually, each on their own merits. Rather, it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price.

Investing is a tradeoff between risk and expected return. In general, assets with higher expected returns are riskier. For a given amount of risk, the MPT describes how to select a portfolio with the highest possible expected return. Or, for a given expected return, MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security, of course, unless negative holdings of assets are possible.

Let’s assume that investors are risk-averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher expected returns must accept more risk. The exact trade-off will be the same for all investors, but different investors will evaluate the trade-off differently based on individual risk aversion characteristics.

Investment diversification in an investor portfolio.

Investors can reduce their exposure to individual asset risk by holding a diversified portfolio of assets. Diversification may allow for the same portfolio expected return with reduced risk. These ideas have been started with Markowitz and then reinforced by other economists and mathematicians such as Andrew Brennan who have expressed ideas in the limitation of variance through portfolio theory.

When it comes to investing, savvy money managers advise that you spread your money around, that is, “diversify” your investments. Diversification protects you from losing all your assets in a market swoon. The sharp decline in stock prices in recent years are proof enough that putting all your eggs in one basket is a risky strategy.

But in order to diversify correctly, you need to know what kinds of investments to buy how much money to put into each one, and how to diversify within a particular investment category.

Having a lot of investments does not make you diversified. To be diversified, you need to have lots of different kindsofinvestments. That means you should have some of all of the following: stocks, bonds, real estate funds, international securities, and cash. Once you’ve diversified by putting your assets into different categories, you need to diversify again. It’s not enough to buy one stock, for instance, you need to have a lot of different types of stocks in that portion of your portfolio. That protects you from being ravaged when a single industry — say, financial services or health care — takes it on the chin.

How stocks, bonds, real estate, metals, and global funds may be used in a diversified portfolio. 

Investments in each of these different asset categories do different things for you. Stocks help your portfolio grow. Bonds bring in income. Real estate provides both a hedge against inflation and low “correlation” to stocks — in other words, it may rise when stocks fall.

Finally, International investments provide growth and help maintain buying power in an increasing globalized world. Also, cash gives you and your portfolio security and stability.

Like a great car, diversification is something that almost everybody wants but seems hard to get if you do not have a lot of money to spend. Luckily for investors, there are more options now than ever before for adding diversity to a portfolio.

The best way for an individual investor to diversify a small portfolio of stocks and funds is to buy more stocks and funds. By allocating a few slots in the portfolio to other assets classes (bonds, hard assets, real estate, etc.), other styles (growth, distressed, etc.), and other regions, investors can achieve an impressive level of diversification without stretching their capital too far. However, remember not to diversify just for diversity’s sake – give the same level of careful attention and due diligence to any asset that you are considering as an investment.

The concept of the efficient frontier. How can we use it to determine an asset portfolio for a specified investor.

The efficient frontier is a concept in modern portfolio theory introduced by Harry Markowitz and others. A combination of assets, i.e. a portfolio, is referred to as “efficient” if it has the best possible expected level of return for its level of risk (usually proxied by the standard deviation of the portfolio’s return). Here, every possible combination of risky assets, without including any holdings of the risk-free asset, can be plotted in risk-expected return space, and the collection of all such possible portfolios defines a region in this space.

The upward-sloped (positively-sloped) part of the left boundary of this region, a hyperbola, is then called the “efficient frontier”. The efficient frontier is then the portion of the opportunity set that offers the highest expected return for a given level of risk, and lies at the top of the opportunity set or the feasible set.

A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal, because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are also sub-optimal, because they have a higher level of risk for the defined rate of return.

Since the efficient frontier is curved, rather than linear, a key finding of the concept was the benefit of diversification. Optimal portfolios that comprise the efficient frontier tend to have a higher degree of diversification than the sub-optimal ones, which are typically less diversified.

The efficient frontier concept was introduced by Harry Markowitz in 1952 and is a cornerstone of modern portfolio theory.

Economic outlook for 2013

Prospects for the global economy are slowly improving again, but growth is expected to be weak, especially in Europe, and unemployment in many advanced economies will stay high, according to the IMF’s latest forecast.

Although action by policymakers in Europe and elsewhere has helped to reduce vulnerabilities, risks of a renewed upsurge of the crisis in Europe continue to loom large, along with geopolitical uncertainties affecting the oil market.

The global economy will continue to expand, though risks from Europe and the Persian Gulf could slow expansion considerably. The International Monetary Fund’s recent World Economic Outlook predicts 3.5 percent growth in world GDP this year, 4.1 percent next year.  Both years have been revised upward since the autumn 2011 forecast.

In 2013, the world economy will do a little better than the IMF forecast, though the risks are even greater. My disagreement with the IMF forecast is within the range of normal professional differences. Their projections are certainly plausible. Business leaders could well use the IMF forecasts as their own base case projections for market potential around the world.

Turmoil in the Middle East is setting back tourism, lowering foreign investment, and putting oil revenue at risk. This region could bounce back moderately if Egypt and Syria settled their political problems. There’s probably not much of an upside scenario possible with respect to Iran, so let’s just say that a Persian Gulf war would be very harmful for much of this region.

Africa has been growing well, thanks partly to strong commodity prices and partly to the spread of good government (even though it’s still somewhat uneven). Finally, American businesses should recognize that global markets offer more growth potential than any of the 50 states.

Where can I invest some money: Target or Wal-Mart?


Overview

Wal-Mart

Wal-Mart Stores, Inc. (NYSE: WMT), branded as Wal-Mart since 2008 and Wal*Mart before then, is an American multinational retailer corporation that runs chains of large discount department stores and warehouse stores. The company is the world’s 18th largest public corporation, according to the Forbes Global 2000 list, and the largest public corporation when ranked by revenue.

It is also the biggest private employer in the world with over two million employees, and is the largest retailer in the world. Wal-Mart remains a family owned business, as the company is controlled by the Walton family who own a 48% stake in Wal-Mart.

The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. It is headquartered in Bentonville, Arkansas. Wal-Mart is also the largest grocery retailer in the United States. In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business. It also owns and operates the Sam’s Club retail warehouses in North America.

Wal-Mart has 8,500 stores in 15 countries, under 55 different names.The company operates under the Wal-Mart name in the United States, including the 50 states and Puerto Rico. It operates in Mexico as Walmex, in the United Kingdom as Asda, in Japan as Seiyu, and in India as Best Price.

Wal-Mart Stores, Inc. operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and neighborhood markets, as well as the websites walmart.com; and samsclub.com.

Wal-Mart’s operations are organized into three divisions: Wal-Mart Stores U.S., Sam’s Club, and Wal-Mart International. The company does business in nine different retail formats: supercenters, food and drugs, general merchandise stores, bodegas (small markets), cash and carry stores, membership warehouse clubs, apparel stores, soft discount stores and restaurants.

Wal-Mart also operates banks that focus on consumer lending; and provides financial services and products, including money orders, wire transfers, check cashing, and bill payment.

