Inept boards - Krispy Kreme

From the New York Times (2005). Posted as KK is one of the case studies. Also shows the problems of rapid growth and franchising.

Australian retailing

How successfully implementing your strategy can benefit your competitors.

Matthew Stevens in The Australian:

SOMETIME before Christmas Bernie Brookes and his fellow owners of Myer Group could be given 1.5 billion reasons to thank Mark McInnes for being such a fine retailer.

This might seem a strange proposition, given that McInnes runs David Jones and is the bloke lauded for the impressive restoration of the brand and balance sheet of Australia's up-market department store operator.

* Photo from Flickr user Voice Pictures. Original photo here.

Australian business podcasts / vodcasts

ABC radio's Radio National provides access to a number of business-related podcasts that might be useful if you wish to know more about the business environment in Australia. You can subscribe to the business podcast at the link.

You'll also find vodcasts from groups like Macquarie Bank.

Here's another one, bnet Australia with a marketing focus, but still providing some strategy-related materials. You can apparently subscribe to their podcasts on itunes.

How accounting rules can affect business strategy

The change to 'mark to market' accounting for certain asset classes continues to impact on the business environment. Today, Adele Ferguson shows us the impact on some of the Macquarie Group listed vehicles.

The demise of Babcock & Brown, Allco Finance Group and the unravelling of the complex structures behind the Macquarie satellites are a stark reminder that investors have had a gutful of backing a model that was good for the head stock/external manager and bad for investors.
...
A statement from ASIC late last month on "fair values", no doubt speeded up the model's demise. ASIC said "careful consideration should be given to whether assets are traded in active markets. Most ASX-listed securities are actively traded, in which case, quoted prices should be used".

This would have given the Macquarie boys some major heartburn. In its latest results, released in May, profit was down 52 per cent, as chief executive Nicholas Moore made a $2.5 billion writedown on assets such as MIG, MAP, BrisConnections, real estate equity investments, loan impairment provisions and CDO exposures.

Keep an eye out in the upcoming reporting season for the impact of mark-to-market driving write-downs and hits to earnings.

Competition in retailing

Following on from the earlier post about the entry of Costco, here's John Durie in his Martin Collins column in The Australian talking about the currents goings on.

John filed his column before Woolworths announced its full year sales figures. Up 7.5% to just under $50billion.

Costco arrives in Australia

And gives us a heads up on how they intend to make money. Via The Age.

''We operate with low margins and with our membership fees, we can sustain low margins,'' Australian Managing Director Patrick Noone said in an interview. ''Lower prices are important because people shop with us to get value.''

Folks I know in the States speak highly of Costco. Let's see how they go about it here.

Photo credit: Flickr user brewbooks. Used under Creative Commons licence

What they used to teach you at Stanford

Seven lessons learned by someone who received an MBA back in 1972.

Seven's corporate strategy

Questions have been raised about the Seven Network's corporate strategy, as well as the communication of that strategy to investors. Nick Tabakoff has the details.

Key grafs:

KEY institutional shareholders, corporate governance specialists and analysts have questioned the Seven Network's investment strategy in the wake of its revelation on Monday it had incurred losses from its strategy to "park" hundreds of millions of dollars in listed securities.

The company revealed it was down a total of $57 million on paper on a portfolio of listed stocks it has refused to disclose to the market. The company has also crystallised a total of $14 million in "realised losses" on the portfolio, after selling out of about $200 million worth of stock in recent weeks.

Hmmm, seems a bit odd. I'd sooner make my investment decisions than have Seven management do it for me.

LTCM

A reminder about what can go wrong, even when smart people are involved. A New York Times essay on Long Term Capital Management.

Can the ASX stay a monopoly?

It's long been argued that there's no compelling reason (or even good reason) for ASX to remain a monopoly provider. Here's another; an ROE of 70% for it's latest results. Have a look at Adele Ferguson's story.

Branding

We here a lot about the importance of branding in generating (abnormal) returns. In a recently released survey, Google tops the global brands.

