Tuesday, June 14, 2016

Mattress Fire

 Back in May—that’s less than two months ago—the Chief Marketing Officer of Mattress Firm (ticker: MFRM; Tangible Book Value Negative $30.32 Per Share if our Bloomberg is correct)—was asked how business had started the new year.
  “It continues to be a bit choppy…” he began—choppy being one of those euphemisms Wall Street hates to hear—before adding, in the true nature of a marketing guy, “…but we’re SUPER optimistic that we’re coming up on summer selling season, Memorial Day...”
 Sure enough, Memorial Day did come—even if Mattress Firm appeared to begin the Memorial Day sales event a week or two before the actual weekend—giving the CEO something positive to talk about on the ensuing earnings call, when some of the more important numbers were otherwise going the wrong way.
 Specifically, while MFRM showed 49% revenue growth in the first quarter, it was thanks mainly to the acquisition of Sleepy’s and other mattress retailers the previous twelve months.   What analysts call “organic” growth was somewhat less than 49%.  
 Like, 5,000 basis points less.
 Comp-store sales were down 1.1% in the quarter (despite a boost from the inclusion of e-commerce sales from the recently acquired 1,000-store Sleepy’s chain in those “comp-store sales,” for some weird reason).
 For a clearer picture of the sales trend at what management itself likes to call “the first truly boarder-to-boarder, coast-to-coast multi-brand mattress retailer,” it’s worth noting that comp-store transactions—i.e. stripping out the effect of sales mix—were down 0.9%.
 That decline in comp-store transactions at MFRM was not, however, a new phenomenon: MFRM has reported declining comp-store units in each of the last five quarters (except for one that was termed “roughly flat”).
 The seemingly innocuous 0.9% comp-unit decline in the most recent quarter looks a little less innocuous when you consider it was up against a seemingly easy-to-beat 6.4% unit decline in the same quarter last year.
 As usual with MFRM, however, things got better after the quarter ended, according to management on the call: “Since Memorial Day our trends have been positive and in line with our revised same-store sales guidance,” they said.
 We’ve heard that kind of “things got better this week” from companies reporting otherwise dour news many times…in fact, we heard it from MFRM last year, when it reported that negative 6.4% unit comp quarter: “However, late in the quarter we implemented certain initiatives to drive units and we had subsequently seen positive results.”
 Prosperity at Mattress Firm is always just around the corner.
 Unfortunately, just around that corner is a new competitor: the internet.
 Specifically, what are termed “Bed-in-a-Box” competitors (Tuft & Needle, Casper et al) that sell mattresses rolled up in boxes delivered straight to your door by UPS and therefore have no need for 3,500 stores like MFRM, or commissioned sales employees or delivery trucks.
 Indeed, according to figures disclosed at a Furniture Today conference in May, the “Bed-in-a-Box” industry—and full disclosure, your editor is a happy repeat Casper customer—is running at a $900 million sales rate right now, from a standing start 4 years ago.
 While $900 million might not sound like much in an industry reported to be worth $7 billion in total (mattresses, not all bedding-related products), it would be the equivalent of about 700 Mattress Firm stores by our math, or about 20% of those “boarder-to-boarder, coast-to-coast” stores.
 Is it any wonder MFRM comp-store transactions have been flat-lining lately?
 And while MFRM would probably note that many of the bed-in-a-box vendors are establishing show-rooms in major cities like Manhattan, we’d bet money that they won’t open anything close to 3,500 stores when it’s all over. 
 Why bother?  They’re already “boarder-to-boarder, coast-to-coast” mattress retailers, in the sense that they can ship anywhere a UPS truck can go, without the fixed cost structure.
 All this makes last night’s news that MFRM had disclosed a “material weakness” in its just-filed 10Q involving “controls relating to accounting for significant transactions” even more interesting than the usual “material weakness” disclosure in your average 10Q:
"Specifically, we did not design and maintain effective controls related to the recording of the expense for the flow through of the inventory step up fair value adjustment in the Sleepy's acquisition. We believe the financial statements included herein properly reflect the correct amount and proper classification of the flow through of the Sleepy's inventory step-up adjustment….”
 You might think that a company with $1.1 million of cash and $1.6 billion of total intangible assets on its balance sheet (thanks to its “coast-to-coast” rollup of mattress retailers) against $1.45 billion of debt, negative $55.4 million of retained earnings and $477.4 million of total shareholder equity would have been on those issues before they cropped up, but apparently not.
 Meanwhile, and unfortunately for MFRM, the Caspers of the world are not sitting still, and watching a reported $900 million worth of mattresses get siphoned off to direct-to-consumer competitors is exactly the thing Mattress Firm doesn’t need at this moment.
 The company spent years steadily snapping up new geographies as part of its grand plan—Mattress Giant, Sleep Experts, Mattress Liquidators, Best Mattress, Sleep Train and, finally, Sleepy’s—at the very moment clever Millennials were figuring out how to design, manufacture and ship a mattress in a box so that they and their friends didn’t have to deal with the process of schlepping down to one of those stores Mattress Firm has been accumulating.
 So when we hear the word “choppy” to describe the sales environment—as we did in May from MFRM’s own marketing man—our ears perk up.  
 “Choppy” is one of those Wall Street euphemisms that can often mean a whole lot more than it looks on paper.  
 It’s right up there with analysts who are “tweaking our estimates lower” (i.e. slashing them) and sales that have “come in a bit light” (i.e. not even close to plan).
 Or, our favorite, management that is “laser-focused” on the company’s problems (i.e. playing solitaire on their iPhones).
  Unfortunately for MFRM, “material weakness” is not a euphemism. 

