Tuesday, August 21, 2012

The Hewlett-Packard Truth Serum Call


 We here at NotMakingThisUp began wondering what would happen on tonight’s Hewlett-Packard earnings call if short-selling terrorists had managed to inject truth serum in the plastic water bottles that every hip Silicon Valley exec carries with them—environmental impact be damned—when they make a presentation or just want to look cool sipping from while they contemplate a question at one of those Silicon Valley confabs before beginning their answer with, “So…” and repeating the question slowly while they figure out how to answer it.
  Here goes…

 CFO Cathie Lesjack: “The following discussion is subject to all sorts of risk factors, and since most of your clients have already lost a lot of money in HP stock by listening to me in the past talk about how great we were doing and taking it at face value, I figure you should already know enough not to pay much attention to what we’re going to say.”
  CEO Meg Whitman: “Thanks Cathie.  We’re going to dispense with reading the press release and the boo-ya stuff, since most of you know how to read—at least you can read everything but a balance sheet.  (Giggles)  Operator?”
 Operator: “Thank you.” (Reads instructions)  “Our first question is from the line of Glen Obvious.  Mr. Obvious?
 Glen Obvious: (Confused) “Hey, thanks.  That was quick.  Umm…”
 Whitman:  “Operator, Glen, is trying to figure out what to congratulate us for, because he always starts out saying ‘congratulations’ on something so his poor clients who own our stock feel better no matter how bad the actual news is.  Why don’t you move on to the next question while Glen gets his brain going.”
 Operator: “Yes ma’am.  Next is Janet Literal.”
 Janet Literal: “Thank you for taking my question—”
 Whitman:  “Why wouldn’t we?  This is a conference call.”
 Literal:  “Well, I always say that…so you’ll think well of me.”
 Whitman:  “Well cut it out.  We’re all grown-ups here.  You don’t have to thank us for foisting dopey acquisitions, massive write-offs, a negative tangible book value, a highly leveraged balance sheet and non-GAAP earnings on America’s small investors.  Just get on with it.”
 Literal:  “Okay—well, that’s my question: you don’t have any non-GAAP numbers in the press release.”
 Whitman:  “Yeah, we figured since those aren’t actually based on ‘Generally Accepted Accounted Principles,’ we should probably start going with just plain old GAAP.  It’s a lot closer to the truth that way.”
 Literal:  “But these GAAP numbers are terrible.  You didn’t make any money.”
 Whitman: “Bingo.”
 Literal:  “So how come your non-GAAP guidance was so much better than this?”
 Whitman:  “D’oh!”
 Literal:  “I’ll get back in the queue.”
 Whitman: “We won’t hold our breath, honey.  Next!”
 Operator:  “Your next question is from Fred Forehead.  Mr. Forehead, your line is open.”
 Fred Forehead:  “Thank you for—oh, sorry, never mind that.  Meg, how should we think about the revenue decline?”
 Whitman:  You want me to tell you how to think about something?!  Didn’t God give you a brain?” 
 Lesjack: “Good gravy, Meg mentioned ‘God’!  Operator, can we excise that from the replay?”
 Whitman:  “Is that really a problem?”
 Lesjack:  “It is if the California Political Police are listening.”
Operator:  “But she didn’t specify a Judeo-Christian ‘God,’ ma’am.”
 Lesjack: “You’re right.  Thank you operator.”
 Operator:  “No problem.  I just wish I got your pay grade.”
 Lesjack:  “Beg your pardon, operator?”
 Operator:   “Well, for starters, I never financed a $10 billion acquisition that went bad in nine months.”
 Lesjack:  “Hey, I thought Autonomy was going to be a great deal for us!”
 Operator:  “At 11-times revenue and 24-times EBITDA?  Puh-leeze.”
 Lesjack:  “And I’ll ask you to excise that from the replay, too.”
 Operator:  “Don’t hold your breath, honey.”
 Lesjack:  “In any event, our corporate counsel has just handed me a note reminding everyone on this call that our unintentional mention of ‘God’ is inclusive of any ‘God,’ whether that be a Buddhist ‘God’ or a Muslim ‘God’ or an atheist ‘God’—
 Whitman:  “What is wrong with you?  Get on with the Q&A.”
 Lesjack:  “Sorry.  Operator, is Fred Forehead still on the line?”
 Forehead:  “Yeah, still here.  So how should we think about—”
 Whitman:  “Careful…”
 Forehead:  “Sorry.  I just don’t know how to ask a question without asking you how I should think about something.”
 Whitman:  “Next!”
 Operator:  “Beth Band-Aid, your line is open.”
 Beth Band-Aid:  “Thank you so much.  This ‘negative tangible book value’ you mentioned earlier…what exactly does that mean?”
 Whitman:  “Are you serious?”
 Operator:  “Yes she is, ma’am.  I’ve heard this girl ask questions on four hundred freaking conference calls, and she wouldn’t know GAAP accounting from a tomato.”
 Whitman:  “Well, for starters, it’s negative $6 per share—”
 Band-Aid:  “Did you say ‘Negative’?”
 Operator:  “Yes she did, Beth.  It’s negative.”
 Band-Aid:  “Well, what, exactly does that mean?”
 Operator:  “It means that in all of recorded time the folks at Hewlett-Packard have managed to lose more money on write-offs of bad acquisitions, one-time charges that happen more than once, and share buybacks at high prices to offset options issued at low prices, than they ever made selling computers and printers, that’s what it means.”
 Band-Aid:  “Cathie, is that true?”
 Lesjack: “Uh…yes…but…”
 Operator:  “It also means I should have her job.”
 Band-Aid:  “Meg, would you agree with that?”
 Whitman:  “Well, now that you mention it, that’s a damn good way to think about it…”

