Friday, August 21, 2009

Gap - Acquisition Trail or Will it be Someones Snack

Gap Inc (GPS) reports some very good numbers in tough times. They truly have a respectable bottom line, improved margins and substantial cash and liquidity. Glenn Murphy, chairman and chief executive officer actually said

Building upon two years of work improving our economic model, we’re now putting further emphasis on changing the trajectory of our top line performance. Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share.”

Here is the crux of the question. They are undoubtedly well positioned. Will it be organic growth? Or will they make some strategic acquisitions. Lots of situations are ripe for a deal. Will Gap acquire something or be acquired by someone?

Management needs to start drawing some lines in the sand.

Thursday, August 20, 2009

Heinz Doublespeak on Foreign Currency

HJ Heinz (HNZ) reported Q1 profits using an interesting format. “Constant currency.” In the headlines they lay claim to sales growing 4.5%, operating Income increasing 5.6%, and EPS rising 9.7% on a constant currency basis. Under their 2010 guidance they explain constant currency; as excluding the impact of currency, which cannot be predicted with consistency. So let’s not use it. That’s like predicting costs without taking into account commodity prices changing. Can you imagine a constant commodity. Sounds stupid. So why do it with currency. Heinz is not the only one doing it and it does sound stupid in other press releases also.

Drill down to SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS: ....specifically to Factors that could cause actual results to differ from such statements include, but are not limited to: ...and you will find that a major risk factor which they feel obligated to warn investors about is ...Currency valuations and interest rate fluctuations.

But when management pats themselves on the back they get to ignore it.

Wednesday, August 19, 2009

Bankrate Displeases the Deal Professor

Bankrate (RATE) has not passed scrutiny with the deal professor. Read this link back to the New York Times and see if this one passes transparency and disclosure.

Deere Needs to Beef Up Earnings Release

Deere & Co (DE) reported terrible results in a terrible market. Somehow investors were surprised and sold off the stock. At this stage of the game you should no longer be surprised by bad operating news. Every business is having major difficulty. If you need to factor that into your thinking now, you are very late.

The earnings report played to the bad news and even admitted that this is the worst decline in fifty (50) years. They did not address their balance sheet other than pointing out that they have reduced their inventories as a percentage of sales. There was no mention of retailer inventories, age of existing equipment and what replacement cycle we may be looking at. There was also no mention of other balance sheet items such as cash and come to think of it I did not spot the sources and uses of cash with the press release. (I know it’s most likely disclosed elsewhere so the SEC says OK but the investor has to really hunt around.)

The lack of management commentary creates the impression that they are just a cork bobbing around on the tide hoping that good things happen soon.

Tuesday, August 18, 2009

Saks Leading Edge Disclosure

Saks (SKS) reported difficult results. When discussing their guidance they threw in the ultimate caveat emptor caveat. Read this quote under outlook for second half 2009

“Variation from the sales trends, up or down, could materially impact the other assumptions listed.”

That’s good guy’s. If sales change then its a different story. Real B school stuff coming to the surface.

Home Depot Skimpy Explanations

Home Depot (HD) announced the same difficult numbers as Lowe’s did. Same store sales and overall revenues are negative. The market found comfort by concluding that the numbers were not as bad as expected. This style of delusional thinking was used on the Titanic when from time to time it was noticed that the ship was not sinking as quickly as they thought.

The situation is difficult. The press release shows that management does not have any fresh or new idea’s. They just report the negative overall numbers, try to cut overheads and hope for something better. Just like Lowe’s (LOW)they need to be prepared for a sustained recession and have nothing to offer. Difficult times call for difficult strategies. Opening and closing a few stores does not cut it anymore. The new strategy needs to be shared with the investing world. If there is one?

Monday, August 17, 2009

Lowes Needs A New Model

Lowes (LOW) reported worse declines than expected. Same store sales are off as the consumer is running scared. The question becomes that of scale. If we are in a prolonged recession, is the company and the industry it competes in structured on the right model. Big box stores need lots of customers. The parking lots are empty. There is a historical bias to open and expand. Here are some structural concerns.

1. If they decide to amputate some stores there will be inventory write downs that will hurt the competition.
2. They will need to amputate/close more than just a few stores.
3. Most of the inventory is commodity price driven. Lumber and metal prices are critical components. Should Lowe’s write down its inventory and structure its balance sheet for the future.

It’s all going to be very different. The old models do not work. Can the board look at a new vision? Same store sales have been declining each quarter for as long as you can remember.

Sunday, August 16, 2009

Too Good to Be True -- Book Review

Too Good to Be True by Erin Arvedlund is a Bernie Madoff biography that delves deeply into the many convoluted relationships a fraud artist constructs. Erin weaves together many of the entanglements and shows the crazy network that supported the largest Ponzi Scam in Financial History.

Erin Arvedlund is the author of a 2001 Barron's article that questioned Madoff. She determined and said publicly that "The Emperor Wears No Clothes" This was earth shattering at the time.

Where we need to go now is why the SEC let him get away with it. Not registered with the SEC, OK why did the Attorney General let him get away with it. This is naked fraud and theft. We need the law enforced before the fact, not $60 Billion after the fact. Thou shalt not steal has been in our value systems since biblical times.

The book is very good at documenting experienced and established market participants who meet with Madoff, tried to replicate or understand his success and realized that the guy is a fraud.

The book is also very good at documenting the greed of the investors who did not do due diligence and were wilfully ignorant. This group was the overwhelming majority of sheep.

The book also provides excellent descriptions of the ways of Wall Street both good and bad that any investor should know about.

Kudos Erin Arvedlund