Friday, November 17, 2006

Home Depot's Dividend Bluff

Home Depot (NYSE:HD) announced a huge whopping dividend increase. The Chairman, CEO and President Mr. Nardelli indicated that the second dividend increase this year is a major testament to Home Depot’s strength.

"For the second time this year, the board has increased the dividend by 50 percent, reinforcing our confidence in the Company's strategic growth plans and our commitment to generate shareholder returns," said Bob Nardelli, chairman, president & CEO. "While the housing market is challenging, our strong financial discipline and clear growth strategy allow us to reinvest in our retail stores and also return cash to our shareholders."

Quite the bluff in this Poker game. Earlier this week Home Depot announced poor earnings. That’s where dividends come from. In the past few years the level of long term debt has risen from $856 million at year end 01 Feb 04 to $6,671 million on 29 Oct 06. Long term debt provides cash but hangs around for a long time and eventually becomes a drag on earnings. At the same time many board members are retiring due to age. Much expertise and valuable perspective is walking out the door. New board members will need time to get up the curve.

Home Depot is becoming a bigger bet. The dividend increase is not the signal that they would have you believe.

Thursday, November 16, 2006

Zale Corporation (NYSE:ZLC) announced results at approximately 07:00 am Thursday Nov 16 well before market open. A conference call is scheduled for the same day at 09:00 am. The results are poor with net operating earnings in the negative by $26.4 million or $0.55 per share. Management points out that previous guidance had left out the impact of derivative accounting for gold and silver. This quarter the hit to investors is $5.4 million or $0.11 per share, which is 20% of this quarters losses. Ouch!

Zale is a specialty jeweler. This means it is in the retail category. The company needs to report on the traditional metrics of a retailer. Sales per square foot, same store sales, average ticket, margins, new store openings and closings. Interested investors should not need to be experts in commodity hedges, the accounting thereof and the obvious losses in this particular instance.

The only qualitative comment made by management about operations was "Earnings performance met expectations for the quarter and comparable store sales were consistent with plan as we moved through clearance and increased transactions were offset by a lower average ticket," commented Betsy Burton, President and Chief Executive Officer.”

The derivative losses while reported on were not discussed in the press release. I would have liked to see at least the comment that management is taking steps to ensure that this does not happen again when they guess wrong about the accounting implications of their hedging strategies. Because you know what: Most investors will not be able to wrap their heads around the implications of SFAS 133 before the start of trading today.

Wednesday, November 15, 2006

Wal-Mart's Organic Difficulties

Wal-Mart (NYSE:WMT) has run afoul for potentially misrepresenting non-organic food as organic. Much skepticism about Wal-Mart’s true commitment to organic and whole foods greeted Wal-Mart’s original announcement that they are embracing the organic food sector. Traditionally Walmart has been very demanding of its suppliers. They frequently have demanded and received substantial product changes. Such was/is their power with traditional consumer goods manufacturers. But the organic food industry has a passion that may match Walmart’s purchasing behaviour. In any event there is now more doubt and skepticism about Walmart’s entry into this food category.

The Cornucopia Institute based in Wisconsin leads this charge. Their announcement reads as follows:

The Cornucopia Institute, the nation's most aggressive organic farming watchdog, has filed a formal legal complaint with the USDA asking them to investigate allegations of illegal "organic" food distribution by Wal-Mart Stores, Inc. Cornucopia has documented cases of nonorganic food products being sold as organic in Wal-Mart's grocery departments.

"We first noticed that Wal-Mart was using in-store signage to misidentify conventional, nonorganic food as organic in their upscale-market test store in Plano, Texas," said Mark Kastel of The Cornucopia Institute. Subsequently, Cornucopia staff visited a number of other Wal-Mart stores in the Midwest and documented similar improprieties in both produce and dairy sections.

Cornucopia notified Wal-Mart's CEO Lee Scott in a letter on Sept. 13, 2006, alerting the company to the problem and asking that it address and correct the situation on an immediate basis. But the same product misrepresentations were again observed weeks later at separate Wal-Mart stores. Fines of up to $10,000 per violation for proven incidents of organic food misrepresentation are provided for in federal organic regulations.

Earlier this year, Wal-Mart announced a sweeping organic foods initiative and declared that they would greatly increase the number of organic offerings for sale in their stores — at dramatically lower prices than the competition. The move by the giant retailer has been under close scrutiny from members of the organic community.

"This is disturbing and a serious problem," Kastel said. "One can question whether Wal-Mart has the management and staff expertise necessary to fully understand organics and the marketing requirements essential to selling organic food. Given their size, market power, and market clout, this is very troubling."

A number of other organic food retailers throughout the country, including Whole Foods Markets and many of the nation's member-owned grocery cooperatives, have gone to the effort to become certified organic in terms of the handling of their products and have invested heavily in staff training.

This past September, The Cornucopia Institute also issued a white paper, "Wal-Mart Rolls Out Organic Products — Market Expansion or Market Delusion?" The report accuses Wal-Mart of cheapening the value of the organic label by sourcing products from industrial-scale factory-farms and Third World countries, such as China."

