Ski INC. 2020; My Second Ever Book Review

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It took two guys like author Chris Diamond and his editor Andy Bigford to make this book as valuable as it is.  Their combined 88 or so years in the industry means they have the knowledge, perspective and access to write this book, and the book takes full advantage.  When Chris says “ski” he means ski, snowboard, etc. through the whole book. 

It’s both a strategic evaluation and a history of the ski/snowboard/mountain resort business.  Like most of you, I was aware of the events and transactions Chris describes.  But having them laid out chronologically and the competitive impact and interrelationships evaluated was great.  It caused useful thinking. 

What does Chris conclude?  The subtitle of the book is a good place to start.

“Alterra counters Vail Resorts; mega-passes transform the landscape; the industry responds and flourishes.  For skiing? A North American Renaissance.”

“My premise in this book,” he says, “is that the Epic revolution, as others have followed Vail Resorts’ lead has initiated a renaissance in skiing.  For decades, the media focused on the high cost of skiing, but now the standard refrain is “what a deal” the new passes are.  Total skier visits can be expected to grow coast-to-coast, and not just at the mega resorts.  This energy will eventually expand the number of total participants, if that hasn’t happened already.”

“It is my view that these recent changes have rescued skiing from the trend of becoming, in effect, a rich person’s sport.”

Isn’t it interesting how consolidation has, so far, turned out to be a good thing?  Or at least a necessary thing.  In doing turnaround work I quickly learned that doing “more of the same” isn’t the path to success.  I’d come around to the idea that some consolidation was necessary and appropriate for the industry, but that it would lead to a “renaissance?”  Not sure I’m that far along in my thinking, though I can see how I might have to get there in the not too distant future.

What’s Chris’s business proposition?  He states it pretty clearly using Holiday Valley’s strategy as an example.

  • Make great snow [technology continues to make that easier].
  • Take care of your guests.
  • Know your markets.
  • Maximize summer opportunities [So you’re not a one season business].

That’s from his chapter on small to midsized areas but, you know, all pretty good business advice for any resort. Early on in this chapter I considered skimming it.  Glad I didn’t.  Aside from turning out to be really interesting, it highlighted some consistent themes over the history of the industry

1.            How important commitment, passion and optimism have been (are, I’d say).

2.            The role, for better or worse, of real estate.

3.            The bad things that happen when commitment, passion and optimism obscure the importance of good financial management and a solid balance sheet.   

When you think about it, what’s going on is that the survivors of the consolidation are doing better business.  Well, that’s what happens in a consolidation.  Like, for example, retail.  Adapt or die.  Know your market and take care of your guests (customers).  What an original idea!

It’s true that many small hills have gone away and, as Chris acknowledges, they were great places to learn.  But they only existed when times were easier and the industry was growing madly and they floundered (Chris describes plenty of this) when times got hard and the environment changed, but they wouldn’t or couldn’t change with it. 

Now, as Chris also describes, some of these places are being resurrected by communities, local governments, and investors/skiers who have resources (including for the significant capital improvements required) and are prepared to run the places with best industry practices.

The story for the industry is not fundamentally different from other consolidating industries.  A revolution?  Nah.  Too fraught a term for me.  Let’s say that the pressures of a changing competitive environment have finally, after many years, reached a tipping point where it was, for the individual players, adapt or die.

Chris’ hypothesis is that the mega passes, along with cheaper lodging (VRBO, etc.) are bringing affordable skiing to more people as long as you’re willing to plan in advance.  The mega passes have become the brand, and customers are planning and plotting to get the best deal.  The resorts, meanwhile, are using dynamic pricing, buddy passes, and other permutations of pass terms to give their customers choices and control – what customers want in most industries these days- and influence their behaviors.  Chris and I agree that this process is just beginning and that the ultimate result will be that few people will be walking up to the window and buying day passes.

