The Water We Swim in: Don’t Stop Your Pandemic Thinking Now

I’ve used this before.  But I want to use it again; it’s increasingly relevant and I can give credit to the person who came up with it.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace, in 2005 Commencement Address to Kenyon College

What is our water, and how has it changed?

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Maybe There’s More to This Than Just Trying to Meet Demand

Recently, somebody sent me a link to the split board binding company SPARK R&D.  Their home page has the title “Production and Inventory Notes,”  where they explain how explosive demand and having to stop and restart production (all virus related) has lead to a shortage of their products and how they are working to meet demand.

I know a lot of you feel SPARK’s pain.  Plenty of brands first reduced orders then had to increase them and have struggled to get enough of the right product in the right place at the right time.  I want to ask if that’s all you’re thinking about.  Perhaps it shouldn’t be.

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Macroeconomics, Data Systems, Balance Sheets and a Changing Business Model

As I explained in an earlier article, my usual detailed analysis of company income statements and reports for quarters ending March through May went on hiatus.  It didn’t seem useful given the initial disruption caused by the virus and lockdown.  Not writing doesn’t mean I wasn’t reading.  In no particular order, I reviewed VF, The Buckle, Tilly’s, Abercrombie & Fitch, Zumiez, Hibbett Sports, Dicks, and Deckers.

Hey, it’s good to have something to do when you can’t go to a restaurant, theater, gym, store, vacation, golf course (thankfully ended) and are threatening to run out of house projects.

This article isn’t about any of the listed companies.  It’s about all of them.  There are certain commonalities, trends, and uncertainties we should (hopefully do) have top of mind as we take this epic journey that increasingly looks to be lasting a while.

To set the stage, please go read this article by John Mauldin, whom I have a lot of respect for.  You won’t like it- I don’t like it- but I’ve never thought it was my job to help you think happy thoughts.  John is telling you something important more succinctly than I could (and with better charts!).

The 10-Qs and 10-Ks all show better results if the reporting period ended earlier in the year.  No surprise.  The average, unweighted, year over year quarterly revenue decline was 27.6%.  Take out VF and Deckers, with March 31 quarters and revenue declines of 11% and 5%, and you get a decline of 34% for those with later ending quarters.

Each has a section in their filings on the impact of the virus and the actions they have taken.  They are almost interchangeable.  Drawing down credit lines, furloughing employees, protecting the health of employees and customers, negotiating with landlords (or just not paying rent), cancelling or reducing orders, and stopping share buybacks are common actions.

It’s a reaction to a set of unprecedented circumstances and a level of uncertainty nobody managing a business has ever experienced.  If you take the time to review the “Risk Factor” section of some of these filings, it will strike you that their significance has changed.  They are no longer statements of possibilities the lawyers required.  They now represent real issues impacting companies.

“We’re screwed if our supply chain was disrupted,” a common risk factor might have said, though in better legalese.  “Oh yeah, I guess, but that’s not going to happen,” you used to think.  Oh wait- it just did.  I don’t know where you shop for groceries, but at the local Fred Meyer, shelves aren’t as full as they used to be.  If the supply chains are allowed to adjust, they will.  But it will take time.

On the plus side, I guess, I’m getting some remarkable buys on wine that’s not being sold to restaurants.  Diane and I are actually converting the hall coat closet to wine storage.  Look, if you can’t go out as much, which do you need more- coats or wine?

Conference calls and conversations with managers told me of some pent-up demand and optimism from some industry companies as reopenings began.  Those were the days of the hoped-for V-shaped recovery.  That’s not happening.  I’ll say again that I expect this to be the worse recession since right after World War II.  And it is happening worldwide in a way no other recession ever has.

Those of you who think the virus caused the recession should know that the National Bureau of Economic Research, responsible for telling us when recessions start and stop, announced on June 9th that the recession began in February- before the virus took hold.  Meanwhile, I’m guessing you’ve noticed that it’s surged in many parts of the country.  Maybe we just got too comfortable with the virus being around, but I think even a modicum of national leadership might have kept this mess from getting quite so bad.