Jeff Matthews
I Am Not Making This Up

© 2016 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.  The content herein is intended solely for the entertainment of the reader, and the author.

Monday, May 23, 2016

Well That Was a Shack-ingly Brief Run

  In the world of Shake-Shack, everything is about “The Shack.”  
 Where most restaurants report “same-store sales” and “store-level operating margins” and “store economics,” SHAK reports “same-shack” sales and “shack-level operating margins” and “shack-onomics.”
 It’s a cute, quirky culture the company has built from modest roots—the now-famous hot-dog stand in Madison Square Park—into an international phenomenon, in 12 short years.
 Of course, 12 years in today’s world is actually a long time, but things didn’t get serious until 2004 when the first Shake Shack restaurant opened, starting the launching pad that would shoot the rocket ship into orbit following the wildly hyped IPO just 16 months ago to the point where, by the end of the first quarter, there would be 88 such “Shacks,” with an inordinately large number—36 to be exact—licensed to other operators outside the U.S., mainly in the Middle East.
 And it is towards that Middle East exposure we turn our attention here, since Wall Street’s Finest haven’t bothered—and anything Wall Street’s Finest don’t bother with is always interesting to this virtual column.
 Not so long ago—in the July 2015 S-1, for the record—SHAK described the Middle East as “our most prominent growth market.” 
 And the Middle East clearly was the prominent growth market at that point, having seen 49.7% licensing revenue growth in the fourth quarter of 2014.
 But by the first quarter of 2016 that growth rate had throttled down to 14.3%.
 What happened to SHAK’s “most prominent growth market”?
 Here’s what management said on the recent earnings call:
 Now, while the Middle East remains a very important market and part of our international footprint, we are experiencing softness in sales there this year, particularly in our mall locations throughout energy-dependent markets that are seeing a natural economic slowdown right now coupled with currency headwinds. So we expect sales in our Middle East Shacks to remain under pressure through this year given the macro environment in the region.”
 Not too long ago—i.e. last summer, around the same time as the aforementioned S-1—the company was describing the Middle East in far rosier terms:
“When we had just opened the second Shake Shack on the Upper West Side of New York, Mohammed Alshaya, probably many of you know Alshaya, from the Middle East, came to us and said, I don't normally do this.  I normally go with much bigger brands here, and I know you only have two, but I think Shake Shack would do tremendous in the Middle East and I want to bring you over. And Danny and Randy kind of looked at each other and shook their heads, but out of pure curiosity got on a plane and went to Dubai, saw the way Alshaya operates, saw how they do things, saw how their culture connects with ours and said, you know what, let's take a chance, let's do it.  So they opened a Shake Shack in the Mall of the Emirates in Dubai and it was one of the leading restaurants in the system and still is at this time.”
 Alshaya is, indeed, a legit operator, and they do indeed normally go with bigger brands.   They’ve opened Cheesecake Factories and Pottery Barns, and they know how to do it. 
 But Cheesecake Factory and Pottery Barn took their time on the whole opening-a-zillion-stores-overseas thing.   
 Specifically, it took Cheesecake Factory 35 years before they opened their first restaurant overseas, in Dubai, with Alshaya in 2012—and the company spent a lot of time getting ready.  
 After all, Cheesecakes in Dubai can’t serve alcohol or sell pork products, so the menu had to be adjusted and the company’s culture had to be transported all the way from Calabasas Hills to the United Arab Emirates.
 Today Alshaya operates just 9 Cheesecakes, compared to the couple-dozen-plus Shacks it opened with a bang not so long ago.
 And while Cheesecake has let it be known, most recently in March, that its international units continue to do well, SHAK said on its recent call the Middle East market is already “maturing...quite a bit” as it switched the focus to new licensees in Asia:
   “If you look at our guidance of seven Shacks all year here for that, the Middle East has got quite a few restaurants there. Our region is maturing for Shake Shack quite a bit. We have some great opportunity. We just opened in Riyadh and doing really well there. As I've said, in Bahrain and Oman. So we fully expected that region to mature a little bit.”
 From “our most prominent growth market” to a “maturing” region in less than 12 months might be a record.   
 Not the record a growth company wants to hold, but a record nonetheless.