But what, you say, about all those hills that have closed, mostly to never reopen again?  Where will we get new participants?  Yeah- problem even with all the positive changes Chris outlines.

He reports that retention has increased from 15% to 19% over the many years during which we’ve been trying to move the needle.  He also reminds us of all the improvements in equipment, process and teaching technique for teaching beginners that have evolved.

Perhaps most importantly, he makes it clear that the larger, consolidating, remaining resorts know that developing new, committed skiers is imperative.  Their acquisition of and relations with other resorts as well as the structure of their pricing and pass products are focused on the issue. 

And perhaps, since we’re trying to change human behavior and tried to do it through the Great Recession, we shouldn’t be too hard on ourselves.  I’m not sure 15% to 19% over a decade or more is so bad.  With the changes going on now, I can even imagine it accelerating. 

So, everything is fine, right?  It’s conceivable that Chris as a consummate industry insider might be on the optimistic side, but he does point out some issues.

To paraphrase, he says the industry will be fine if we don’t have a recession.  I’d change that to “until we have.”  The business cycle has not been rescinded and we won’t have any more fun in a recession than other industries. 

He also notes our inability to crack the diversity puzzle.  I’ll just include myself on the list of people who don’t have a solution.

Climate change.  Yes of course, though it’s amazing that this industry still has people resisting the idea.  Tactically, we are relying on improved and increased snowmaking and warm weather activities to deal with this.  The big players are counting on geographical diversification.  Strategically, the industry is active in sustainability and confronting climate change.

He also discusses issues with demographics; an aging base and drop off in snowboarding.  He spends just a paragraph on issues of income, and I think more time might have been warranted.  Skiing may be getting less expensive, but it’s never going to get cheap.  What I know about the stagnation or even decline in real middle class and below incomes over several decades gives me pause.  Skiing may be “cheaper” but if taking advantage of that requires a $500 or higher outlay months before you hit the slopes (plus equipment, lodging, transportation, food, apparel even if they are all cheaper), does it matter?  Economics limits our customer base.

The answer?  Snowmaking, good management, and summer activities generating year around cash flow.  It doesn’t hurt if some of your competitors have gone out of business.  You need to read this book.  The integrated strategic perspective is very important as you consider what your industry business should be doing.

I’ve never met Chris.  I think I might have met Andy.  If you guys are going to be wandering around Denver in a couple of weeks, I’d love to talk with you.  Among the things I’d like to ask is if the numbers exist yet to evaluate the extent of the decline in cost to go skiing. 

Tilly’s: A Solid Quarter. What Did They Do Right?

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In its 10Q and conference call, Tilly’s is kind of tentative in explaining what they are doing right.  Let’s go through the numbers and review a few conference call comments to see if we can tease out an explanation.

Revenue for the quarter ended November 2 rose 5.4% from $146.8 million in the prior year’s quarter (PYQ) to $154.8 million in this year’s.  E-commerce revenues were 16.9% of the PYQ’s revenues ($21.2 million) and 17.2% ($22.7 million) in this year’s quarter.  Revenue from proprietary brands were 25% of total revenues in the current quarter, the same percent as in the PYQ.  Below is a table showing revenue by category for 13 and 39 weeks.

Comparable store sales rose 3.1% compared to 4.3% in the PYQ.  That includes e-commerce sales, which means we don’t have an important metric of how their brick and mortar is performing. 

The gross margin rose from 29.7% to 30.5%.  They had a 0.8% improvement in the merchandise margin.

SG&A expense rose 6.9% to $39.5 million.  The most significant increase was $1.0 million for e-commerce marketing and fulfillment. 

Pretax income was up 17.7% from $7.32 million in the PYQ to $8.62 In this year’s quarter.  Just to give you some perspective, pretax income for the first nine months of the fiscal year went from $22.0 to $22.3 million, an increase of 1.4%.

