Friday, March 09, 2007

Talbots Stuck In The Muck

Talbots (NYSE:TLB) seems to be in the twilight zone. They reported Q4 and year end results that were basically in line with revised expectations. The problem was the revised expectations were poor. Arnold B. Zetcher, Chairman, President and Chief Executive Officer commented that after a strong first half and a strong Sep the trend disappeared (read customers stopped spending money). This was spread over all lines.

Mr Zetcher did grasp at straws with this comment

“However, our major Spring 3 catalog, which was mailed to customers in the beginning of March, has so far received positive customer response and is off to a strong start.”

The comment was included in an early morning press release on March 7.

Trading has been downward since Oct. Institutions have unloaded approximately 55% of their holdings. Mr. Harold Bosworth the Chief Merchandising Officer unloaded 12,500 shares in Jan 26, 2007. I am sure it was financially wise but extremely discouraging to other investors. Was he correcting his own homework?

The company is due for a shake-up. Even some mild performance improvement will not catch the markets attention. The problem is some 57% of shares are held by insiders and 5% holders. Someone has to decide they want out of the boat. A boardroom bloodbath is usually involved. Until this cleansing action occurs the company will probably remain stuck in the muck.

Thursday, March 08, 2007

Satellite Radio Congressional Tap Dance

Sirius Satellite Radio Inc. (NasdaqGS:SIRI) and XM Satellite Radio Inc. (NasdaqGS:XMSR) continue the congressional tap dance as they desperately attempt to secure approval for their desperate merger.

The executives are prepared to cut their financial throats and have put the sharp knife in place with this comment

"If our merger is approved, we will offer consumers a much more attractive choice -- the best of each service on one radio at a price well below the cost of the two services today," Sirius Chief Executive Mel Karmazin told a House telecommunications subcommittee hearing.”

When asked if the discount would be around $10 or $2, Karmazin said it "looks closer to 10 than to two."

That is a whole lot of cash flow that cannot possibly be recovered by cuts in operating costs and other synergistic nonsense that executives are hoping for.

The deal must be approved by both DOJ and FCC. The original licenses were issued by the FCC on the basis that the two entities will never merge. Consumer groups are screaming and the merger does not have any political capital. Politicians will not be re-elected because they support this deal.

A merged entity is not a guarantee of improved viability. The capital cost of satellites is huge and will continue to stay huge. Just check with NASA about discount space travel and listen to the exasperated silence.

One is reminded of a horse racing handicapping rule. When two fast horses are pitted against each other bet on the third good horse as the first two will burn out and will need very long periods of recovery.

This is dead money as the executives are lost in space without any idea as to how to return to profitability. Somehow I do not see any private equity swooping down to pick up the pieces.

Wednesday, March 07, 2007

UPS Big Future Promise

United Parcel Service (NYSE:UPS) CFO Scott Davis reaffirmed recent guidance at an investor conference in Cologne Germany. Included in the comments was a one sentence forecast for the US economy for 2007

“Davis said domestic small package operations will be affected this year by a slowing economy in the United States, with next-day air growth flat to slightly positive in 2007.”

If you respect Dow Theory tenets that transportation should confirm the Dow be ye afraid or at least sell a few positions.

The real long term news is the fundamental shift in the mix of international vs domestic.

“International profits are expected to be one-third of the total of its operating income in 2010, compared to 24 percent of the total in 2005, Davis said. UPS, also known as United Parcel Service Inc., expects that profits from its U.S. domestic business will represent about 60 percent of its total operating income in 2010, compared to 73 percent in 2005.”

The implicit assumption is a higher margin generated by international business rather than domestic activities. The higher margin will naturally attract competition from alternatives and it remains to be seen if higher margin assumptions hold.

In a global economy many costs become homogenized. Fuel and energy are driven by petroleum prices. Capital equipment such as aircraft and vehicles are usually sourced from only a few large international providers who sell off a global price list. Labor costs will be radically different but unions will move to protect themselves and UPS will need to avoid power struggles. Finally global customers will negotiate global pricing which will negate local differences.