The company operates about 10,231 retail units under 69 different banners in 27 countries, including the United States and Puerto Rico, as well as Africa, Argentina, Brazil, Canada, Chile, China, India, Japan, Mexico, and the United Kingdom.

Target

Target Corporation, doing business as Target, is an American retailing company headquartered in Minneapolis, Minnesota. It is the second-largest discount retailer in the United States, behind Wal-Mart. The company is ranked at number 33 on the Fortune 500 as of 2010 and is a component of the S&P 500 index.

Its bull’s-eye trademark is licensed to Wesfarmers, owners of the separate Target Australia chain which is unrelated to Target Corporation.

The company was founded in 1902 in Minneapolis as the Dayton Dry Goods Company, though its first Target store was opened in 1962 in nearby Roseville, Minnesota. Target grew and eventually became the largest division of Dayton Hudson Corporation, culminating in the company being renamed as Target Corporation in August 2000. On January 13, 2011, Target announced its expansion into Canada.

Target will operate 100 to 150 stores in Canada by 2013, through its purchase of leaseholds from the Canadian chain Zellers.

Vulnerabilities

Wal-Mart:

Just controlling such a huge organization is a huge undertaking and in particular managing the employees. Suppliers are always under pressure with regard to price and their ability to supply when required. Because of the low prices customers often question and are concerned at the quality of the goods. This is offset to some extent by the satisfaction guarantees offered.

Local competing vendors hate the possible arrival of Wal-Mart and a lot opposition is likely. Also competition from local convenience stores is likely to increase as travel costs to Wal-Mart increase. Also in Europe, the expansion of the German retailers, Aldi and Lidl, is growing fast. These companies offer limited stock but are local and are cheap. ALDI is like the “Southwest Airlines” of the grocery business, with efficiency being the name of the game with only 1000 or so stock items against the normal 20,000 to 30,000 items in Wal-Mart.

Although Wal-Mart is huge, competition from similar companies is also likely. Being successful, they are open to attack on any ethical stance – low pay and poor work conditions, supply of goods from ‘poor’ cheap labor countries, and environmental issues.

Wal-Mart depends heavily on China for manufacturing its merchandise as it purchases billions of dollars worth of merchandise every year. Additionally, many of the company’s suppliers like Mattel (MAT) manufacture their products in China, which in turn are sold in Wal-Mart stores. Wal-Mart’s imports are substantial. By outsourcing to China, Wal-Mart is able to secure lower costs of inventory, which the company in turn passes on to low prices for customers.

However, as a result of its dependency on Chinese manufacturing, Wal-Mart is vulnerable to fluctuations in the value of the dollar compared to the Chinese Yuan. If, for example, the dollar weakens compared to the Yuan, the price of Wal-Mart’s Chinese imports would rise. As a result, the company would either have to raise its prices or would have to cope with narrowed gross margins, reducing its profitability. Additionally, the company is vulnerable to adverse legislation, such as higher tariffs, that would raise the cost of its Chinese imports.

Target:

Target has carved out a niche for itself as a “cheap chic” retailer. In January 2011, Target took its first step in expanding outside of the US with the purchase of 220 Zellers stores in Canada. Target plans to convert 100 to 150 of these stores by 2013 or 2014, with revenues similar to those of its US counterparts. Target also started REDcard promotions with its credit card program, which could increase its revenues. However, rising commodity prices may offset these gains.

Target does not have as many stores as their competitor Wal-Mart. Even with Target’s great advertising, it makes it difficult for the consumers to shop here when there are not that many stores around. Besides, although their prices are low, they just are not as low as Wal-Mart’s prices. As a matter of fact, compared to Wal-Mart’s prices, Target may even seem expensive.

Another problem with Target is that they keep a low overhead of items, so they run out of items very often. Target also focuses a lot on self service so it can be difficult to find what you are looking for sometimes. The threat number one for Target is Wal-Mart. Despite the fact that they are the number one retailer in the world, they also have very low prices. Kmart also proves a threat to Target just because they are beginning to focus more on women’s apparel.

Financial Trends affecting Wal-Mart and Target

Many experts have found three main trends working against retail stores. According to those theories, Wal-Mart and Target are losing shoppers and both are falling behind in the digital revolution. Finally, there are too many people out there relishing Wal-Mart’s failures. These stores have to wake up and reposition themselves properly.

Stressed-out consumers: The most popular theory behind Wal-Mart’s decline is that the same people who traded down to Wal-Mart during the darkest recessionary stretches in late 2008 and early 2009 are now simply trading back up to more “chic cheap” discounters or traditional department stores. Wal-Mart is now leaning on its longtime customers, and that is a dicey proposition when economic uncertainty and sky-high unemployment rates are thinning out what little discretionary income they previously had.

The trend is real, but it does not explain away all of Wal-Mart’s problems. After all, are we to assume that same-store sales will spike higher if we dive back into a recession.

Weak navigation of the digital divide: Some people do not want to be seen at a Wal-Mart; and apparently a lot of people don’t want to be seen at walmart.com, either.

Wal-Mart announced a major organizational restructuring of its online operations. But things clearly are not going too well in cyberspace, even though Wal-Mart’s penchant for low prices should sell well when shoppers do not have to navigate through massive parking lots and huge superstores to save a few pennies at the slow-moving register.

Truth is, Wal-Mart, despite being the world’s highest-grossing retailer, is lagging behind several bricks-and-mortar chains, including office supply specialists Staples (SPLS) and Office Depot (ODP), in e-commerce. Top of Form

Wal-Mart is not doing itself any favors on that front.

In fact, after eight years of selling music downloads, walmart.com is shutting down its MP3 store. The digital convergence of traditional media is here. Teens are downloading music, movies, games, and novels, and it is eating into the physical sale of CDs, DVDs, video games, and books. No one understands why Wal-Mart would turn its back on the one musical format that is growing while its stores continue to stock cobweb-collecting boring CDs.

Now the question is how will Wal-Mart ever become an online retailing force when its digital offerings are about to become woefully incomplete.

Haters: Unfortunately, a lot of people want to see Wal-Mart fail. They hate the way the corporate giant shakes out the operators. Anybody can actually appreciate Wal-Mart’s frenetic inventory turns that create the opportunity for low and honest markups on items. If people save money at Wal-Mart, the money saved will likely work its way back into the community by being spent locally. Wal-Mart has never had a problem getting its value message out there. Customers just don’t care.

It was selling MP3s for less than iTunes, but apparently that did not matter to ear bud-donning e-shoppers. Target (TGT) gets slapped with the “cheap chic” label, but it wears it with pride. Now, here is an easy experiment. Post “I’m going to Target” on Facebook and favorable responses will trickle in. Let’s get serious: ask yourself when was the last time you saw someone bragging about going to Wal-Mart through Facebook or Twitter.

The closest thing Wal-Mart had to being cool was in 2008 when it put out exclusive The Eagles and AC/DC CDs. It could have aimed younger — or at least timely — but at least it was able to get recording legends to commit to the discounter.