The balance sheet remains solid with lots of cash and no long-term debt.  Equity declined from $183 million a year ago to $181 million, but this has to do with accounting for operating leases- something they didn’t have to do a year ago.  They note that the $5.2 million increase in cash provided by operating activities was “…primarily due to lower inventory.”  That’s a good thing.

Tilly’s starts its narrative by describing itself as “…a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 232 stores, including one RSQ-branded pop-up store, in 33 states as of November 2, 2019. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.”

Really nothing insightful or distinctive there.  They seem to put stores almost anywhere, and I’ve always thought them as being particularly focused on their real estate- perhaps a source of competitive advantage.  You can see that in the way they talk about the retail market and their brick and mortar strategy.

In describing the industry they say, “The retail industry has experienced a general downward trend in customer traffic to physical stores for an extended period of time. Conversely, online shopping has generally increased and resulted in sustained online sales growth. We believe these market trends will continue.”

Then they go on, “We continue to believe we have a meaningful number of opportunities to open profitable, new stores in the future. We believe we are under-represented nationally in terms of the number of stores in key population centers relative to many of our larger teen specialty apparel competitors who have a much greater number of stores than we do. We expect to finish fiscal 2019 ending February 1, 2020 with 14 new store openings. In fiscal 2020 ending January 30, 2021, we anticipate opening up to 15 additional new stores. We will continue to focus new store openings within existing markets and certain new markets where we believe our brand recognition can be enhanced with new stores that are planned to drive additional improvement to our operating income.”

They tell us they aren’t committed to closing any stores in in 2020.  “Yet some may likely occur as we work our way through our continuous lease renewal negotiations.”  Once again, there’s that real estate focus, though all retailers are looking for better lease deals these days.

They acknowledge the e-commerce trend, then, but are focused on new brick and mortar.  Perhaps it’s because Tilly’s is so good at picking real estate.  Partly, it’s because they only have 232 stores.  They think new stores can enhance their brand recognition.  There are hints of an undescribed strategy here, though I can’t figure out what they are doing that might give them better brand recognition than their competitors.

Towards the end of the conference call CFO Michael Henry talk about the relationship between brick and mortar and e-commerce in a way that gives some insight into their strategic thinking.  “SG&A leverage,” he says, “is going to have a lot to do with how sales are balanced between stores and e-commerce.” He explains that growing e-commerce sales generates a lot of costs (they mentioned $1 million in the quarter we’re discussing here) while improving comparable brick and mortar sales generate a real opportunity to leverage SG&A expense.  That is, higher sales in a store don’t mean you have to pay more rent and other expenses.  Remember brick and mortar is still around 85% of their business.

They’ve got to have improvement in both e-commerce and brick and mortar, CFO Henry explains, “Because as you’ve seen in recent quarters when it’s only e-comm those are more expensive sales for us because of the shipping fulfillment and all the marketing affiliate costs that go along with the e-comm business.”  Did you hear that?  E-commerce sales are more expensive than brick and mortar I think he said.

So, what is Tilly’s doing right?  First, they seem to be pretty good at managing their real estate and picking locations.  Second, they believe they have some room to expand brick and mortar because they don’t have that many stores yet.  Third they recognize, hopefully like all other retailers, the interaction between online and brick and mortar.  E-commerce is critical for brand positioning and customer interaction- omnichannel and all that stuff.  But it’s especially valuable if helps to improve brick and mortar comparable store sales and you can spread some of both e-commerce and brick and mortar SG&A across the store base, improving the bottom line.

Tilly’s isn’t the only big retailer in our space that understands this.  We’ll figure out which ones don’t when they go away.

What We Can Learn from New Paint Companies?

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I imagine it’s happened to all of us.  You need to paint (or if you’re lucky, have painted) a wall/room/house.  You go into the store to pick “the right” paint color and are confronted with literally an infinite number of choices- because they can match any color you want.  As if the paint chips by themselves weren’t more than you could possibly parse.

