Thursday, March 06, 2008

Korn /Ferry International Out of Pocket Conundrum

Korn/Ferry (KFY) one of the worlds premier recruiting and head hunting firms announced a 22% Increase in Fee Revenue in Q3 of Fiscal 2008. The head guy CEO Gary D Burnison provided this quote "As the world has flattened demand for talent worldwide has intensified. Our performance this quarter has set a new industry record and is indicative of the ongoing need for organizations to recruit and develop their people. We are focused on using our global scale, our diversified services, and our strong brand to help our clients identify, hire and develop the best leaders in the world."

Blah blah blah. The press release provided precious little commentary about actual market conditions either by industry sector or geographical orientation. The economy in North America is looking more difficult every day. Yes you always need really good people so recruiting will not go away. But what are the real market prospects. Korn/Ferry needs to provide a great deal more colour on this topic.

Looking at the income statement there is a curious issue of reimbursed out of pocket expenses. It seems that in Q3 Korn/Ferry could only recoup 77% of these expenses from the client. In Q3 this leakage is equivalent to 20% of net income. 20% is huge. When you talk about margins you need to consider this drag on earnings.

Why is the shareholder paying for it?

Wednesday, March 05, 2008

Brown Shoe's Curious Case of Deferred Rent

Brown Shoe Company (BWS) announced this morning that Q4 sales decreased approximately 10% but net earnings increased 2.7% on a diluted per share basis. They are opening new stores in North America and are stepping up their expansion in China. But...

Management has not provided any commentary on the growing Deferred Rent Category. This item has grown 9% from $38 million to $41.4 million over the last year. It is rapidly approaching one year’s worth of net earnings and is growing in significance.
It may seem simple and basic but this liability will eventually have to be settled.

The question is how and when? Management needs to comment on why this shoe still fits.

Tuesday, March 04, 2008

Staples Global Numbers Need Explanations

Staples (SPLS) announced that Q4 Sales Rose Eight Percent and Diluted EPS Increased 15 Percent on a Proforma Basis Excluding the Extra Week in 2006. The financial media almost uniformly reported quarterly profit dropped 1%, hurt by fewer customer visits and lower demand for furniture and business machines.The company also lowered its full-year profit forecast, citing a challenging economic climate.

The company follows up with an announcement that the cash dividend has been upped by a whopping 14%. The press release relating to the dividend included the headline of “Supported by Record Full Year 2007 Free Cash Flow of $891 Million.”

They are working on swallowing up Corporate Express which may still work out for them. So let’s take a look at some of the operations. When everyone is focused on high level concepts how is the house keeping behaving.

The international area achieved record sales of $2.7 Billion which is roughly 28% of total sales. There is next to no comment about international operations. No insights not even a nuance. We only know of a few stores opening in Europe with this quote from the press release:

“Opened three stores in Portugal, two stores in Netherlands, one store in Germany and one store in Belgium, and closed three stores in the UK during 2007, ending the year with 268 stores in Europe.”

In terms of business unit income international represent 10% in Q4 whereas they were only 6% for the year. This means international is coming on rather rapidly. Management needs to provide a more comprehensive overview of the international numbers. When you pop the dividend you need to explain especially if an operating unit appears to be doing well.

Monday, March 03, 2008

Asensio Still Sceptical About LDK

Asensio issued two press releases outlining what they view as issues with LDK Solar Panels (LDK). Regular readers of this blog will know that Asensio has long been critical of LDK. LDK has been controversial with one Charles Situ leaving the company under strained circumstances last year. As a result of allegations made by Charles Situ regarding inventory levels and valuations an independent committee was struck to investigate.

Let’s read a quote from Asensio’s press release which I received before market open Feb 28, 2008.

“It appears that LDK's most recent financial filing betrays the findings of the committee led by two of its own independent directors. On February 25, 2008, LDK reported its financial results for the fourth quarter of fiscal 2007. On the unaudited balance sheet released with this earnings report, LDK now classifies $29.98 million of its $380 million inventory as "Inventories to be processed beyond one year." During the earnings call, LDK CFO Jack Lai commented on the inclusion of the mysterious line item:

"...based on the manufacturing recipe, we have a limit percentage of polysilicon powder that can be used in the production process. So we work on our formula, work on our production anticipation this year, and some of the inventory will be going beyond this year."

Asensio is calling into question LDK’s financial reporting in this quote
“ believes the findings of LDK's independent audit committee are questionable. In fact, recently contacted Simpson, Thatcher and Bartlett LLP in connection with LDK's long term inventory. The company continues to file earnings reports without including any notes or discussion. Until LDK's disclosures improve, it is impossible to properly evaluate the condition of the company's inventories or the level of earnings it reports. “

On Monday Feb 3, 2008 Asensio issued another press release regarding LDK which included this comment:

“In addition to these disclosure issues, LDK now appears to have suffered serious damages to equipment and property, resulting from a winter storm in late February. According to a translation of an article published in the Jiangxi Daily on February 25, the "snow disasters" damaged a material sum of "15,000 tons silicon material." In addition, LDK suffered "some machinery and equipment damage." So far the company has made no announcement in connection with these damages.

LDK is a tough story to buy into. In the past I have suggested to LDK to upgrade their disclosure so as to avoid the doubts that some investors have. LDK you have a long way to go. My sense of the matter is that Asensio’s judgement needs to be paid attention to.