How the stock will perform in the future

Wal-Mart reached the top of the Fortune 500 in 2001, becoming the largest corporation in the United States, and has stayed there every year since except 2006. But what makes investors really smile is that Wal-Mart is still expanding, offering the opportunity for growth in share values.

Investing in Wal-Mart stock is a smart choice for several reasons. It appears to offer a good return, with a solid PE ratio and a good but not excessive dividend. Management seems to know what it is doing, and Wal-Mart seems to be positioning itself to be an efficient and successful company worldwide. Wal-Mart seems to promise a good return partly because its valuation is reasonable.

Unfortunately, Wal-Mart’s been accused of bribing officials in Mexico to grow its business.  But by and large, few in America seem to care.  The stock fell only modestly from its highs for one week, and then, the stock recovered from the drop off to the lows of February. Looks like Wal-Mart is trying to defend and extend a horribly outdated industrial strategy.

I suggest Target, a stock that I think will hold its ground even in a double dip recession coupled with inflation, and will really take off if the economy stages a recovery. Target management is aware of customers’ cash flow problems, and has rolled out the RED card credit card initiative, which gave customers a 5% discount for shopping at Target, to huge success. Target also has a very low cost base, owning most of its stores outright and therefore not having to pay leases. These factors have led to Target staying in the black throughout the recession despite poorer profitability. I believe that Target’s customers have already retrenched all that they can, and that sales at Target have reached their nadir.

Target has yet to saturate its core domestic market. Wal-Mart has some 3000-4000 stores in the US, while Target has a relatively paltry 1750 stores. Management expects that an expansion to 2500-3000 stores is reasonable in the US market. Target is expected to sell its receivables to a financial company in the future, a step which should bring in cash for its current expansion, as well as clear up any misgivings about the valuation by bringing in an independent set of eyes. This will also turn TGT into a pure play retailer once again, which would make it easier to analyze for retail analysts.

Financial Ratio Analysis

Gross profit margin ratio: also known as gross margin is the ratio of gross margin expressed as a percentage of sales. It is a measure of the efficiency of a company using its raw materials and labor during the production process. The value of gross profit margin varies from company and industry. The higher the profit margin, the more efficient a company is. Target has 30.9% and Wal-Mart 26.7%.

Again, the higher the profit margin the better off the business, the profit margin is an extremely useful measure of how your business is performing over time. At a glance, you can see whether your business’s net profit has increased, stayed the same, or decreased over last year. And if it is decreased, you will know to take steps to cure the problem, such as better controlling your expenses.

Current Ratio: The current ratio is an excellent diagnostic tool as it measures whether or not your business has enough resources to pay its bills over the next 12 months. A current ratio of over 1 is good news, generally, although if you are comparing your current ratio from year to year and it seems abnormally high, you may have problems with collecting accounts receivable or be carrying too much inventory. On this area, Wal-Mart shows 0.8 while Target shows a healthy 1.3.

Quick Ratio: This is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio is, the better the position of the company. The numbers say: Wal-Mart 0.2 and Target 0.5.

The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash.

Asset turnover: This ratio measures a firm’s efficiency at using its assets in generating sales or revenue, the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Here, Wal-Mart is doing better with a 2.4 versus a Target’s 1.6.

Return on Assets: An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage.

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. Wal-Mart got an 8.5% while Target 6.4%.

Recommendations

Based on figures, we will notice that Wal-Mart has a much higher receivables turnover than Target, which is because it keeps a very low balance of receivables as a percentage of assets. Thus, we are not focused with the actual number here; the more important part is the trend. Wal-Mart’s receivables turnover has gone down each year since 2007.

Despite Wal-Mart sales up about 20% over that time, the firm has taken on about 70% more receivables, which is why the number seems to have gotten much worse. Target, on the other hand, has steadily improved its receivables turnover since 2008. When looking at the inventory number, Target and Wal-Mart have gone in opposite directions. Target’s number went down for two years and then has rebounded, while Wal-Mart’s went up for two years and has decreased since. Wal-Mart’s higher number means that it is getting more inventory pushed through the system, but if the trend continues, Target will be catching up.

Wal-Mart has a higher number for all three turnover ratios, but the recent trend has been better for Target, despite the lower numbers. Looking at these numbers, we must remember that Wal-Mart has much higher sales and a larger asset base, so they sometimes have more flexibility to get things done. However, you must also look at the trend, and Target has the advantage there.

Overall, both companies are quite solid. Wal-Mart has a bunch of higher numbers, but Target has been doing better as of late in certain respects. Both of these names are quality investments, and would add a nice piece to any portfolio.

References

What would happen if Best Buy enters India?

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Best Buy Co., Inc. is an American specialty  retailer of consumer electronics in the United States, accounting for 19% of the market. It also operates in Puerto Rico, Mexico, Canada and China. The company’s subsidiaries include Geek Squad, CinemaNow, Magnolia Audio Video, Pacific Sales, and, in Canada operates under both the Best Buy and Future Shop label.

Together these run more than 1,150 stores domestically and internationally. In addition, the company operates over 100 Best Buy Express Automated Retail stores or “ZoomShops”, operated by Zoom Systems, in airports and malls around the U.S. The company is headquartered in Richfield, Minnesota, United States.

On March 9, 2009, Best Buy became the largest electronics retail store (online and bricks and mortar) in the eastern United States, after smaller rival Circuit City went out of business. Fry’s Electronics remains a major competitor in the western United States, while Hhgregg remains competitive in the eastern United States. Many locations feature in-store pickup, which can be arranged through the company’s website.

As of December 28, 2008, the company operated 1,010 Best Buy Stores, 13 Magnolia Audio Video Stores (specializing in high-end electronics), 7 stand-alone Geek Squad stores, 3 Audio Visions Stores, 13 Best Buy Mobile Stores (standalone) and 17 Pacific Sales Stores (in Southern California, Arizona, and Nevada), all through its U.S. retail subsidiary. They also run 51 Best Buy and 140 Future Shop stores throughout Canada. In 2003, the company opened its first international global procurement office in Shanghai, and operates sourcing offices in Beijing and Shenzhen, primarily to cut costs and increase the speed to market by purchasing products directly from manufacturers.

As of January 2009, Best Buy operated five “branded” stores in Shanghai, one “premium” store in Beijing, as well as 151 Five Star Appliance Stores in China.

Track the currency exchange rate for the past 24 months, explain what has occurred, and name the economic variables that have most influenced these exchange rate movements.

Here we have a graph about the Indian Rupee exchange rate in the last two years. Since August 1 2011, the Indian rupee has lost roughly 20 percent of its value relative to the U.S. dollar.

While large Indian traders of bulk commodities generally hedge against exchange-rate risk, smaller traders as a rule do not, preferring to bear this risk themselves. As a result, commodities traded primarily by small and medium traders are entering an import slump. The rupee’s fall may have been arrested by a modest intervention coupled with indirect controls imposed by the Reserve Bank of India.