Home you go with a big bunch of small chips.  After some agonization, you come back and maybe (at a paint specialty store) get some large chips.  Then on the next visit, you get some small sample paint jars and slap them on the wall.  By this time, any thoughts you may have had about being daring and, for example, having a bright accent wall has been bludgeoned out of you.  You just want to get “the right” color.

I spend way too much time choosing and about 14 nano seconds after the project is complete, it’s fine and I never think about it again.  I may not have gotten “the right” color but I sure spent a lot of time doing it.

Some new paint companies are trying to help me.  They offer curated palettes of between 50 and 150 colors.  One of the company names is actually Curator.

It was a decade or two ago when I suggested that snowboard companies should stop picking their SKUs based on what their competitors were doing.  What mattered was what your customer wanted.  More SKUs wasn’t automatically better. 

True- following your competitors’ lead was easy, but it was lazy.  It didn’t answer the question, who are my customers and what do they want?  Mostly, I think we’ve figured that out.  Many of you, I know, have cut your SKU count.  It’s good for inventory management, cost of goods sold, branding and holding margins.  May not help your top line, but it will sure help the bottom line.

Have you cut it enough?

If a paint company believes they can compete with just fifty colors against Benjamin Moore’s 3,500, well, maybe they are on to something.  When you read this article think about how they’ve tried to have colors with a common theme that fit together.  Looks to me like a lot of their colors work with each other.  These companies are betting that the customer will have a better shopping experience with fewer choices with a product I’d have previously characterized as a commodity. 

Can you make your brand special by offering fewer choices?  Perhaps a lot fewer.  You can if you improve their shopping experience.

How’s the Trade Show Business? Emerald Exposition’s Quarterly Results

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Emerald didn’t report a great September 30 quarter.  However, there are some mitigating factors.  I’ll discuss those results and the factors below. 

 Before digging into the numbers, let’s focus on issues of strategy and tactics.  Emerald’s previous CEO was resigned about a year ago.  It happened suddenly and, to the outside world at least, unexpectedly.  I wondered why but never was able to find out.

Now, I might have a glimmer.  Sally Shankland has been President and CEO since June 2019.  She used a presentation during the conference call to describe her actions since becoming CEO and the company’s new strategy.  If you go to this link, scroll down a bit, and on the right, under “Third Quarter 2019 Earnings Call” click on “Earnings Presentation” you can see it for yourself.  I recommend reviewing the slides.

If you do that, you’ll notice three major things. 

First, there is what the presentation described as a “New Management Team.”  Everybody isn’t new, but there are at least three senior executive hires since Ms. Shankland came on board. 

Second, take a look at the strength/weaknesses slide from the presentation below.  There is more detail on each point in the presentation.

I can’t speak to the B to B trade show market outside of the active outdoor industry, but certainly the at least temporary cancellation of Interbike, the decision to consolidate two OR shows into the single end of January show in Denver with the Snow Show and what I see as the general industry desire to spend less money on trade shows suggest the first strength can be questioned in our industry.

I have no idea as to the dedication and passion of the employees.  However, my experience in turnarounds (of which Emerald is surely one) makes me certain, given the weaknesses slide (more on that in a minute), that the employees must be happy and relieved to have new leaders acknowledging and addressing the weaknesses that I guarantee the employees all knew about.

Those weaknesses on the right side of the slide are, I agree, fixable.  But as a group they are pretty staggering.  The list runs the gamut of operations.  Maybe 10 years ago when trade shows were “had to go to” events and when Emerald wasn’t a public company you could get away with this.  But not now and I’m glad to see them getting on with it.

One of the outcomes of addressing these issues is the introduction of value pricing.  As COO Brian Field puts it, “…this is research and analysis of live event pricing and promotion based on customers’ perceived values of available locations and packages.”  They’ve already begun the value pricing process at six shows including OR and Surf Expo.  They believe it can increase show revenue by four to eight percent.

