In response to The Butcher of Sears Holdings It is Showtime writes

I could write a whole history of retailers failing due to leverage and / or being run by financial gurus, if I thought anyone would read them.

I was a senior in high school when the Haft Family made its early push for Dayton Hudson / TGT. I left for college the next year and never really moved back to MN. That was 1987. My earliest memories of tagging along on store visits with my dad (he worked for Dayton’s) are mixed in with Ali – Foreman which puts them in 1974 and 5. By that math “Asshole Bankers Don’t Understand Retail” was the final lesson of a 12 and a half year live-in retail apprenticeship under the guy who was central to the creation of the modern Target.

Which is nothing I did. I was just lucky as hell to be raised by (and get along with) a very unusual guy who was certainly one of the top 10 merchants from 1950-2000. He’s wildly underrated but I’ll argue his placing with anyone.

(Forgive the digression. Quite a bit of coffee is involved in these Sunday morning columns and visits to the comment section.)

Ken’s problem with retail LBOs was the debt. He wasn’t afraid of the risk. He loved risk. What he hated were cheap, dirty stores. Or empty cash stands when there was a line. Or flimsy displays… Wow, did Ken Macke hate flimsy displays. You end up with all of those when you lever up retailers whether it’s to do an LBO or buyback or dividend.

Retail margins are terrible. 10% is about your cap. There’s no room to add excessive debt payments without cutting spending. Cutting spending leads to sloppy execution which becomes a messy store. So help me God if a Target store was dirty my dad would grab the nearest flimsy display and use it as a staff to Smite the store manager dead like Ken was Moses himself (I may be conflating that memory… I was a kid).

The Haft family ended up crapping out of Daytons. The Hafts had been front-running their own press clipping. They’d get long, announce a bid then sell down the position in the ensuing ramp. (Did you honestly think Ackman invented the idea?) Lather-rinse-repeat. In the summer of 87 the Hafts were out. By the time of the article, October 15 1987, the Hafts were long up to 4.9% at $50. They’d bought huge in the fall of 1987.

Which means the Hafts were levered long into about $300m of DH right into the crash of 87. The stock fell somewhere around 40%. So Endeth the lesson on mixing leverage and actual business.

(Another funny point on the article… Check the part where it says Daytons sent a “tersely worded 2 page fax”. The original draft of the fax was 2 words. “F— you”. The lawyer wouldn’t let Ken send it. I was listening to my dad on the call when he complained “Which part of ‘f*** you’ do you think the Hafts won’t understand?”)

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I wonder if Walmart realizes how screwed it is.

I don’t mean that smugly. I want Walmart to win. I think it’s run by smart, generally good people. But even smart people can lose perspective if they don’t have outsiders getting in their face occasionally. Corporate cultures are like royal bloodlines; if you don’t freshen the breeding pool up every so often you start to go a little “Windsor”.

I love Walmart, though. It makes me sad to sincerely wonder if the company has any grip on the degree to which it’s getting murdered in what it still calls “the e-commerce space”. Because there’s a growing chasm between how Walmart should be viewing its online efforts and the spin the company is offering in public. Such disconnects are the calling card of a company losing it’s grip on reality.

Corporate dementia is usually bearish. In this case it’s a matter of life and death.

This morning Walmart reported .6% comp store gains in the US for the 4th quarter. That includes 25-basis points of boost from e-commerce which sort of counts as one big store*. Walmart says online sales grew globally by 8% in Q4 and 12% for the full year, rising to $13.7b. Walmart is crowing about serving 20 US markets with online grocery already.

Some problems:

• Walmart’s growth online is lagging the growth rate of cyber-retail as a whole, which grew 14% last year according to the government.
• Amazon grew US sales by more than 24% to $21.7b in Q4.
• This morning Amazon is leaking reports that it plans to hire more “Uber like” delivery employees. That’s not really “news” (as I’ve reported Amazon is already doing same day delivery in many markets… they’ll be same day, nationwide by next Christmas). It’s just a reminder of how far ahead of Walmart Amazon is. In fact, I’m pretty sure Amazon is hyping this just to screw with Walmart. I have no proof of that but I really want to believe it.
• Walmart should not be at all pleased about a below-average growth rate online. It has more resources than any other retailer on earth. Online is still up-for-grabs and Walmart is losing share to the field. Walmart is getting its ass kicked by Etsy. Saw Walton would not be pleased.
• Look at the growth rate of E-commerce as a percent of total US sales in the graph below. If there was a country with a market that was 10% the size of the US and growing in the teens Walmart would be throwing every available penny at the opportunity:

• I can forgive Walmart not growing abroad. Retail concepts seldom travel well. Merchants should assume every foreign country is Vietnam. I wouldn’t expect Walmart to grow any faster than US GDP at physical stores**. But Walmart has to grow online. Walmart can’t afford to be 1/8th the size of Amazon and fading fast.
• That being the case, the execs should actually be sheepish about these stats. Instead they are marveling at the shopping habits of online grocery buyers. That’s either an awesome job of spinning or evidence of a disturbing lack of urgency.
• Walmart is run by very smart people. It’s a legendarily tough company. That makes me wonder if they have any real friends in-house. A friend is someone who isn’t afraid to tell you when you’re screwing up. They tell you uncomfortable truths, over and over again. That’s how you can tell they’re you’re friend. I’m not sure Walmart execs have anyone with the wontons to tell them they’re 10 years from becoming Sears.
• I’ll be your friend, Walmart. Call me.