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Sunday, August 12, 2012

A Tale of Two Retailers


 We present below excerpts from analyst presentations by two retailers. 
 The first is an old, well-known department store chain, and the presentation was made last September, when its long-time CEO spent an hour or so ruminating about the transformation of his company.
 The second is more recent—like, this past Friday.
 And it’s by JC Penney, or “JCP” as its new-age executives insist on calling it—a misguided nod to the company’s stock ticker, which seems to be the one thing those executives understand about the company and its now-muddied 110-year old relationship with the American consumer…a relationship that won’t be getting any better any time soon so long as its executives insist on referring to a stock ticker that 98% of Penney’s customers wouldn’t recognize if you tattooed it on their foreheads.
 After all, did Steve Jobs walk around talk about the great things “AAPL” was creating?  Does Coke run ads saying, “Enjoy a KO Today”?  Do Wal-Mart greeters say, “Welcome to WMT” to the overburdened mothers and their screaming toddlers as they begin the hair-pulling search for the day’s bargains?
 No they do not.  But Penney executives would.
 Worse still, the company runs newspaper ads with no identification except “JCP” on the page.  And TV ads with only a “JCP” logo on the screen.  It’s no wonder the company’s sales collapsed 21% last quarter.
 But if you’re expecting ex-Apple retail genius Ron Johnson to bend a little on the “JCP” thing, well that’s not going to happen, if last Friday’s earnings call was any indication—but we’re getting ahead of ourselves. 
 The point here is to contrast Penney’s Friday morning transcript detailing its current “transformation” with last year’s presentation from another, larger department store—we’ll call it “XYZ” for now—describing its own “transformation.”
  If you can guess what company “XYZ” is, well, you just might be cynical enough to work on Wall Street.

 Who We Are
  XYZ: I think, overall, we feel good about our position in the marketplace…I would say that our transformation over the last five to seven years—I came [here] at a time when the turnaround had been complete and we identified the fact that we needed to be an attraction that people came to us for merchandise, but they also had to have an experience that was memorable.
—9/7/11.

 JCP: We are going to become an entirely new class of department store that doesn't exist today.  We are going to create a new category that we call the specialty department store and we think it is going to be profound and let me tell you about it…
—8/10/12

Our Customer Experience
 XYZ: So we focused very much on engaging our associates and having them be the best ambassadors. I'm pleased to say that our customer service scores have been outstanding and lead recent American Express poll three years in a row, lead for department stores. I think that is a real testimonial to the effectiveness of our sales associates.
—9/7/11.