For value pricing to work, the shows have to provide clear value.  They are working to use what they describe as their “unlinked and underutilized” customer information.  The idea is that “Bringing these types of data together allows for refinement in messaging, segmentation strategy and customer insights,” says COO Fields.

First, they have to identify the data.  Then they have to develop the best ways to sort and access it.  Then they have to look for insights.  But booth revenues are two thirds of total revenue.  CEO Shankland says she could “…see us in a place where our booth revenue is 50% of our total revenue. And the other half comes from conferences, from education, from sponsorships, from content marketing, from a whole list of things that we can be doing given the fact that we have a digital presence that we’re not offering today.”

Well, the digital presence not being offered is a little scary.  But the real challenge is to take the insights they develop from their (long overdue) data mining and create value customers will pay for when the trend in our industry trade shows is to pay less.

The third thing I noticed, in both the presentation and the conference call, is what’s summarized in the last strength as “Opportunities to supplement organic growth with tuck-in M&A.”  CEO Shankland puts it this way. “…we plan to continue to pursue M&A opportunities that make sense for us, which means where they meaningfully strengthen the existing business that we already own or where we bring considerable value to the acquisition that dramatically enhances the acquisitions growth trajectory. We will apply an even higher level of discipline and rigor to this process than we have in the past.”

When Emerald went public (May 2017) they presented the opportunity as a chance through acquisitions to roll up an industry with many small players.  It was portrayed as a major focus.  Now it’s not.  That’s a good decision- especially if they can grow “non-booth revenue streams” as they are trying to do.  Trade shows and conference events represented 83% of revenues in the nine months ended September 30.

Being public and having access to capital markets might make sense if you’re busily rolling up small players in a consolidating industry.  If that isn’t the strategy anymore and you’re focused on operating better and generating non-booth revenues then perhaps you’d be better off as a private company.

Let’s spend a little time on the numbers.

Emerald currently operates 55 trade shows in additional to other conferences.  Remember when looking at their balance sheet that they receive a bunch of cash for shows in advance of the event.  They carry it as deferred revenue ($149.2 million at September 30) and don’t record it as income until the event is completed.  Most of you reading this, including me unfortunately, don’t get cash for your product before you provide it. 

Revenue was $75.6 million for the quarter, down $26.7% from $103.1 million in the same quarter last year.  The reduction “…partly reflected a net $13.3 million reduction from several show scheduling differences in the third quarter of 2019, most notably Outdoor Retailer Summer Market, which staged in the second quarter of 2019 versus the third quarter of 2018. In addition, revenues for the quarter were further reduced by $7.1 million as our Surf Expo and ISS Orlando shows were forced to cancel due to the impact of Hurricane Dorian. We recorded the associated $6.1 million insurance settlement…as other income in the quarter. Further, acquisitions made in 2018 contributed $1.9 million of incremental revenue in the third quarter of 2019, while 2018 third quarter revenues included $5.3 million from discontinued events, primarily our Interbike show, which did not stage in 2019.”

They tell us that including these adjustments, organic revenue was down $3.7 million, or 4.4%. 

Cost of revenue fell by $1.3 million compared to last year’s quarter to $24.6 million.  SG&S expense rose 13.5% to $33.7 million.  “The increase in selling, general and administrative expenses for the third quarter of 2019 reflected approximately $1.6 million in incremental costs from the 2018 Acquisitions and $1.2 million in higher non-recurring other items, offset by $0.6 million of lower costs attributable to show scheduling differences and $0.9 million in reduced costs related to discontinued events. The remaining $2.7 million increase in 2019 partly reflected additional senior management costs and incremental investment initiatives.”

There were also asset impairment charges of $26.3 million.  There were none in last year’s quarter.  “The impairment charges were due to a decline in fair value compared to the carrying value of goodwill, certain trade names and certain customer-related intangible assets, which were primarily driven by changes to future forecasted performance and decline in our stock price, which management deemed a triggering event and requiring quantitative analysis.”