The Indian rupee hit a fresh all-time low against the dollar Wednesday, as risk adverse global investors wary of India’s twin deficits drowned out central bank efforts to stem the currency’s slide.

The rupee hit 54.44 against the dollar, breaching its prior low of 54.39 set Dec. 15, according to FactSet data. The slide helped send the benchmark Sensex index down 1.8 per cent Wednesday. Analysts said they expect the rupee to soften further, breaking 55 to the dollar, as Eurozone jitters dovetail with growing worries about India’s slowing growth and current account and fiscal deficits.

The Reserve Bank of India sold about $20 billion between September and March to prop up the rupee, but India’s falling foreign exchange reserves limit the bank’s ability to intervene decisively.

Analyze the exchange rate risks associated with transaction, economic, and translation exposure in the Indian market. Then, based on the tracking and your analysis, anticipate what fluctuations seem likely to occur in the next 24 months.

India’s balance of payments (BOP) depends critically on remittances, services exports (forming part of invisibles) and of course capital flows, both FII and foreign direct investment (FDI). Yet, it is essential that all market participants, including banks and other intermediaries, be provided the wherewithal to undertake forex risk management in a scientific way.

The basic principle for accessing domestic foreign exchange markets is hedging of underlying foreign exchange exposures.

To the facilities traditionally available such as booking of forward contracts, newer ones were added as the domestic forex markets evolved and acquired depth and volumes. Newer hedging instruments have included swaps and options in addition to the foreign exchange forwards.

However, to a very large extent hedging was permitted only against `crystalized’ foreign currency exposures. In layman’s language it means that only where there is an underlying forex risk arising out of a `genuine’ transaction, say an import, will the cover (hedging) be allowed.

The extension of hedging options will benefit India’s trade and has come not a day too soon. On the eve of the latest monetary policy, the exchange rate policy of the RBI was as much in focus as the interest rate policy. There has been a high degree of topicality as well.

Obviously, hedging options are particularly relevant at a time of volatile exchange rates. The RBI (Reserve Bank of India) wants the markets to be better ready to face volatility and the increased risks.

India’s exchange rate policy has ensured that the forex markets remained stable, with the rupee depreciating gradually. The situation changed drastically from March this year when the rupee started appreciating sharply against the dollar. Moving from above 44 to below 41 (to the dollar) in a span of less than two months, the rupee broke several records. There have been several well-informed analyses about why the rupee should become so strong at this juncture and whether such appreciation is in line with the exchange rate policy of the country and so on.

At a practical level, there has been increased awareness of the hedging instruments available as well as a clamor for new ones. Not only is the range of hedging tools being expanded further, but market participants will also be able to hedge on a `dynamic’ basis. Two parallel routes are being thrown open. The first are the set of liberalization measures announced in the credit policy. These include permission given to those in the trade of select metals (aluminum, copper, nickel, lead and zinc) to hedge their price risks in international commodity exchanges. Actual users of aviation turbine fuel are also being given a similar facility to hedge based on their domestic purchases.

Contracts booked by importers and exporters in excess of 75 per cent will have to be on deliverable basis and cannot be cancelled. The earlier limit was 50 per cent. Greater leeway is now being given to resident corporates to hedge their risks arising out of their overseas investments in debt and equity. Procedural changes include the freedom to cancel and retook forward contracts. Small and medium enterprises will now be permitted to book forward contracts without underlying exposures or records of imports and exports.

They are permitted to freely cancel and rebook the contracts. Resident individuals too can book forward contracts without production of underlying documents up to an annual limit of $100,000, which can be freely rebooked and cancelled.

Simultaneously, as Indian markets integrate rapidly with the rest of the world, hedging products offered at international centers such as the Chicago Mercantile Exchange should be harnessed for the benefit of Indian market participants. Cross-currency instruments using futures and options are available but as far as India is concerned there has been a serious worrying in that none of these instruments is denominated in Indian rupees.

Consider how the MNC could minimize any negative impacts of such movements. To this end, formulate at least two (2) currency-derivative strategies that the MNC can use for foreign exchange risk management. Explain how they would minimize the impact on international business operations.

The spot foreign exchange (also called spot FX or forex) market is the largest market in the world, with over one trillion $US traded every single day. One of the forex derivatives of this market is called the forex futures market. This market consists of only about one hundredth of the total size.

Speculating and Hedging are the 2 primary ways in which forex derivatives are used. ‘Hedgers’ use forex financial contracts futures to help eliminate or reduce risk by insulating themselves against any possible future price shifts. In contrast, speculators want to take risks in order to ensure a profit. There are two main techniques that can be used as forex derivatives.

Speculating is profit-driven. In the FX market, futures and spot FX do not differ too much from each other. So why would you want to identify trade opportunities in the futures market instead of the spot market? So, there will be pros and cons about dealing with forex financial contracts in the futures market.

The pros of using the futures market as a FX derivative is Lower spreads (2-3), lower transaction costs, and more leverage: often as much or more than $500 a contract. The cons of using the futures market as a type of foreign exchange derivatives is that it often requires a larger amount of capital, the fact that it is limited to the foreign exchange’s session times, and that fees may apply.

The trade opportunity strategies employed for speculating are much the same as those used in spot markets. The most widely used foreign currency derivatives strategies are based on regularly used forms of technical chart analysis since these FX markets tend to trend well. Alternately, some foreign currency derivative speculators use more intricate strategies, such as arbitrage.

When you take a closer look at hedging, you will see why there are several reasons to utilize hedging strategies in the forex futures market. A major goal is to neutralize the currency fluctuations effect on sales revenue. For instance, if a firm operating overseas wants to find out how much revenue it will get from its European stores (in US dollars); it could purchase a futures forex financial contract. The contract will be the same amount of its proposed net sales to try and eliminate the effect of currency fluctuations.

When hedging, FX traders often make a choice between futures and another of the foreign currency derivatives known as a forward. They have several differences, but the two most important differences is that forwards allows more flexibility in selecting dates and contract sizes; and that the cash that backs a forward will not be paid until the contract expiration, whereas futures-generated cash is calculated on a daily basis.

Apply a hedging technique to manage the risks of transaction, economic and translation exposures that may occur in the Indian market.

Transaction Exposure risks: In real world, a single transaction (sales and receipt) may take some period of time. For example, you sold goods to a foreign customer on 15 December 2011, and customer promised payment after two months. Now during these two months the exchange rate may fluctuate on either side and this will result in exchange gain or loss. These transactions may include import or export of goods on credit terms, borrowing or investing in foreign currency, receipt of dividend from foreign subsidiary. This type of exposure can be safeguarded by using hedging instruments.