The last piece of bad news is that this recession has happened when debt around the world is at unprecedented levels and will continue to climb.  That’s important.  What the research shows is that the positive impact of more spending on GDP, when it’s funded by debt, is much lower when debt is already high.  If you’re interested in the overwhelming evidence this is accurate, go to this page and read the article at the top of the  list called “Quarterly Review and Outlook; 2nd Quarter 2020.”  It’s pretty short, but not an easy read.

Sorry for all the bad news.  Regular readers know I made the decision years ago to say what I thought the data supported, even when I knew it wouldn’t be popular.  Somebody has to.  As always, please feel free to tell me if you think I’m wrong.

In these circumstances then, what matter?

Your balance sheet and, yes, I know you know I was going to say that. I won’t spend any time on it except to say that a strong balance sheet is a critical determinant of your ability to be flexible and, bluntly, to just come out the other side of this.  Outlasting your competition as a strategic objective sounds harsh, but there you have it.

Data.  You need it, it better be good, and I hope you started upgrading systems and optimizing for flexible, algorithmic data collection long before now.  Your financial model is changing.  Not just some higher costs due to the virus, but different costs.  Customer behavior is changing (duh).  As a result, I’m fairly sure some of your KPIs (key performance indicators) are changing.

Let’s focus on inventory.  Yours and everybody else’s.  Remember what happened when The Sports Authority went belly up and the inventory from their 400 stores, was dumped on the market?  I’d expect this to be a lot worse.  It includes not only the inventory from companies going out of business, but those desperately trying to raise cash (which is pretty much everybody), and the product you didn’t take delivery of.  Meanwhile, for some unidentified period of time, demand for all that inventory has declined as people increase their savings and lose their jobs (partially offset by government programs, but we can’t pay people $30,000 a year to not work forever).

If you’ve got stable inventory from solid brands and a balance sheet that supports this, consider carrying it over until next year.  If you’ve got the balance sheet to do that.

We’ve all acknowledged that the virus is going to accelerate ongoing changes.  If the virus takes as long as I expect to be controlled, more of the changes that might have been temporary will become set in stone.  What are those changes?  I could list the ones we all already know.  It’s the ones I don’t know and haven’t imagined yet that worry me.

I was going to ask, “What kind of stores do you need and where?” but that’s the wrong question.  The right question- the only question- is “What is your customer’s behavior and how has it changed?” The customer doesn’t care about your distribution channels, your inventory levels, or your supply chain problems.  They only care about the convenience of getting what they want, when they want it, the way they want it.

If you agree and think I’m not too far off on my macroeconomic analysis, then consider the implications for the importance of data.

Now can we ask how many stores, what size and where?  Uh, well, except we can’t until we’ve got a handle on our inventory- how much is where, how is it selling in different stores, how quickly can we move it around, which stores are also distribution centers, how quickly can we replenish it and, ultimately how much of what do we really need?

Some of those are old questions that go back to when the first retailer opened the first store. But with those answered can we get back to where and how big stores should be?  Sorry, no.  We need good data on our online efforts and how customers interact with us online.  How do online and brick and mortar impact each other?  What is the impact of opening or closing a store on online sales?

I could go on.  There is an immediate and massive interdependence of functions that just didn’t happen in the past when things could move slower.  No that’s wrong- the interdependence always existed.  But the required speed of the response has accelerated and the granularity expanded.  You can/have to make more changes in many smaller things faster.  Your business has to become a dynamic programming model.   Bluntly, I don’t see a way to manage lacking high quality and evolving integrated data systems.  Once, having that kind of data was a competitive advantage.  Now it’s just a price of entry.

You’ll know you have it when the answers you get surprise you and provide new insight into customer behavior.  At the tip of the spear, as algorisms improve, expect your systems to tell you to make, or they make for you, adjustments that initially seem wrong, but that work.

Aside from letting you identify and serve your customers better, consider why this is important to what I think is your new business model. Most industry companies are going to take some revenue hit for some unknowable period of time.  If we go back to some forms of locking down, it will be worse.  It’s true that your online revenue will rise, but it won’t make up for the decline in brick and mortar.  Yes, I know there are exceptions.