Yes, it’s a noncash charge.  But you can see it implies a decline in future performance so it’s very real.

Pretax income was a loss of $23.3 million, compared to a pretax profit of $28.8 million in last year’s quarter.  For the nine months ending the same date, pretax income was $28.5 million, down from $86.7 million in last year’s nine months.

Sounds like the new management team is doing the right things and is fundamentally changing the business model.  I haven’t been following Emerald Exposition every quarter, but I think I’ll start.  This should be intriguing.

The Disaster of Negative Interest Rates

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On October 31, I posted an article called “What’s Wrong with Capitalism?” After a couple of paragraphs of me ranting and raving there was a link to an article that described what Ben Hunt calls the “financialization of Texas Instruments.  It was disturbing to a few people I heard from and, I hope, to some others I didn’t hear from. 

In the spirit of continue to disturb you in a good cause, here’s another article you should read called, perhaps not surprisingly, “The Disaster of Negative Interest Rates” published by the Mises Institute.

If you’ve never heard of the Mises Institute, named after the economist Ludwig von Mises, you might consider adding their web site to your favorites or even signing up for their free occasional emails.  This is another of my attempts to get you information you really need but won’t find if you rely on mainstream media. 

The point of the article is not just that negative interest rates are a business and economic disaster if maintained too long, but that they threaten the structure and functioning of our republic.  Here’s the link to the article.

Big 5 Sporting Goods. What Should We Think About Their Solid Quarter?

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At its September 29 quarter end, Big 5 had 433 stores down from 436 a year ago.  Big 5 “…provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. Our product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, winter and summer recreation and roller sports.”

Almost 55% of their revenue for the quarter came from hard goods.  27.5% was from footwear and 17.1% from apparel. 

I’ve been in maybe a half dozen of their stores, most recently within a couple of weeks.  As you can see from their product description above, they carry a very diversified product mix.  I wouldn’t say it’s well merchandised and I certainly think of them as competing on price.

As I’ve said in prior reviews of their results, that’s not a compelling source of competitive advantage in our current environment.

Revenue for the quarter was essentially constant at $266 million.  But they grew the gross margin from 31.0% in last year’s quarter to 32.3% in this year’s.  They reduced SG&A expense from 29.2% of revenue to 28.9%.  The result was operating income that rose 89% from $4.8 to $9.1 million.  Net income more than doubled from $3.1 to $6.4 million in spite of a tax bill that rose from $0.84 to $2.0 million.

The stock market of course loved that, but I want to dig a little deeper into how they did it.

While total revenues didn’t rise significantly, same store sales were up 0.3% compared to a 2.0% decline in last year’s quarter.  They note that “Sales from e-commerce in the third quarter of fiscal 2019 and 2018 were not material.”  That’s kind of a concerning statement. 

The improvement in the gross margin had three main components.  First was a 0.98% increase in merchandise margins.  “The increase primarily reflects a shift in sales mix towards higher-margin products and a decrease in promotional activities.”

Second was a reduction of 0.78%, or $2.1 million, in distribution expense.  “The decrease primarily reflected a reduced provision for costs capitalized into inventory compared with the third quarter of last year.”  Sounds like a one-time thing.

Third was a $0.6 million increase in store occupancy expense.

From the conference call: “Multiple factors contributed to the margin gains, including the benefit of a product mix shift, reflecting reduced sales of lower margin firearms and ammunition products and increased sales of higher margin opportunistic buys. Additionally, and quite significantly, our margins benefited from a favorable response to our strategic efforts to optimize our pricing and promotion.”

I wonder if those “high margin opportunistic buys” are a repeatable, intentional part of their strategy and would love to hear more about how, exactly, they are optimizing their pricing and promotion.

The $0.8 million reduction in SG&A expense resulted from three factors.  First was a $0.9 million reduction “…due mainly to lower newspaper advertising.”  Most of us are familiar with those ubiquitous Big 5 advertising inserts.  If they are reducing them, I wonder what they are replacing them with.  There’s no mention of a social media strategy.