Translation Exposure risks: When a business has several subsidiaries located in different foreign land, then it needs to consolidate its financial results of overall operations. Translation exposure affects the financials of the group when it translates its assets, liabilities and income to home currency from various currencies. The widely used mean of protecting against translation exposure is known as balance sheet hedging. In this method, assets and liabilities are matched of offset in order to reduce the net effect of translation.

For example, a company may try to reduce its foreign currency dominated assets if it fears a devaluation of foreign currency. At the same time, it may increase its liabilities by seeking loans in the local currency and slowing down payment to creditors. The firm may try to equate its foreign currency assets and liabilities then it will have no net exposure to change in exchange rates.

Economic Exposure: This type of exposure affects the value of the company. Any adverse exchange rate fluctuation will reduce the present value of all the future cash flow, thus reducing the value of the company. It is difficult to measure the dollar value effect on the value of the firm. For instance, an Indian firm is operating in other country through a subsidiary.

Assuming that the foreign country in question devalues it currency unexpectedly, this will be a bad happening for the home firm. This is because every local currency unit of profit earned would now be worthless when repatriated to India.

On the other hand, if could be a good news as the subsidiary might now find it profitable to export goods to the rest of the world. If a firm manufactures all its products in one country and that country’s exchange rate strengthens, the firm will find its export expensive to the rest of the world. Sales will be stagnant if not lowering and the cash flow and value of the firm will also deteriorate. On the other side, if a firm has decentralized production facilities around the world and bought its inputs from all over the world, it is unlikely that the currencies of all its operations would revalue at the same time.

It would therefore, find that although it was losing exports from some of its productions facilities, this would not be the case in all of them. When borrowing in more than one currency, firms must be aware of foreign exchange risk. Therefore, when a firm borrows in US dollars it must settle this liability in the same currency. If US $ then strengthens against the home currency this can make interest and principal repayments far more expensive.

However, if borrowing is spread across several currencies it is unlikely they will all move in one direction ­ upward or downward and economic exposure is reduced to considerable extent. Borrowing is foreign currency is justified if returns will then be earned in that currency to finance repayment and interest.

India’s country risk analysis

According to the economic figures, many experts believe that India’s economic growth is set to overtake China’s economic growth in a couple of years. It also said that by 2050, China, America and India are poised to be the three biggest economies. However, these reports listed these findings subject to some caveats related to country risk analysis.

Before making any investment, it is very important to discuss these caveats and analyze their implications on the general well-being in context of the Indian economy. The first important issue is getting the information about how sound is the fiscal and monetary policy.

A persistent ratio of Fiscal Deficit to GDP over 4% is viewed with concern. Countries with ratio of debt to GDP of more than 70-80% of GDP are extremely vulnerable.

India’s central bank needs to be commended for maintaining an independent monetary policy and taking effective measures to balance growth with inflation. It is the fiscal policy which is leaving the economy barefooted. Currently the central bank is raising rates in hope to rein inflation by squeezing money supply. But the inflation is proving to be sticky and not responding quickly to monetary tightening.

Part of this can be blamed to lack of tandem in monetary and fiscal policy. Government is spending more than its earnings and the spending is acting like a stimulus.

This stimulus is aiding growth and fueling inflation. Worst still the government spending is increasing in non-productive areas like subsidies and populist social programs which lack metrics for performance and delivery mechanism effectiveness measurement.

Now, let’s focus on the economic growth. The economic growth prospect of India looks very changing. One day the economy looks like it’s invincible and portrays a healthy picture for future growth. The very next day, economy starts looking vulnerable. The long growth prospects of the economy look very optimistic. But after Lehman brothers and Euro crisis, who has seen long term. Still, the policy paralysis in a difficult environment has stalled the growth momentum. The medium term growth prospects depend largely on external macros and internal proactive policy.

Also, a small current account deficit on the order of 1-3% of GDP is probably sustainable, provided that the economy is growing. The current and near term projections for current account deficit is 2.7 % of GDP. Though there may be a spike in import bill on account of depreciating Rupee, exports too may rise easing the burden on current account deficit. The current account deficit is within reasonable limits and is likely to be so in the medium and long term.

At the same time, current account deficit poses the maximum risk to India’s economy. Any substantial shift could lead to a run on the Rupee and the economy could come under serious stress. Phasing out subsidies and an efficient tax system has become indispensable.

India’s has a current account deficit so it borrows money from abroad, or in other words foreigners are net investors in the country. But the amount of money India has borrowed in within bounds on a relative basis. Besides that, it is very important to know about India’s liquidity.

By liquidity, we mean foreign exchange reserves in relation to trade flows and short term debt. An important ratio is reserves divided by short term debt. A safe level is 200% while a risky level is under 100%. The country is sitting on a reserve base which is roughly equal to short and medium term external debt. This limits the ability of RBI to intervene in the foreign exchange market to support the rupee in times of downward pressure of Rupee. Still the situation is not as comfortable and as regards the foreign exchange reserves India is just within its means.

The political situation is supportive of the required policies. In India, as in America, being in opposition means opposing every policy move of the ruling party even if it means opposing your original stand.  There is a talk of party paralysis in India thanks to inaction of UPA. But there’s a lot of contribution of opposition parties to this policy paralyses.

Without getting into this debate, this factor is the biggest contributor to country risk of India. In fact on a valuation metric, political risk will have the highest beta. The country risk premium is relatively high compared to other emerging economies. The economy is facing strong headwinds from abroad and tailwinds from within the country. Big steps need to be taken to ramp up the GDP and its growth metrics.

Whole Foods


Organic foods are those products or agricultural inputs produced under a set of rules called “organics.” These procedures are intended primarily to get food without chemical additives, avoiding or synthetic substances and achieving a greater protection of the environment with non-polluting techniques. What distinguishes the organic agriculture is that all synthetic inputs are not allowed. Also, the crop rotation is mandatory to strengthen the soil.

In that trend, food producers must make sure their organic products are chemical free, and they cannot use for transgenic seeds or plants for their production.

The organic crops are fertilized preferably by composting, to give back nutrients to the soil through of food. Among the traditional methods used is the terrace system or natural barriers to prevent erosion soils. In addition, organic products may have other qualities such as ecological packaging for their deliver to the final consumer.

Following that particular trend, Whole Foods Market is a supermarket chain specializing in organic and natural food more important to the United States. It has over 300 stores in the U.S. and England and is a benchmark for the industry as it serves as a promoter of the organic culture, integrating values such as chemical-free, livestock protection, access to truly healthy food, responsible consumption, support small producers and fair trade.

While many people think healthy food is insipid, boring, and organic food is for vegetarians or people in sickness, Whole Foods tries to prove the opposite, integrating two trends in cooking: healthy and delicious.

Evaluate the competitive environment of the firm: Apply Porter’s model and analyze each factor relative to the company.

Supplier Power: Most of suppliers have little to no influence. There has to be a large number of suppliers in the market. That means that organic food suppliers are not highly concentrated, so natural food retailers have some power over them. The fact that there are not any substitutes for organic and natural food greatly helps this industry.