Product costs in general will rise not just because of supply chain disruptions but because of inflation.  But not just yet.  This ongoing form of magic money creation, historically, has always led to inflation, but as long as the velocity of money keeps falling, we may escape it.  For a while.  I expect you will find yourself raising prices to hold margins.  Those wonderful new systems of yours are going to be critical for having the right inventory in the right place at the right time and holding those margins.

Many of your will start to optimize your supply chains for reliability rather than lowest cost.  Your customers won’t tolerate anything else.  This might be an opportunity to focus on higher quality product.  I recommend you consider it as a possible point of differentiation.

Meanwhile, at least initially, costs are going to rise especially in relation to revenues.  Protection against the virus costs money and will last for an unknown period of time.  Meanwhile, and hopefully also short term, closing and opening stores, and managing staffing has some costs.  Taxes are going to rise, though not this year.

There is a ballet going on (maybe mosh pit is a better analogy) between working at home, landlords and tenants and malls.  Who is going to work from where and pay what for how long?  And remember the macroeconomic impact, as malls lose stores, tenants want to pay less, and real estate owners have trouble making their loan payments and lenders have big loan losses.

Ultimately, this all works out after a historically difficult adjustment period.  Those of you with strong balance sheets, a solid brand, quality systems and knowledge of your customers can even expect to come out of this in a stronger position.

But it’s going to be a wild ride.  The time for more of the same is over.   It won’t work.  Take chances.  It’s less risky than not taking them.

As an afterthought, if you want to get some historical perspective on the political, social and economic situation we’re in, you might read the latest chapter of Ray Dalio’s book on empires and cycles.  Here’s the link.  It’s all happened before.

 

 

 

 

 

 

 

 

 

 

 

 

Corona- The Beer, Not the Virus

And you think you’ve got problems with your brand? Actually- and I say this with a certain amount of relief- apparently relatively few people are stupid enough to relate the beer to the virus.  Go take a look at this article on Snopes.com that discusses what’s happened to the brand in spite of some of the press it’s gotten.  Corona is owned by Budweiser along with a whole host of beer brands so I imagine it will be fine.

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Keep Calm and Carry On

 

The poster with the slogan was issued in 1939 by the British.  We don’t have anybody bombing our cities or threatening to invade us- exactly- but the coronavirus is a national challenge with social, financial and health related impacts unlike anything most of us have experienced.  I’m not sure I’m overstating it to say that you had to be alive during World War II- maybe the attack on Pearl Harbor- to have had a similar experience.  The speed with which it has hit us is remarkable.    

I lived in Dublin for two years and I can tell you that when the Irish close the pubs, it’s serious.

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The Impact of Demographics on the Active Outdoor Industry

I’ve just finished reading a book called The Methuselah Effect, by Patrick Cox.  As I’ve said, I often get intriguing business ideas from non-business books.  This is one of those times.  I really recommend this book.  The trouble is, it doesn’t seem to be on Amazon, which I’ve never seen before.

Anyway, the book is about advances in biotechnology and how they are going to impact health and longevity.  The first chapter title is, “Fewer Births, Longer Lives: Society’s Aging Changes Everything.”

His premise, which I found convincing, is that people are going to live longer and be more active.  But there are going to be fewer people.  He goes on to says in the first page, “From here on out, every generation will be smaller than the one before it.  After 200,000 years of population growth, mankind’s numbers are shrinking.”

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The Sports Authority Bankruptcy: Symptom of a Perfect Storm and How You Can Benefit

TSA’s filing for bankruptcy on March 2nd wasn’t a surprise. It had missed a $20 million bond interest payment in mid-January. It reached an agreement with the bond holder to file and try to sell assets to pay down debt. We’ll see how that works out and if they can avoid liquidation.

A couple of people asked me when I was going to write about it, so I sat down and started working through some of the bankruptcy court documents. Here’s the link to the court documents should you be inclined to plod through any them yourself.

But then I noticed that some other people had undertaken the task of plodding through them.  Between all those articles and court filings, your need for details of the filing should be well and truly sated.

Now let’s get to what I’m calling the strategic background. In an operational sense, you probably only care about TSA’s bankruptcy if you’re an unsecured creditor. Like most unsecured creditors in most bankruptcies, you shouldn’t expect to see a lot of your money.