 JCP: But where we are most excited is how we are going to use RFID to transform the customer experience… So next spring we will be rolling out personal check out. So in addition to being able to check out from any employee anywhere, any time, you will be able to check out by yourself in our stores. And we think customers are going to like it and it is going to help our conversion and the customer experience.
—8/10/12

Our Technology
XYZ:  We maintain a $650 million capital expenditure commitment this year primarily on digital infrastructure as well as remodels, two new stores, and fixture rollouts for our attractions and new initiatives…
—9/7/11.

 JCP: From a technology perspective…we have overspent on technology as a company. Part of that is because we have an extraordinarily complex and an abundant number of applications to run the business.
 Mike shared last January we have 492 unique applications, 88% of them are customized, meaning we have done all this hard work internally to make them unique to us and the challenge of that is 95% of the money we spend every year, $400 million was spent to maintain and support outdated applications, which meant we only got to spend about 5% on strategic go forward initiatives.
 If you think about that, that is $20 million a year out of $400 million going to something new to improve the customer experience or ability to manage the business and the balance going to maintain outdated legacy systems. That is a problem.
—8/10/12

Our Promotional Policy
 XYZ: Well, our pricing and promotion is set in a year in advance, so we don't react on a week-to-week basis, but I will say that we are well priced; as I said, we're the lowest priced anchor in the mall and we compete head-to-head in the off-mall.
—9/7/11.

 JCP: In 2011 our Company ran 590 unique promotions and the average item had 20 to 30 prices -- different prices during the year. And so I figured going to three types of prices would be a lot simpler. A great everyday price, some items at a month-long better value and then clearance, which we called best price.
—8/10/12

Our Home Business
 XYZ: We've done very well in luggage, in housewares, in the soft home side. We have a very well developed window covering business. I think one-third of all windows in the United States have [our] window coverings. That's a tremendous advantage when people are building homes and remodeling.
—9/7/11.

 JCP: And on the home thing, just so you know, there is going to be a material change in home.
—8/10/12

Our Online Business
 XYZ: I've said many times we'd been better off if we started from scratch the dot-com than trying to change the locomotive's engine while we're running down the track. So I believe we've done a good job of understanding the issue, but it has not been easy, and has not been accretive to our monthly comps. Having said that, we've invested heavily because we believe it is a strength and that we have a history of being able to ship items to a customer's home effectively and the customer looks to us for that.
—9/7/11.

 JCP: Yes, we have not been performing well online. It is one of our big opportunities. Steve Seabolt is here in the front row. Steve took over the online store in May, we have uncovered a lot of issues -- basic issues. We don't set up our items on time. We had items in our shops that weren't set up online. Our navigation is kind of kludgy at times.
—8/10/12

Our Cost Structure
 XYZ: Our expense program, overall, is really designed to get us to as competitive as possible of a cost structure. Our margins have been - are historically high, so we just need to make sure that our cost structure is competitive to get back to double-digit operating profit.
—9/7/11.

 JCP: Expenses -- we have talked a lot about this at $900 million. So in 2011 we had $5.1 billion of expense. Our anticipation is that number will be down by over $900 million in 2013. And where is that coming from? About $400 million of it is coming from our stores. It's about $350 million coming out of our home office and about $150 million coming out of our marketing.
—8/10/12

Our Workforce Scheduling System
 XYZ: Our workforce utilization, our jTime - what we call jTime, which is matching schedules to when the customer is in the store, that's, again, we've taken out cost. But at the same time, our customer service scores have gone up because we have better staffing when the customers actually are in the store and save the expense when obviously there is less traffic.
—9/7/11.

 JCP: So I think in many ways our employees are so far ahead of us and they are so tired of having to go find a piece of paper to figure out when they should work…
—8/10/12

Our Store Merchandising System
 XYZ: We have a very sophisticated process that allows us to merchandise every store differently even if they're in the same market or in the next community.
—9/7/11.

 JCP: So we will have as many distinct shopping choices in our 130,000 square feet as you will find in a 1 million square-foot mall, except you won't have to go from check out every time you leave a store, this will be a whole unique environment…
—8/10/12

 Those readers with good memories, or long experience with JC Penney, or long experience with this virtual column, are probably already ahead of the game and know that both XYZ and JCP are one and the same: JC Penney.
 Or “JCP.”  Take your pick.  Either way, will the new JC Penney “transformation” work any better than the previous one?
 If it does, Ron Johnson really is a genius.  If it doesn’t, well, at least he tried a whole lot harder than the last crew.


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.