Friday, December 19, 2008

CarMax Not Reducing Costs Quickly

CarMax (KMX) reported terrible Q3 results. They lost money, have halted store openings and are trying to cut variable costs. Given the business they are in this should not be surprising. The investors that are currently disappointed and selling as a result of this press release have been asleep and deserve to lose their money.

But here is where I believe management is not coming up with the goods. They are not reducing fixed costs fast enough. They claim

“The increase in the SG&A ratio was mainly the result of the significant declines in comparable store used unit sales and average selling price. This increase was partially offset by reductions in variable costs. In the current market environment, we continue to reduce variable costs by reducing associate hours and allowing natural attrition to further reduce store staffing. In addition, we have implemented a hiring freeze at the home office and are carefully monitoring expenses at CAF.”

Hiring freeze is not going to cut it. You have to reduce all costs, especially fixed costs in absolute terms. This needs to be done now.

Thursday, December 18, 2008

Mary Shapiro Can She Enforce "Thou Shalt Not Steal"

SEC gets a new chairman Mary Shapiro. Sounds like a good choice by Obama. The real proof will be in how the new regulatory environment will unfold. We are currently in a serious crisis. Policy is being made quickly as Presidential Teams transition. President Obama wants to hit the floor running on this one. 21st century is the direction he is calling, which sounds good. But greed and larceny are an age old problem dressed in today’s technology. “Thou Shalt Not Steal” has been around for a long time. We just need to enforce it adequately. Watch for the SEC to expand dramatically and hire a lot of Wall Street types who do not want to be on the street right now.

Wednesday, December 17, 2008

GE Changes Disclosure and Guidance Policy

General Electric (GE) announced guidance for the remainder of 2008 (like two weeks left) and the all important 2009. What is particularly important is that they are stepping away from quarterly guidance. Personally I applaud the change; quarterly guidance is fraught with dilemmas, coded talk and alchemy like divinations.

What we will need to monitor is the way executives now speak to the marketplace when they do MD&A type discussions. In the past everything was summarized in the number. Now investors and analysts will have to pay attention. What GE did not explain was how often they would be announcing changes or tune ups or tweaks to the annual guidance.

Tuesday, December 16, 2008

Goldman Compensation Cost Still High

Goldman Sachs (GS) reported Q4 results and of course lost money. If they had shown black ink no one would have believed it. Take a look at compensation costs as a percentage of revenues. In this business you have to pay your people for results. The question becomes are they deleveraging their people costs as fast as there financial costs. In 2007 they paid out 44% in compensation and benefits. In 2008 taking out severance costs of approximately $275 million in Q4, the ratio of compensation and benefits to net revenues was 48.0% for 2008. 4% at these levels is critical. Sounds like Goldman has some ways to go.

Madoff Executive Summary

In God We Trust. All others pay cash. Trust no one. If you are prepared to invest tens of millions if not more without asking questions then you deserve to lose it all.

Monday, December 15, 2008

Lear Good Grasp of the Obvious

Lear Corporation (LEA) a leading global supplier of automotive seating systems, electrical distribution systems and electronics products, today announced it is withdrawing its full-year 2008 financial guidance as a result of further weakness in global automotive demand and overall industry uncertainty.

That’s good guys. Real good of you to state the absolutely obvious. Basically you have no idea of what to do. The conference call that you will hold to discuss the future is scheduled for Thursday, January 29, 2009 when you will lay out Q4 results which of course will be terrible. By then we will probably know if the Big 3 are still standing. Essentially you have something like $500 million in cash, negative cash generation and receivables from the Big 3 that will kill you.

Rather than talk about unprecedented economic events lets start thinking about what to do when the titanic finally goes down.