Closer to home, here's how branding is reported for some of the local retailers:
David Jones & Myer and changing demographics, and Just Group focuses on the so-called Generation Y.

This one's got the lot

General Electic has announced its first quarter profits, and disappointed the market. The Wall Street Journal (as featured in The Australian) has the story. Some business analysis:

GE's results also shake another common Wall Street belief, that large multinational conglomerates have become safe stock market havens.
GE, which recorded more than half of its $US173 billion in 2007 sales outside the US, did post strong international results, but not enough to fully counter its problems at home.
"It's evidence that you can't offset declining US earnings by having operations in the rest of the world," said Sherry Cooper, global economic strategist at BMO Financial Group.

Some accounting analysis:

On the consumer-lending side, Mr Sherin said GE would likely increase loss provisions beyond the planned $US600 million for the year because of increased delinquencies.

Some discussion of the role of analysts:

One reason for Wall Street's surprise: GE usually works closely with analysts in giving guidance on where its earnings are likely to land. The company generally meets the consensus estimates of Wall Street analysts.
This time, the analysts were way off. Their consensus suggested GE would record earnings per share from continuing operations of US51c. Instead, the number was US44c, down 8 per cent from a year ago. Overall, GE earned $US4.3 billion ($4.6 billion), or US43c per share, in the first quarter, down from $US4.57 billion, or US44c per share, in the same quarter a year earlier.

And another example of the impact of missing analysts' forecasts:

The disappointing results put new pressure on Mr Immelt to shake up the company he took over six years ago. GE's closing share price of $US32.05 on Friday is 19 per cent below its level when Mr Immelt became chairman and CEO just before the September 11, 2001 terror attacks, although the share price is well above its 2002-03 lows.

Business strategy - don't forget the demography

Bernard Salt in the Oz provides a timely reminder that changing demographics will impact on both business strategy and forecasting. If the nature of a population (target market) is changing, then that's worth taking into account in assessing the likely success of a business strategy.

Ten Questions Every Investor Should Ask

Janice Revell in Fortune produced a really good summary for equity analysis. Read it here.

Again, what's the number one rule?

1 HOW DOES THE COMPANY MAKE MONEY?

If you don't know what you're buying, you're hardly in a position to know what you should be paying for it. So before you buy a stock, you need to get a handle on how the company earns its dough.

How did they value stocks?

A good old article (from 2001, yep, 2001!!!) from Gretchen Morgenson in the New York Times discussing the ways that analysts and salesmen were trying to value stocks back in the internet bubble days. In short, because these companies weren't reporting positive earnings, folks were looking for something else to use as a valuation metric (like number of viewers, or internet clicks, or marketing expenditure). Turns out that turning a profit is still a good way to stay in business, and continuing to make losses is a good way to go out of business.

The article (page 3) also discusses the extensive use of 'pro-forma' earnings numbers being peddled by companies at the time (and it still continues).
Last para in the article reads:

Byron Wien, chief United States investment strategist at Morgan Stanley, is fearful that companies that spin their results using pro forma figures could do serious damage to investor confidence in the financial markets. "Corporations have a lot of flexibility in how they report results," he said. "Nobody knows more about the truth than the corporate executives themselves. Taking a short-term view of truth may make things look good in a quarterly report. But it will ultimately catch up with them."

That is a good description of what seems to be happening today.

And continuous today.

Warren Buffett

Here's the latest Chairman's Letter from Berkshire Hathaway: pdf link. Have a read.

And a key section (from page 6):

Businesses – The Great, the Good and the Gruesome
Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss what we wish to avoid.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.

* Photo taken from JasonSmith's public flickr stream. Original photo found here.

Investing

The bottom line of this article is perhaps the most important.

MAKE sure you understand what you are investing in. If you don't, don't touch it.

That's pretty much what we try and convey in the Business Analysis week of the FSA course.

Wesfarmers and value creation

How will Wesfarmers make money out of buying Coles? Only by selling off part of the business, according to Paul Kerin in The Australian. A good article to read about trying to realise synergies in corporate acquisitions.