Buyer Power: There still exists the chance that when stores like Target, and other mass merchandisers, start to carry organic food, there might be a decline in income for Whole Foods. As we expect, big firms are looking for making the most of the returns on their spent capital. Consumers in the organic industry are not really looking for the best price but instead the best quality.

Competitive Rivalry: Whole Foods has seen the increasing of the direct competition from supermarkets that to compete, are re-branding. In that way we have Wal-Mart, Trader’s Joe and Wegman’s. These stores are trying to copy the atmosphere and most of the food items sold by Whole Foods.

Threat of Substitution: The organic food sector has low propensity to substitution.  Whole Foods has focused its service to the customer loyalty. The unique aspects of its particular service are the competitive advantage for Whole Foods. For some customers, no substitute product can be offered for anybody else. However, Trader’s Joe is achieving to appeal some of the organic food customers. But in the case of natural and organic food, the very nature of the company’s products reduces the threat of substitutes. 

Threat of New Entry:  As a consequence of the economic crisis, there are a decreasing number of independent retailers. If anyone walks through any mall, we will see that a majority of them are chain stores. The trouble to start-up a store is not impossible to overcome; however, the ability to set up supply contracts, rent facilities and be competitive is almost impossible. Whole Foods has achieved a competitive advantage over independent retailers.
Discuss which environmental factor poses the most significant threat to Whole Food and what the company can do to combat it.

The environmental factor that poses the most significant threat to Whole Foods could be the weather or climate. The climate change will impact agriculture and food production worldwide because of elevated CO2 in the atmosphere, higher temperatures, etc.

Besides that, altered rainfall and perspiration regimes, increased frequency of extreme events and modified weed, pests and pathogens pressure. In general, low-latitude areas are at greater risk of decreasing crop yields.

Let’s talk about the scientific explanation of this theory. Phenology is the study of natural phenomena which are repeated regularly, and how these phenomena are related to climate and seasonal changes. As of today, the effects of regional climate change on agriculture have been relatively limited.

The changes in the crop phenology provide important evidence of the response to the recent regional climate changes. A significant advance in the phenology has been observed for agriculture and forestry in large parts of the Northern Hemisphere.

Complete a SWOT analysis and identify significant opportunities and threats facing the organization.

Strengths

–        Whole Foods offers catering services, seasonal products and recipes, in the store events such as cooking classes, free tours around the store for customers with food allergies.

–        Originally, health food stores were small, expensive, and do not have a large variety of products, whole foods change all of this and that became the foundation company in this industry.

–        Whole Foods has a commitment for sale high-quality natural and organic products, offering satisfactory service and delighting their customers, also, Whole Foods care about their communities and the environment. That’s why customers feel attracted by the company.

–        Whole Foods has a trendy image and attract more rich and young buyers.

–        The company recorded revenues of $7,953.9 million during the financial year (FY) ended September 2008, an increase of 20.7 % in 2007.

–        They have had 25 years of double-digit revenue growth.

–        Whole Food is the undisputed leader of $ 4.7B organic supermarket industry leader.

Weaknesses

–        At the moment, the government of the United States subsidizes the corn growers industry but not organic farmers. Therefore, companies which not use organic ingredients can produce more food cheaper and faster.

–        The number of organic farmers is growing, but at a slow pace and the supply chain of organic foods is underdeveloped and cannot meet the needs of our food system.

–        Whole Foods has been dubbed as “whole paycheck”, because some food is more expensive than other grocery stores.

Opportunities

–        Whole Foods might sponsor more city events to increase their brand recognition and make customers more aware of the products they offer.

–        They have to promote and build a brand identity with organic foods and eventually lead to the idea that when people think “organic”, they will think “Whole Foods”.

–        Now that our economy is emerging from the recession, Whole Foods has to find a cost-effective ways to give a little back to clients that make purchases and try to get new customers with the same approach. One strategy might be a rewards card, or points accumulation reward card that allows the customers to get a discount on their next purchase or get something free from the shop.

–        As the world is increasingly aware of how important it is to eat healthy, Whole Foods’ commitment to high quality and organic food natural leads to higher prices than those who are not organic and natural food.

–        Many consumers have the misconception that healthy food is more expensive than regular food, when in reality; Whole Foods provides a store brand that is comparable in price of other supermarket chains. Whole Foods needs to change the attitudes of consumers.

Threats

–        A change in the government regulations for organic food would have an impact in the consumer spending.

–        The economic situation is a threat due to Americans of desire to save money and that means saving on food. However, since food is expensive, Americans do not see the cost effectiveness relation for buying organic food.

–        Whole Foods has increased competition from supermarkets that are re-branding to compete with them, such as Target, Wegman’s and Trader’s Joe. These stores are trying to copy the Whole Foods atmosphere and even some of the food products.

Discuss how Whole Foods can use it strengths and opportunities to achieve a sustained competitive advantage in the marketplace.

Whole Foods can get a great competitive advantage from the fact that now is the only major organic food provider in the United States. As food prices have raised in recent months, led by increases in corn and wheat, Whole Foods has not produced a significant decrease in sales. The old fashion, fatty, colored, preserved, and brand name food no longer have the same value that once did, and the wellbeing of the body and the environment are becoming more and more a part of the modern society. In fact, as conventional foods are becoming more expensive, the premium products offered by Whole Foods actually become a little more attractive from a customer point of view.

Other supermarkets are trying to enter the huge market that has become the industry of organic food, but the sale of “regular” food along with organic food does not have the same market penetration, and the variety is not near what Whole Foods offers.

Caterpillar: Financial Analysis

Company Overview

Caterpillar Inc. is an American corporation based in Peoria, Illinois. Caterpillar is the biggest manufacturer of construction and mining equipment, diesel engines and industrial gas turbines. The company markets its products directly, as well as through its distribution centers, dealers, and distributors. It was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. Caterpillar Inc. was founded in 1925 and is headquartered in Peoria, Illinois.

Caterpillar products and components are manufactured in 110 facilities worldwide. 51 plants are located in the United States and 59 overseas plants are located overseas. Caterpillar’s historical manufacturing home is in Peoria, Illinois, which is also the location of Caterpillar’s world headquarters and core research and development activities.

Although Caterpillar has contracted much of its local parts production and warehousing to third parties, Caterpillar still has four major plants in the Peoria area: the Mapleton Foundry, where diesel engine blocks and other large parts are cast; the East Peoria factory, which has assembled Caterpillar tractors for over 70 years; the Mossville engine plant, and the Morton parts facility.

Caterpillar products are distributed to end-users in nearly 200 countries through Caterpillar’s worldwide network of 220 dealers. Caterpillar’s dealers are independently owned and operated businesses with exclusive geographical territories. Dealers provide sales, maintenance and repair services, rental equipment, and parts distribution. Almost 66% of Caterpillar’s sales are made by one of the 63 dealers in the United States, with the remaining 34% sold by one Caterpillar’s 157 overseas dealers. Caterpillar operates through three lines of businesses: Machinery, Engines, and Financial Products.