Second, store related expenses were down $0.7 million “…due primarily to reductions in certain employee benefit-related expenses such as health and welfare expense, partially offset by increased employee labor expense.”  The increased labor costs were the result of minimum wage increases.

Finally, administrative expenses increased by $0.7 million. 

The balance sheet hasn’t changed much since last year, except that the current balance sheet reflects the new accounting standards for reporting operating leases.  Cash provided by operations improved from a negative $8.1 million in the nine months ending last September 30, 2018 to a positive $13.7 million for the nine months ended September 29, 2019.  I also want to highlight the nine months capital spending decline from $8.4 million to $6.1 million. 

So here we are with a solid quarter from Big 5 as measured by the bottom line.  I’ve been encouraging a bottom line rather than top line focus for years now.  This strong bottom line improvement, however, seems caused by one-time events and expense cuts that can’t be continually duplicated.  I am not as optimistic as the people who drove up the stock when the earnings were announced.

We still seem to have a brick and mortar retailer that’s competing based on abroad product offering and price, and its online performance isn’t significant they say.  There was no discussion of strategy in the 10Q or on the conference call- at least partly because no analysts took part in the call to ask questions.

Based on the information Big 5 is providing in its public documents, I don’t understand their strategy for success.

What’s Wrong with Capitalism?

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Well, uh, nothing actually.  Okay, not nothing.  Some things- sure.  There’s no perfect system.  But the real problem is that what we actually have is less and less like real capitalism.  Adam Smith’s invisible hand and Schumpeter’s idea of creative destruction have both taken it on the chin.  Quantitative easing, low to negative interest rates, too much debt, and the growth of oligopolies and perverse management incentives are knocking capitalism for a loop. 

Follow this link to Epsilon Theory and read Ben Hunt’s article, “Yeah It’s Still Water.”  Please take the time to understand his analysis of what Texas Instruments has done with its cash flow in recent years.  Recognize that this is going on all across the public company space in our industry as well as others.

When you’re done, you might consider signing up for Epsilon Theory’s free weekly emails or putting the web site in your favorites for occasional consideration. 

If Texas Instrument had taken all that cash flow and put it into competitive enhancements rather than share buybacks and management compensation, what might they have accomplished? Our GDP as a country only grows because more people are working (population growth) or they are each making more for each unit of labor (productivity growth).  With population really only growing due to immigration we are dependent on productivity growth.  Unfortunately, stock buy backs, dividends and management compensation don’t contribute anything to it.

Kathmandu Buys Rip Curl: Analysis and Questions

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I admit it.  Before this deal, I’d never head of Kathmandu, a public company headquartered in New Zealand.  If you haven’t either, you can visit their consumer facing web site or their investors web site where you can pour over all the deal related documents I’ve looked at.  Mostly, though, I think you’re happy to leave that chore to me.

Kathmandu “…is a designer, marketer, retailer and wholesaler of clothing, footwear and equipment for travel and adventure. It operates in New Zealand, Australia, United Kingdom and United States of America,” as described in their public filing for the fiscal year ended July 31, 2019.  Below are some summary numbers for its last two full years.

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Machine Learning Dominates AI Use for Retailers

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This is interesting.  It seems to indicate that most retailers are being left behind. You might want to click through to Capgemini and sign up for some of their research.  Anyway, here’s the link.

 

 

An Inevitable Deal: SPY Purchased by Bolle

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I never learned why SPY went public in the first place all those years ago.  I imagine it was because a group of people who may not quite have understood the industry saw potential fast growth and a chance to make a lot of money.  Those were different times.  I have some experience with that way of thinking from the snowboard industry.

The benefit to me, and to you, was in being able to follow a smaller niche player with a solid brand and see how they could compete among the big players in an industry where meaningful product differentiation wasn’t easy to come by.

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