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Retail and Brand Strategy: Cycles or Long Term Trends?

Could this time really be different?

Recently, a couple of retail CEOs have been pointing out, or maybe bemoaning, the lack of a strong retail trend. They’ve noted how in the past they’ve been able to rely on such trends for big sales boosts and have explained their worse than expected performance partly by the lack of it.

They say, “But that will change.” I’m sure they are right. It will change.   Their implication, however, is that this is a traditional retail cycle of relatively short term duration. I’m not so sure about the “short term” part.

It’s a bit awkward for me to be asking, “Could it be different this time?” because I’m very aware of the cycles of history over decades and centuries. I know that in retail cycles, not to mention social, economic, and financial cycles, it has mostly turned out to not be different.

I’m going to compromise with myself and say it’s probably not different, but the time frame during which that becomes clear is going to be longer than we’re used to. The factors that are coming together guarantee a long, strange trip as the tidal wave of divergences works through our retail market. I’m going to look at what those are and try to reach some conclusions about succeeding in our industry.

Let’s start with overall economic conditions and debt then move on to customer behavior and how we sell to them. Next, I want to take a look at technology and what that means to the competitive environment. Based on that, I’ve got some ideas about how retailers and brands have to operate.

It IS the Economy, Stupid

I don’t think I need to spend much time trying to convince you that this economic recovery has been weaker than any since the 2nd World War. You are certainly aware that wage growth has been low to nonexistent and that job growth, especially for our primary customer group, has tended to be in lower paying jobs and often involve multiple jobs. Let’s call that group the millennials, though you’ll see below I think that’s an over simplification. When can we expect improvement?

Not for a while, and the reason is debt. I’ve recommended a book called This Time Is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff. It’s so well researched that it’s hard to dispute their findings, but they are hardly the only ones acknowledging the problem debt is causing. Basically, they show that debt over a certain point leads to lower growth in an economy.

They suggest that growth starts to be impacted when total private and public debt as a percentage of GDP reaches around 90%. As of the start of 2015, by way of some examples, Canada is the cleanest dirty shirt at a bit less than 300%. The U.S. is about 375%, the Eurozone about 475%, the U.K. 500% and Japan, the hands down winner, is north of 650%. What probably won’t surprise, but should disturb you, is that total debt has continued to rise since the Great Recession.

I’ve always found the idea of fixing a debt problem with more debt perplexing.

Meanwhile, take a look at this chart showing real GDP growth in selected periods in the U.S. 2000 is the year the stock market bubble first burst. To my way of thinking, though the Fed stepped in and “saved” us, that’s when things started to go south in a noticeable way.

GDP chart for Retail and Brand Strategy article for TWB 1-16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I borrowed” this chart and the data in the previous paragraph from Hoisington Investment Management’s review and outlook for the third quarter of 2015. You can get your own copy at http://www.hoisingtonmgt.com/hoisington_economic_overview.html. I highly recommend it.

I’ve studied enough statistics to understand that correlation does not necessarily equal causation, but I’m convinced that there’s a relationship between GDP growth and debt. It is kind of logical. If you owe money, then you have less to spend while you pay it back and pay the interest. If you choose not to pay it back, then the people you owe it to have less to spend.

I think we’re in a low growth period until we do something about our overall level of debt. Solving the problems will be unpleasant and, if avoided long enough, draconian. Please, please, please, email me and tell me why I’m wrong.

So the first thing we have to deal with is continued slow economic growth caused by over indebtedness. Let’s move on. I don’t have room for a good rant on the damage the Federal Reserve is doing with continued low interest rates.

Our Customers

Our customers are, uh, wait a minute. Who are they anyway? Seems like we, as an industry, are trying to sell to everybody from six year olds to baby boomers. A couple of individual brands seem to succeed with that, but mostly you can’t. I’ll spare you my oft repeated speech about the dangers of expanded distribution except to remind you that 1) growth requirements make it hard to be a successful public company in this space because of the requirement for regular, quarterly growth and once you get into broader distribution 2) they may know your brand but not your story and your competitive advantage goes away and 3) we’re way over retailed with too much indistinguishable product.