The Machinery business offers construction, mining, and forestry machinery, including track and wheel tractors, track and wheel loaders, pipe layers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders, underground mining equipment, tunnel boring equipment, and related parts.

The Engines business provides diesel, heavy fuel, and natural gas reciprocating engines for Caterpillar machinery, electric power generation systems, marine, petroleum, construction, industrial, agricultural, and other applications. It offers industrial turbines and turbine-related services for oil and gas, and power generation applications.

Finally, the Financial Products business provides retail and wholesale financing alternatives for Caterpillar machinery and engines, solar gas turbines, and other equipment and marine vessels, as well as offers loans and various forms of insurance to customers and dealers. It also offers financing for vehicles, power generation facilities, and marine vessels.

Evaluate the company’s vulnerability to current financial threats such as a recession, higher interest rates, and global competition. 

Caterpillar’s situation is very challenging. One of the main problems is the high debt to equity ratio. If a company has a high debt to equity ratio it simply means that they used a lot of outside financing (such as business loans) to finance their company, meaning a lot of the business’s expenses go towards repaying these loans.

Another issue is the slow US housing market. However, the 10-20% revenue increase forecast for 2012 persists in spite of an expected continuation of the weak US housing market and no new highway construction. Also, the falling sales in Africa and the Middle East are caused by the political instability. Caterpillar sales going down about 30% compared with 2010.

Another problem for the construction giant is its poor corporate incentive system. Incentive systems are an important part of any organization. Unfortunately, Caterpillar does not show an organized schemed for employee salaries, bonuses, prizes, etc. With a poor recognition system related to employee incentives, is very difficult to keep talented people.

The increase in raw material costs is causing a limited availability of those materials. Caterpillar Inc.’s raw materials’ spending has increased from 2009 to 2011 in a significant way.

In a global market, the strong competition is a fact. The Japanese competitors are posing a big threat to Caterpillar. Those competitors are Komatsu and Hitachi. Komatsu was especially dangerous to Caterpillar due to the fact that it was the second largest EME (earth moving equipment) Company worldwide. Due to this danger Caterpillar decided to penetrate the Japanese market through a joint venture with Mitsubishi.

The result of this was that Caterpillar and Mitsubishi Heavy Industries Ltd. formed one of the first joint ventures in Japan to include partial U.S. ownership. Caterpillar Mitsubishi Ltd. started production in 1965, has been renamed Shin Caterpillar Mitsubishi Ltd., and is now the No. 2 maker of construction and mining equipment in Japan.

In the other hand, Hitachi Construction Machinery is focusing on mining- equipment, a market that’s less competitive than construction machinery. The company set a target to capture a 30 percent share of the global market for large mining trucks by 2018 to challenge Komatsu and Peoria, Illinois-based Caterpillar Inc. (CAT).

Hitachi Construction Machinery now has a 10 percent share for dump trucks that can carry at least 190 metric tons. It has a 40 percent market share in mining excavators weighing at least 190 tons. Therefore, Caterpillar should increase their participation in the booming Chinese housing market to get a bigger share of business.

Financial Performance

Due to a $76 million favorable impact from higher average earning assets, Caterpillar got an increase in revenues. The Peoria based construction manufacturer reported revenues of $2.645 billion in 2011. That means an increase of $93 million or 4 percent compared with 2010. Also, profit after tax was $378 million, $100 million or 36 percent increase from 2010.

Caterpillar is planning to lay out $3 billion in capital expenditures this year alone to avail itself of growth opportunities it sees all over the world, including laying down the tracks to become over time, the leading builder of construction machinery in China.

Based on current trends and sharply improving prospects, we might expect Caterpillar shares going from $112 to $122. With the company indicating that it expects to consummate the acquisition of small companies in 2012, we believe that Caterpillar can earn $10.00 per share in 2012.

A lot of Caterpillar’s business is still torpid, e.g. Solar turbines, large natural-gas engines, small construction machines related to domestic housing and non-residential construction, etc., and, as these areas start to recover in the next one to two years and Caterpillar folds these small companies acquisitions this summer, we believe that profits can reach $10.00 and shares can fetch $120 in 2012.

New Trends

The success of biofuels may enhance agricultural equipment sales. Caterpillar’s agricultural equipment sector could prosper if the nation has to harvest massive amounts of corn or soybeans to fuel its vehicles. It takes about 21 pounds of corn to make 1 gallon of ethanol, which would mean much more demand for Caterpillar’s tractors if corn-based ethanol took off.

The rapid growth of emerging markets like Mexico, China and India all could benefit Caterpillar, which has distribution networks to offer worldwide industrialization projects with equipment. More than half of Caterpillar’s revenue is international, and that number is increasing. Also, the US Subprime lending crisis led to a decline in home values which undermined Caterpillar’s consumer facing equipment sales. Real Estate Developers simply do not need to buy new equipment to build new neighborhoods. The Real Estate Index Fund (IYR) is down over 30% since July 2008 and is showing no immediate sign of recovery.

Stock Price Analysis

The industrial industry tends to be sensitive to economic cycles. It is better to look for undervalued industrial investments during economic recessions when stock prices are low and sell industrial investments during the late stages of a bull markets when stock prices are high. The global economy is now in a recession; therefore, it is the perfect time to buy industrial investments.

At least for a while, Caterpillar is a stock for holding. This is a stock very likely to improve its performance in the future, but not now. Not even in the short-term. As of today, Caterpillar’s stock price is $110.52.

Abercrombie & Fitch: An Upscale Sporting Goods Retailer Becomes a Leader in Trendy Apparel

            Abercrombie & Fitch is an American fashion retailer, headed by chairman and CEO Michael S. Jeffries. The A&F brand focuses on casual wear for a target consumer ages of 18 through 22. With over 300 locations in the United States, the brand has embarked on international expansion throughout various world markets. Its image has become synonymous with the American youth and has been a mark of multiple parody and controversy.

Great environmental threats that have immediate implications for A&F

            Among the main threats for A&F, there is the competition. Many apparel firms like American Eagle Outfitters, The Gap, Nautica, and Old Navy are getting a bigger share of the apparel market for teenagers.

            Another issue for A&F is the lawsuits. This company has been sued many times for discriminating practices and racy advertisement. Eventually, this legal matter has been fixed out of court.

            Besides that, imitation poses another threat for A&F. In many third world countries, the brand A&F have been copied without permission of the owners.

Great opportunities available in the marketplace for A&F to pursue

            In times of hard competition, A&F have the big opportunity in brand new markets like Asia and South America. In many places, this brand is still unknown.

            Another important issue for A&F should be providing accessories, as a way to expand their horizons. Not only being focused on clothing. Instead of, A&F can also offer new items like belts, wallets, purses, shoes, etc.