 

*Walmart doesn’t make it easy to put this data together, for obvious reasons.

** NOT the Law of Large Numbers.

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Buyback-Lash(TM) is picking up steam as investors sell-off shares of companies with monster buyback programs. Apple, IBM, Chipotle, Gilead… the list is growing.

The story is also picking up steam. Perhaps inspired by the Weekend Buyback Primer I created with links to pieces on AutoNation, Apple, WholeFoods Markets, Macy’s and IBM) Fortune went through Apple’s hypothetical P&L on repurchased shares yesterday:

 

It’s a decent read but misses the main points. Allow me to elaborate:

Repurchased Shares Go to $0 Immediately

I went over exactly why in the nuanced piece “Wall Street Street Screwed You Again! Buyback Mailbag“. It’s a nice exercise to point out that Apple is down 21% on buybacks but it misses the point.

If shares move higher after a repurchase the company has no direct benefit. Apple doesn’t trade its shares. If AAPL were trading at $200 the company itself wouldn’t be able to flip stock for a profit. Unlike literally every other potential investor corporations can’t just flip shares in the open market. The stock is instead retired to reduce share count.

In part this offsets dilution from stock option programs. That means buybacks are a good pay to hide pay and help push EPS higher all things being equal. Most executive pay packages are based at least in part on earnings per share. Buying back stock is easier than coming up with new business ideas and can lead directly to an executive team getting paid more, regardless of what the stock itself does.

Buybacks Don’t Work

On their call last night Gilead announced it had spent an insane $10 billion repurchasing shares at an average cost of $95. As a result EPS in the fourth grew faster than net income! Ya! Everyone got a bigger chunk of the earnings pie! Gilead added another $12 billion to its $15 billion repurchase program last night. $27 billion and the company is openly accelerating buybacks right this second.

The problem isn’t that Gilead is down $10 on its investment. Gilead is down $10b but that’s not even the problem. The real issues are a) shares are going lower anyway b) that money might come in handy some day c) Gilead is competing for stock with its own investors even though Gilead has no real use for the stock.

That’s not returning cash to shareholders. It’s screwing them in the short term so your monster options package is less visible.

Yes, Gilead generates a ton of cash. So did IBM at one point. $75b in buybacks later IBM, a company once so powerful it was considered a monopoly, has missed every trend of the last decade. IBM shareholders are left with net profits of $0 since 2010.

 

Parade of Dunces

Financial media is like a game of telephone. Somehow has an insight then everyone passes it alone in some slightly different form. I’m not complaining or bragging about other folks picking up on this story without attribution. I expect that to happen. I just want to make sure they get it right. It’s important because investors should be insanely outraged right now and it’s not quite happening.

Among the inanity…

Chipotle spent 30 minutes detailing every margin-crushing hell that can befall a company on last night’s call. -36% comp sales, loyal customers abandoning them, promotions of unknown expense and higher costs in general. I was on the call. Shares held up fine right up until the CFO said this:

This was after the company guided to breakeven for Q1 and pulled guidance for the rest of the year because he openly has no idea how much the company will have to spend to buyback shares. How about settling the NoroVirus investigation before getting long CMG, guys? Because the stock really isn’t a buy as long as we’re synonymous with both bacterial and viral ways of contracting explosive diarrhea.

Comcast hiked buyback by $10 billion. Because the best way to fight cord cutting and ad drops is investing in your own stock.

Buybacks Need to Die Before Walmart Does

They never make sense. “Opportunistically buying back shares” is the 2016 version of Citi’s Chuck Prince blithely telling the New York Times that his bank was taking on more debt because “as long as the music is playing you’ve got to get up and dance“.

Citi still has risk to $0.

Walmart has $20b in repurchases in place. Target is buying its own stock. Amazon is not. Amazon is going into bookstores. Those are Trojan Horse distribution systems. Target and Walmart have a combined growth rate of 0%. Both chains get less than 5% of its sales from online. By Christmas Amazon will be killing them ecommerce and brick and mortar stores.

Walmart is spending under $1b developing its internet business this year. How much cash do you think there will be to return to shareholders in 10 years if Walmart doesn’t create a viable online presence?

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