I also wondered a while ago if maybe distribution didn’t matter due to online and because good merchandising could overcome wider distribution. To summarize, I thought that once a product was ubiquitous in the online world and a click away, customer’s reaction to broader distribution might change. I’ve decided the answer is “no.” It turns out that getting retailers who’ve never been great at merchandising specialty product to do it well is expensive, challenging and time consuming. There’s also our continuing problem of a lack of product differentiation which poor merchandising just highlights.

Meanwhile, back to our customers. If we have to characterize them as a demographic, we’d say, “the millennials.” This is the group (much like my mom’s generation who’s formative years were in the Great Depression) that got slammed by the Great Recession. They are financially conservative (and will be for life), are having a hard time making a wage that allows them to live independently, are not particularly brand loyal (though if you can get them, you can keep them), are most influenced by their community (not your advertising), and are more interested in experiences. A product is something they seek in order to have an experience, rather than buy for the hell of it. They have the data to find exactly the right product with exactly the right attributes because they don’t want to screw up the experience. Don’t try and bullshit them.

Okay, now that I’ve defined our customers as a demographic, I have to tell you not to do that. In the days of instant, endless, information about anything, groups, trends, styles, points of view can come and go pretty damned quickly. And anybody who’s interested in them can find out about them and be part of the community they represent. It’s easier to say your customer is of a certain age, and it may be true. But it’s not an adequate description of who they are.

Notice how the term “fast fashion” seems to have disappeared? It’s like it’s no longer an aberration, but a permanent condition. This seems to require that companies be a bit reactive after all those years where being proactive was a virtue.

To go with a soft economy, then, we’ve got customers that are harder to get and keep and in general have less money to spend. I am just a font of good news today.

Technology

 Let me remind you of two things I hear brands and retailers saying all the time.

“Get the right product to the right place at the right time,” and “Give the customer what they want, when they want it, where they want it.”

Those two catchy phrases make a lot of sense and are indicative of two things. First, they tell us how much the customer is in charge. In the days of too much retail space, too many undifferentiated products and near perfect information, that’s probably inevitable. Second, we’re all trying to figure out how, exactly, to do this and the one thing we’ve learned for sure is that it’s really expensive. There’s an advantage here to big players with strong balance sheets, because the cost for a 50 store retail chain to do it is probably not that much different than for a 600 store chain. Let’s put it this way- the cost per store is lower for the larger retailer or brand.

When you accomplish it, you won’t have created a long term competitive advantage; you will have just bought yourself the right to compete. I’m not talking about using a POS system here. I’m saying that from design at the brand to returns at the retailer the systems have to be integrated to keep up with the speed and requirements of your customers.

My Hero

Maybe you remember that a couple of years ago Rip Curl got itself in trouble. They tried to sell the company, but couldn’t get the price they wanted. So they decided to solve the problem the hard way.

They refocused on just being the best surf company they could be. They cut their product offerings by 50% and focused on the ones that their customers needed. They try to offer technology and quality that differentiate the products they do sell. They emphasized efficiency and reduced their distribution. They only sold places where they could make money. What a good idea.

In summary, their primary focus was on improving net income (and reducing working capital invested) rather than gross revenues.

It seems to be working, and regular readers will know I thoroughly approve of what they decided to do. Bluntly, I don’t think they had a choice. And neither do many of you.

The economy is making fast revenue growth difficult. Your customers (who can’t be simply identified as an age group any more) won’t buy what you tell them to buy, but what their community supports. They have endless choices and information. And the continuous investment required to satisfy their product and shopping requirements has gone through the roof- especially for smaller brands and retailers.

Do some surprising things. Perhaps completely outside of what your customers expect. Even contrary to your brand image. If you accept my premise that it’s tougher to get and keep brand loyalty in the days of endless, instant new brands, and that’s it’s damned near impossible to keep up with what’s “cool” anyway, why not surprise your customers this way? It’s a way to claw back a little initiative and not have to be reactive all the time in an impossible attempt to keep up with the rate of change.