            Going beyond, A&F might consider a bigger target. Usually, when people think in A&F, they link this brand with teenagers. However, with the appropriate offer plus some changes, A&F might be able to offer products for people between 22 and 30 years old.

A&F greatest organizational strengths

            Abercrombie and Fitch (A&F) was founded in 1892. This company has more than 100 years of experience doing business in the apparel market. That’s a big advantage over the competition. Besides that, A&F has international experience. This allowed the company to learn how to fit in new markets, how they can adjust their items to a different culture and how can these items should be offered in a different environment.

            Another important strength of A&F are their brand names like Abercrombie, Hollister and Ruehl. They already got a place on people’s mind. Even if Ruehl was not a successful experience, these brands have been providing an important share of the market for A&F. All this is backed by an interesting website which allows customers to see the items and buy them on line.

A&F: the company’s greatest weaknesses.

            Nowadays, on line sales are decreasing everywhere. A&F is not an exception and their website is not making enough sales to make it profitable.

             Even though, A&F image has become synonymous with the American youth, is also important to say that A&F has been a mark of multiple parody and controversy.   Discriminating employees have been a regular practice in A&F. Many lawsuits were filed against A&F because employees from minorities have been discriminated on the basis of race, receiving a different treatment than white employees.

            Sometimes, A&F advertisement has been blamed about being racy and offensive.  Many people feelings have been affected because of the sexuality or offensive slogans on A&F t-shirts. Most of the times, A&F efforts to look trendy have ended on lawsuits or deals out of the court because of this offensive advertisement.

            Another important subject to be mentioned: A&F doesn’t do an appropriate R&D. Any research and development department should have given enough importance to minorities. However, this company ignored all the trends and moves in the marketplace.

How can A&F strengths be used to deflect environmental threats and take advantage of opportunities to further the company’s success in the industry?

            Abercrombie & Fitch is heavily promoted as a near-luxury lifestyle concept. The move began in 2005 upon the opening of the Fifth Avenue flagship store. Being alongside Prada and other upscale retailers, the Abercrombie & Fitch image needed to be on par. The trademark “Casual Luxury” was thus introduced marketed as a fictional dictionary term with multiple definitions such as using “the finest cashmere, pima cottons, and highest quality leather to create the ultimate in casual, body conscious clothing, and implementing and/or incorporating time honored machinery …to produce the most exclusive denim…”

            This upscale image has allowed A&F to open flagships in international locations concentrating on high-end retailing. The “image” is continued, but the trademark itself is not as widely used as before.

            Abercrombie & Fitch fashions are casual, and are supposedly designed for the college-aged lifestyle. The clothing offerings are available in a variety of colors (black excluded). There is a heavy promotion of “Premium Jeans”, and the brand only carries underwear for men. Occasionally, there are northeastern college influenced looks, but the majority of the designs are trend driven.

            The company also offers the Abercrombie & Fitch Credit Card issued by the World Financial Network National Bank. Carriers can use the card in store and on-line for all A&F brands’. As the popularity of Abercrombie & Fitch goods increased, so did the counterfeiting of them. In 2006, the company launched the Abercrombie & Fitch Brand Protection Program to combat the issue worldwide (focusing more in Taiwan, China, Hong Kong, Japan and Korea) by working with legal forces globally.

            Shane Berry, who joined the company in November 2005, was placed in charge of the program. Berry is a former Supervisory Special Agent from the FBI, and was a part of its Intellectual Property Rights Program. The news release from A&F announcing its initiative stated that the “program will improve current practices and strategies by focusing on eliminating the supply of illicit Abercrombie & Fitch products.”

            The Brand Protection program covers all A&F brands; mainly A&F, Hollister and Ruehl (shuttered by end of January 2010). Assuring that its consumers are aware of the issue, the Abercrombie & Fitch Brand Protection and Abercrombie Brand protection features suggest customers to purchase from authentic stores and to report suspected A&F counterfeiting.

            The company’s Abercrombie & Fitch brand gift cards have been recognized by Consumer Affairs as a “top pick” for not having deceptive features such as expiration dates, dormancy fees, and post-purchase fees.

            The company has been considering European expansion for years and decided to enter the European market believing that the demand for Abercrombie & Fitch has grown strong there. After its expansion into the United Kingdom in 2007, where it launched its European flagship store in London, Abercrombie & Fitch Co. plans to continue expansion in the area with key locations – preliminary talks about opening a store in Dublin, Ireland by 2011. Abercrombie & Fitch has been attempting to secure locations in Italy, France, Germany, Spain, Denmark and Sweden.Image

Electronic Surveillance of Employees

Determining whether there is a “reasonable expectation of privacy” typically involves many factors, including the employer’s policies and whether employees were notified of a lack of privacy, how and whether these policies were regularly enforced, the sort of privacy right involved, the nature of the employer’s business interest, the nature of the employee’s privacy interest, the type of information involved, and the level of intrusion by the employer.

Federal and state laws specifically address an employer’s right and ability to monitor, save, record, access, or otherwise conduct surveillance of employees’ use of company electronic communication resources and systems.

Generally speaking, if an employer complies with the notice and consent requirements under these laws, and writes and distributes policies consistent with the laws, it will be difficult for employees to show a reasonable expectation of privacy in using company-owned electronic communication systems.

Employees do have some privacy rights at work. But while some of these rights are inviolate, others can be overcome if you give employees appropriate notice and disclosure and if there are compelling business reasons in the employer’s favor.

Outside his or her own workspace, a corporate officer or employee has a reasonable expectation of privacy to challenge a search if he or she has a “possessory or proprietary interest” in the area searched and there is a connection between this area and his or her own workspace.

There are alternative methods of ascertaining the honesty of salespersons that are less invasive of the employees’ privacy. An example of that would be a salesman providing misleading information. To assess this situation for example, the manager could use surveys of customers to find out this information.

Nowadays, many businesses use customer surveys rather than electronic surveillance to evaluate the honesty of their sales personnel.

There is little specific regulation of private-sector employers’ surveillance activities. The Electronic Communications Privacy Act of 1986 prohibits intercepting electronic communications but generally excepts business communications. An employer’s interest in monitoring his or her employees may conflict with the employees’ privacy interests. The employees’ interests may be asserted in a tort action for invasion of privacy. To succeed in such a tort action, an employee must show that he or she had a reasonable expectation of privacy in not being monitored.

Generally, if the employer can point to a legitimate and significant business reason for the surveillance, then the court may decide that the employer’s need outweighs the employees’ interests in privacy. The means of surveillance should not be extremely offensive—a court will consider the availability of less intrusive alternatives.

To further protect himself, an employer should inform employees that they are subject to monitoring—perhaps by setting up a highly visible surveillance system or distributing to all employees and job applicants copies of a surveillance policy, or both. Employees might also be given an opportunity to comment on the results of any surveillance.

With respect to innocent third parties (customers), they have to be informed that their conversations could be monitored, and they must give at least implied consent to the monitoring.Image