Wal-Mart does not have this category under control.

Ross Stores Conflicted Disclosure

Ross Stores, Inc. (Nasdaq: ROST - News) reported Q3 earnings in a press release issued at approximately one hour before market open on Tuesday Nov 14, 2006 They indicated more complete details would be available on the conference call to be held the same day at noon ET. Reading first the press release and then secondly the transcript as provided by Seeking Alpha it would appear that much more substantive information was available on the conference call than in the press release.

In particular the comments of Mr. Michael Balmuth were significantly more comprehensive and dealt with higher supply chain costs, packaway units, markdown trends, shrinkage to name a few topics. The press release was very cursory. Management comments were certainly more meaty on the conference call.

Investors who could not dial into the conference call were at a significant disadvantage. The 8-K was filed at the same time as the press release. The question becomes how to apply Reg FD. If as and when more information comes out a company should issue press releases and the 8-K so as to keep all informed. So where is the line to be drawn.

In this case the stock dropped sharply during the conference call and never fully recovered during the remaining hours of trading. It closed 2.79% down for the day on approximately twice the daily average trading volume. The dividend yield is approximately 0.80%. Investors just lost over three years worth of dividend yield. The stock did not drop on the open when investors read the press release.

Tuesday, November 14, 2006

Pre-Paid Legal Blinks Erratically

Well that did not take very long. A press release was issued Tuesday at approximately 11:24 AM which said “In light of Monday's share price action and comments from several outside shareholders, Pre-Paid Legal Services, Inc. (NYSE: PPD - News) has decided to cancel the previously announced insider transaction. We will not purchase any of the 639,000 shares previously announced. We will continue to purchase treasury shares in the open market and consider additional private block purchases.”

What did they think was going to happen. Management has essentially been scared off and rightfully so. Now what? The annual general meeting should be a donnybrook with 70% of the float in a short position. Corporate governance will most likely collide with shareholder rights all seasoned by a unique mixture of greed and irrationality.

Home Depot Stalls

Home Depot (NYSE:HD) announced surprising financial results. Total sales are up 11.3% but net earnings are essentially flat. B school students are failed when they come up with this kind of model. Total retail sales grew 1.1% but same store sales dropped 5.1%. Total sales in HD Supply grew 159%.

Included in the press release “Bob Nardelli, chairman, president & CEO. "Our sales performance was softer than we anticipated..) Essentially the CEO made a series of stay the course comments.

What is positively of interest is the phrase that they will be moving to a richer store staffing model. Duh! How much money has walked out of the store because you could not get service? Now they say they see the light.

Home Depot is a big entity depending on a lot of very small but unique decisions. When a customer has a question about a plumbing fixture the question is incredibly important and usually wrought with anxiety. To Home Depot its maybe around $5 of revenue. This is what Mr. Nardelli does not comprehend.

The shift to HD Supply represents big picture thinking. We like clients who need truck-loads of stuff. The individual home-owner do it yourselfer is a second class citizen. HD Supply with its huge growth does not seem to be driving the bottom line up.

If the retail consumer is not enticed back put this stock on the dead money list. Housing cycle excuses aside. (Do not people renovate instead of move?)

Look for some executive staffing changes before the next annual meeting. If the retail investor does not return Mr. Nardelli must go.

Monday, November 13, 2006

Pre-Paid Legal buys Out Insiders

Pre-Paid Legal (PPD) announced a share buy back of 639,000 shares from four insiders. The deal was priced by the closing trade on Friday. Approved by the Board, the purchase represents 11 to 12 days of trading volume according to the trailing 3 month daily volume average.

The insiders are Prescott Investors (500,000 shares) a private equity fund, HC Stoneclipper (125,000) the president, Randy Harper (8,000 shares) and Kathy Pinson (6,000) both very senior officers of the firm. What to make of this move when these four want to liquidate, especially Prescott Investors?

The corporate press release indicated that PPL would need 30 days to liquidate short-term investments to avoid penalties and then pay up. The press release also mentions that the company will use proceeds from a term loan issued by Wells Fargo. We could use some clarification on exactly how the cash will work. The company apparently did not want to sell the shares on the open market. Hmm.

The company also went on to say “We have reduced the number of shares outstanding by approximately 43% from 23.6 million at March 31, 1999 to 13.4 million today.” (Today being Friday Nov 10, 2006) This has cost approximately $308 million to accomplish. Essentially the share price has moved sideways since 1998.

The pre paid legal services business is very attractive and has huge potential in a litigious environment such as the USA. The shares are trading near their 52-week highs. If they are being positioned for a takeover at a lower multiple then why not finance with the companies own cash and buy back later at lower PE’s.

But here is the kicker. The shorts are howling. 70% of the float is short. You need 90+ days to cover the short position. They are trying to squeeze out the shorts. But they may have to amputate without an anesthetic.

The stock is not for the faint of heart. Hopefully more news pending. Caveat emptor on this one as there are strange doings afoot.