Jeff Matthews
I Am Not Making This Up

© 2016 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.  The content herein is intended solely for the entertainment of the reader, and the author.

Tuesday, April 26, 2016

When Analysts Surrender

 It’s bad enough when analysts thank CEOs for letting them ask a question on an company earnings call, at least when they do it in a way that goes beyond a simple act of politeness and more towards a cringe-making act of fawning, which too many analysts have a way of doing these days.
 This is, after all, a business: it’s an analyst’s job to ask questions; it’s a CEO’s job to answer them.   Get on with it.
 What’s worse, however—much worse—is when an analyst who asks a good question gets schmoozed by the CEO, and instead of following up and getting an answer, surrenders.
 It happened tonight on the Apple call.
 After thanking the company for “fitting me in” (really?) the analyst asked Tim Cook—all quotes are from the indispensable Seeking Alpha—a very reasonable question about the “top two or three things” that had changed from the previous quarter, when Apple’s CEO was way more bullish about the demand environment for iPhones than it turned out to be.
 Cook’s response turned the question into a math equation:
 “…we did not contemplate or comprehend that we were going to make a $2 billion-plus reduction in channel inventory during this quarter. And so if you factor that in and look at true customer demand, which is the way that we look at it internally, I think you'll find a much more reasonable comparison.
 The analyst jumped on Cook for changing the subject—after all, he said, the fact that you decided to cut $2 billion out of channel inventory must mean you had $2 billion more product in the channel than you expected, which means “true customer demand,” as Cook called it, was $2 billion weaker than plan, right?
 Ha!  We’re joking.
 The analyst did no such thing.   He surrendered.   “Okay, great.  Thank you,” he said, and then asked a softball follow-up.
 Tim Cook took home $10.3 million last year.   He can handle tough questions.
 Personally, I’d like to know why Cook—who gets on his high moral horse every time some politically correct brushfire starts up somewhere in America—gives up without a sound when the Chinese authorities demand the Apple Store stop carrying apps involving the Dalai Lama.
 We know the answer: money.
 Still, it would be fun to ask.
 But don’t hold your breath.

Jeff Matthews
I Am Not Making This Up

© 2016 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.  The content herein is intended solely for the entertainment of the reader, and the author.