After re-reading the trading update and looking back over my monitoring of JB stock levels across a dozen stores nationwide since they first stocked the watches at the start of November, I believe JB has contributed to a much poorer Christmas result than would have otherwise been.
A few years before the peak of the DVD retail trade, I owned a DVD retail store which only sold DVD’s (without renting). In some ways DVD sales were similar to Spacetalk - both are discretionary and both will be bought throughout the year but both also make good gifts for Christmas. We sold plenty of DVD’s through the year but I clearly remember how many people came in to buy DVD’s for Christmas. We were in a shopping centre and we had two queues of customers lined up that extended we’ll outside our doors and then another 30-50 customers browsing the shelves. We had two people on the two tills, two or three staff behind the counter grabbing more popular DVD’s out of cardboard boxes lined up behind us to speed up our serving of customers at the tills and at least 5 other staff frantically restocking shelves and helping customers on the floor. The last two weeks before Christmas was extremely hectic and we relied on December for our full year profit. In those two weeks we might have sold 2 or more months worth of DVD’s. It may have been even more - I wish I still had the numbers but it was big. The one thing I made sure of, especially at Christmas, was having more than enough stock of all popular movies because if you didn’t have it at that time of the year, the customer went elsewhere to buy. Spacetalk is a bit different in that the customer is probably more likely to come back and buy later because they can’t go buy it at Big W or Kmart like they could with DVD’s.
What is clear to me though is that by having many JB stores running out of popular colours or in some cases running out of all colours in the last one to two weeks before Christmas was a very poor management of stock levels by JB. From my experience I think sales of Spacetalk for the two months at JB stores could easily have been double what they were had the stores been fully stocked throughout the lead up to Christmas. Based on the numbers in the update, JB probably sold around 7 to 8 thousand in the two months to Christmas but by running out of stock in the two weeks before Christmas in many stores I think they missed out on selling up to that many again in those last two weeks. I think many of those customers will come back to buy. One small positive out of this is that it may give us stronger post Christmas sales than we might have had if we sold more through Christmas. There will always be birthdays for those kids that might have missed getting one for Christmas. We’ll have wait to see how seasonal sales will now be. I’m sure they will be far less seasonal this year for Spacetalk than they were for our DVD’s because so many people will still be unaware of Spacetalk but will come across it in the months to come and some customers that couldn’t get the colours they wanted through JB will come back after the stores are restocked.
One disappointing thing about this is that we were all waiting to see the sales numbers over Christmas had JB been adequately stocked but now we don’t know what the real potential was. The other disappointment is that we gave JB exclusive rights and promised them a strong advertising campaign, ordered plenty of stock to be able to support them but they let us and themselves down by not maintaining stock levels on what was clearly a product in strong demand.
Looking forward from here, sales may now be stronger post Christmas due to pent up demand, JB’s exclusive rights will expire and others will come on board. Europe is expected to rollout within the next 6 months and hopefully they maintain stock levels better than JB. I’m sure we haven’t seen anything like the full potential and we would have seen much better results had JB maintained adequate stock. That leaves me confident on the next six months and beyond with UK and Europe being far larger markets for us than JB. In the end this stuff up by JB will just be a minor hiccup in the big picture. MGM has done everything extremely well to date. A poor handling of stock levels by JB over Christmas doesn’t take anything away from the great job that MGM has done or the likely strong growth going forward for both Spacetalk and the wearables sector.
"Sales for the month of March 2018 reached 82% of the pre-
Christmas sales levels achieved in the month of December 2017."
That adds weight to my expectation that post Christmas sales this year will not see much of a drop from pre Christmas, especially if there is pent up demand from JB running out of stock which we didn’t have last Christmas. The latest trading update showed strong quarter on quarter growth throughout from the March qtr onward. If this March qtr is only 80% below the Dec qtr and then we see strong qtr on qtr growth again, then a full 12 months of sales going forward should be at least 6 times the sales of the 2 months to end of December. Based on the numbers in the update, I’d say at least 8 or 9,000 watches were sold to customers in the 2 months to Dec. If that is a reasonable assumption, then sales for the 12 months starting Nov last year to the end of Oct next year should be around 48,000 to 54,000 units. That would be a great result and there is nothing in that for sales to Europe now flagged for the next 6 months. The market is over-reacting on thin volume, probably traders exiting that were hoping for stronger results. My guess is many of them would have sold on the news regardless of what it was. No doubt a few investors also selling after hoping for better results but I think they have over-reacted. Others are and will be buying.
MWR Price at posting:
$3.37 Sentiment: Buy Disclosure: Held
