Wednesday, November 21, 2007

Barnes & Noble Is It Really Better?

Barnes & Noble (BKS) reported improved results that were better than street expectations. This brought about appropriate applause. The big improvement revolves around the issue of better than expected inventory losses. Not so much stealing and other naughty stuff that the shareholder had to put up with.

Inventory shrinkage is a challenge for all retailers and Barnes & Noble has been working on it. What concerns me is they do not know if they have got it right. In the conference call transcripts available on Joseph Lombardi the CFO put this comment out.

"Our shrinkage rate has been declining and it declined to a level that we weren't sure was sustainable. We estimated and accrued to a higher level and as a result, we're truing up our numbers based upon the results, as the results were more favorable than we thought they'd be.

I think the good news here is that if we sustain the improvement, this gross margin benefit is permanent albeit obviously spread more proportionately throughout the year. So just good news for us and we're pretty happy overall with the result."

If you true up your numbers because you think you have better controls that's fine. But if you cannot decide if this is a consistent positive contributor how do investors know if the inventory shrinkage problem will worsen and the numbers true up again. Except this time they may be negative.

I find it hard to get excited about an investment because stealing is down with management not sure if they can outwit the thief tomorrow

Monday, November 19, 2007

Xerox Dividend Is It Really True?

Xerox (XRX) announced the restart of a quarterly dividend after a five year hiatus. Xerox also announced the return of its debt to an investment grade rating. Clearly there is cause for optimism. Lets look at a few things.

The stock dropped substantially in the summer and has not really recovered. The dividend is payable at the end of Jan 08 to holders of record as at Dec 31 07. This should block year end tax selling which must look awfully attractive in this kind of market.

Since launching its stock buyback program in October 2005, Xerox to date has repurchased about 129 million shares, totaling $2 billion of its $2.5 billion program. This is approximately equal to what their net earnings have been for approximately the same period.

The long term debt to book equity is approximately 1:1. You cannot chew up your cash in this fashion for very long without running into some difficulty.

Sure Xerox looks promising but they cannot afford to squander valuable cash resources to pop the stock short term. The earnings story needs to start carrying the price not a stock buyback program.

Ann Taylor Inventory Question?

Ann Taylor (ANN) announced earnings this past Friday and wants you to focus on diluted EPS increasing by 22%. Because that's good isn't it? Parse the financials carefully. Read this comment and you will know how they are window dressing the statements

"Ann Taylor President & Chief Executive Officer Kay Krill stated, "Despite a difficult retail environment for much of the third quarter, we delivered solid margins and record earnings per share, reflecting our heightened focus on tightly managing the business and the ongoing benefit of our share repurchase program."

The increase is a result of share repurchase; a well known financial engineering technique. The underlying fundamentals reflect the current challenges of retail. That's code for trouble.

The cash position is 25% of what it used to be from comparable previous periods. The press release indicates that inventories per square foot have improved by moving down by 4%. The press release ignores the balance sheet comparables which compare current to Feb 3 which of course is year end after Jan sales. We all know you stock up for the season and hope for the best. But in the context of a drastically reduced cash position inventories as presented by management are up 24%.

Retail is in for a rough ride. Ann Taylor may need to come clean on fundamental operating ratios and stop merchandising the financial engineering stuff.