International expansion has been the shiny city on the hill for many companies. Somehow most entities do not make it. If they get there it does not last for long.

Mr. Davis please be careful how you beat that drum!

Tuesday, March 06, 2007

Barnes & Noble Good Clients Financial Bite

Barnes & Noble (NYSE:BKS) announces poor guidance and prepares for the financial scrub brush. With real earnings to be announced several weeks into the future Barnes & Noble has announced that its best customers are its worst financial problem. Most other industries make the most profit on their best customers but not in this case.

At the same time they announce some house keeping about closing an internet distribution center and let slip that their investigation into stock option granting is still underway.

If you read carefully the internet side of the business accounted for slightly less than 10% of sales. By this time you would have expected the internet to be more profitably rooted. Somehow Barnes and Noble cannot significantly connect in this segment.

The book industry has not been able to sell itself other than through price competition. They all seem to offer the same book by the same author as their competitor (either retail or internet) and therefore have not been able to develop additional value added propositions.

The book selling industry needs margin, immediately if not sooner. Amazon should consider buying Barnes and Noble. Institutions have dumped 15% of their Barnes & Noble holdings since last summer. An acquisition allows the combination of best of breed in both the internet and retail categories. Barnes and Noble can entirely close down poorly performing internet distribution. The combination will minimize hyper price competition and allow markets for authors to be developed. In other industries that is called profits and product development.

Something has to give. Barnes and Noble cannot thrive by closing down a few bad stores and opening up a few new ones. Barnes and Noble market cap is roughly similar to Amazon’s 06 gross profit. Jeff Bezos pull the trigger and improve your retail margins with an easy one. If you do not move to maintain your hold on book selling someone else will do it and threaten your entire franchise.

Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) are scanning huge amounts of books into their data-bases. Microsoft associate general counsel Thomas C Rubin in prepared remarks he planned to give at the annual meeting of the Association of American Publishers in New York accused Google of copyright infringement.

As the industry consolidates buying up the traditional outlet which has the legitimate rights to distribute the copyrighted book would create the legal high-ground needed to dominate. The purchase would solve the sticky copyright infringement issue. Publishers who have not been able to leverage electronic rights would be only too happy to sign over these rights and actually see significant cash flow.

Barnes & Noble may actually have a utility value in a greater game. Opening and closing a few stores is just a mugs game.

Monday, March 05, 2007

Berkshire Hathaway Future Dilemma

Berkshire Hathaway (NYSE:BRK.A, BRK.B) leader Warren Buffet has released his annual letter to shareholders with the latest commentary. Warren Buffet is the second richest man in the world and his financial achievements will always hold a special place in investing history.

We all know that he is getting old and admits to a diet of cherry coke and hamburgers. The entire succession thing is approaching a crisis point. There exists an intense media speculation about his successor which is sometimes stoked by management comments regarding three top individuals who are known to the board etc. But we cannot tell the market who they are.

We all know that Warren Buffets estate is primarily going to charities. Currently Berkshire is a purely capitalist entity. Step One is maximize profit. Step Two is repeat step one. Once Warren Buffet is longer on the scene the new leader will have to report to the new shareholders to a degree that Buffet never had to do.

Charitable entities will have their own agenda’s. Social causes will have a much heavier weighing. The shareholders will exert an influence onto the investee entities. Can you try to help stem the rise of an epidemic in Africa using the profits from Coca Cola (NYSE:KO) which has sugared its product and stands accused of contributing to a vast array of health problems within western society?

Also charitable institutions spend money as they attempt to rightfully fix a problem or two. This may mean cashing in a few chips here and there not because the investment has peaked and should be sold but because someone needs an expensive medicine. In any event there will be a huge need for dividends to pay for ongoing programs.

When looking to Berkshire Hathaway’s future there will be more influences coming from socially motivated shareholders rather than a high profile replacement.

So the issues will be if you follow the superstar’s replacement whoever he/she may be, will you go long on an investment that will have an above average concern in social causes? This perhaps explains the current handling of the succession question and the whole secrecy issue.