Especially as a newer brand, focus on your web site and selling there. You can’t find the customers- they have to find you. Social media, etc. This minimizes marketing costs. What you do spend should be aligned with creating experiences. If you’re not going to grow revenue as fast as you once might have, make sure you’re selling at a price that gives you a solid gross profit. In your brick and mortar retail, be very cautious about whom you open and curate the hell out of them until you know they have you figured out. Do some temporary stores in surprising places for strange reasons. Never over supply.

It’s really a pretty interesting time to be building a brand as long as you acknowledge what I think are longer term conditions under which you have to operate. Rip Curl can watch some of its competitors flail as it just focuses on the bottom line with a business model that’s responsive to existing business conditions using some of the concepts I’ve briefly described above.

You can do the same thing.

Altamont Acquisition of Hybrid; the Plot Thickens

When Altamont bought Fox Head in early December, I wrote this article, reporting what little we knew about the deal and speculating on what Altamont was up to strategically, if anything. Here’s, in part, what I said.

“Altamont now owns or at least has investments in Brixton, Dakine, Fox Head, HUF and Mervin Manufacturing. That is quite a gaggle of action sports/outdoor/street wear/fashion businesses. Are these just opportunistic buys or is there a plan here? That is, will each continue to run independently, or is there enough overlap in markets and manufacturing to justify some coordination? Maybe Altamont is looking to build the next VF. I hasten to add that’s complete speculation on my part. Still, it does feel like there’s been a recent focus on this market by Altamont.”

Now, Altamont has gotten itself a Christmas present, investing in “Hybrid Apparel (Hybrid), a leading supplier of branded, licensed and private label apparel.” On its web site, Hybrid describes itself as”… a complete and vertical operation; designing, merchandising, developing, sourcing, producing and distributing branded, licensed, generic and private label apparel to all tiers of distribution.”

The Altamont press release continues: “Hybrid’s partnership with Altamont will allow Fox, the number one global motocross apparel brand and a recent Altamont and Hybrid investment, to benefit from Hybrid’s product development and supply chain expertise as well.”

Hybrid, then, invested in Fox Head along with Altamont.

Feel now, with the investment in Hybrid, that Altamont has a plan. In the last couple of years, we’ve watched pretty much every large brand or retailer improving manufacturing and logistics. They want to minimize SKUs, control inventory, and reduce time to market. There’s too much money on the table to not do that well and it’s an important attribute of brand building.

Altamont now has a partner that specializes in exactly those areas. I can’t for the life of me imagine that Altamont won’t ask Hybrid to take a look at Brixton, Dakine, HUF and Mervin. I’ll take a shot in the dark and guess that all those brands make t-shirts. Can you think of a reason Altamont wouldn’t “encourage” consolidation and coordination of those orders through Hybrid? I’m thinking you could take some significant cost out of each of those brands, not to mention get better pricing by increasing volume.

I suggested in the quote from my earlier article above that Altamont is thinking about building the next VF. If you follow VF at all, you know one of the things they do is bring a rigorous manufacturing and logistics process to their acquisitions.

Maybe Altamont started out making opportunistic buys, but it now looks like they are creating a package of related and coordinateable brands all of which have some growth potential that can improve their financial performance even before Altamont, through Hybrid, takes some significant costs out.

Okay, now let’s take the next step in speculation. Again, I’ll remind you that I have no actual information.

With some revenue growth and cost control over the next year or two, (and other acquisitions?) what an interesting group to take public as an exit strategy. The tag line would be something like, “Just like VF, only our brands are cooler!”

Just an idea. Go back to enjoying the holidays.

What Does the Data on Our Target Market Say About Your Business Strategy?

It was a lot of years ago when I first started reminding you not to focus just on your gross margin percentage, but your gross margin dollars as well. Then, in 2009, with the recession in full swing, I got all excited about Gross Margin Return on Inventory Investment (GMRII) after Cary Allington at Action Watch pointed me to the concept.

I discussed it in some presentations and wrote about it. Here’s one of my articles on the subject. It’s held up pretty well.
I liked the GMRII concept because my reading of history is that debt caused recessions (if recession is an adequate word to explain what we’re going through) last a long time. This one, I concluded, was not going to be different from all the others. It seems, unfortunately, that so far I’m right about that.

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