Neiman Markus announced their 2 year plan aimed at reinforcing the company’s image as a retail innovator. In the past the department store used to be the leading example of the retail industry as the first retail store to offer a customer loyalty program and as one of the first luxury retailers to start selling products online. Now they are trying to improve their online presence along with the in-store experience, with initiatives like ship-to-store delivery and free shipping and returns all year round both for online and in-store purchases. The project announcement comes just after the news of the company’s sale to the Ares Management and the Canada Pension Plan Investment Board.

Since 2011 Neiman Markus has been trying to match the online and the in-store experience, by incorporating some of the advantages of shopping online to it’s physical stores and vice versa. Their site has been redesigned so as to align with the layout of the quarterly publications, a “find in store” button has been added to help domestic clients find products in nearby stores and international clients can now see the prices in their local currency and enjoy free shipping as well. On the other hand many technical enhancements have been incorporated into Neiman’s physical stores so as to make the experience more satisfying. Associates carry with them smart phones in order to be able to assist clients with any type of request (alterations, deliveries, availability etc). Additionally iPads are available for the customers throughout the stores.

This initiate, that the retailer budgets at $100 million dollars, will help them resist the pressure of online retail giant Amazon that keeps innovating and attracting customers through even more channels. Their last effort includes a “register and pay with Amazon” service that became available through participating online stores. Neiman’s strategy of improving at the same time all channels (in store, online and mobile) will be vital to the company’s future and is an undertaking that will take 3 years to complete. The funds will be raised during the 2014 fiscal year and implementation of the project will start in 2016.

Sources: 

http://www.retailsolutionsonline.com/doc/neiman-marcus-takes-on-amazon-in-million-omni-channel-project-0001

http://www.retailsolutionsonline.com/doc/neiman-marcus-decides-that-free-shipping-is-not-just-for-the-holidays-0001

Nieman Marcus tried a new trick this season – selling a Mystery Box. It was a hit, with customers quickly snatching up $250 boxes filled with surprise items. A different kind of promotion, it was still pretty straight-forward, as each customer received the same thing, and they could count on Nieman Marcus to provide them with a quality collection worth well more than the sticker value of the box. On the accounting side, it seems pretty easy to deal with; recognize Revenue for 250/box, COGS at their true value, and then Retained Earnings need to be debited for the value of the difference.

However, this campaign seems to be a simple imitation of the Luck Promotions common in Japan and other Asian countries. In deals such as this one, customers purchase an item, having no idea of its value. Sometimes, the contents may be priced accurately, some times the contents are worth less than the ticket value, and other times they can be worth quite a lot more than their ticket value. In this case, how should a company account for their COGS?

On the one hand, Specific Identification would seem to be preferred, as each of these bags can have a radically different value. However, assuming this is impossible, what then? Pricing the COGS using a weighted average calculation seems the most appropriate. Not only is it an accessible method of inventory calculation, it seems to accurately reflect the value of the contents. After all, when a customer buys a “cheap” bag, they are not actually buying the contents of the bag, rather they are buying a possibility of receiving an expensive bag. Essentially, what they are buying is the expected value of the bag – or in other words, the Average cost of the contents.

This type of accounting may make sense locally, but it will need to be reconciled with the actual inventory count, and the inventory methods of the company. Therefore, an adjusting entry for a marketing cost will probably need to be made at the end of the promotion.

Those, who know Neiman Marcus, know that this merchant sells some grand items. It is not your next door Macy’s or TJMaxx; this retailer offers high-quality, premium goods that only few people can afford.

But today, Neiman Marcus didn’t offer another glamorous $300 sweater from a famous fashion designer; neither had it introduced another pair of shiny black shoes. It went higher than that, a move, I would deem epic in a way. This move is the introduction of one of a kind home gadget that only a selected few could ever afford: a 1.5 Million Dollar Outdoor TV!

What is so special about it? Well, this is waterproof and designed by a Porsche team! It is stored underground and emerges with a push of a button on your iPad. The screen’s diagonal is 201 inches and it is over 15 feet tall when in use. It also comes with DirecTV satellite, 300 built-in movies, and a Blu-ray DVD.

The inventory costs would reflect as follows:
Unit cost: 1.2 Million
Installation: 300K
Optional speaker upgrade: 1 Million

However, with this price tag, Neiman Marcus expects to sell only 25 items this year. One of the lucky buyers will be famous LA developer: Mohammed Hadid (partially seen on Real Housewives of Beverly Hills).

I presume at these price levels and quantities, outdoor TVs will be easy to calculate. I would recommend to stick with FIFO cost assumption method as TV prices (like any electronics) are rapidly falling in value. Thus, this natural deflation would help to report less money on the income statement (Net Income) and pay fewer taxes to IRS; thus, releasing capital for other business needs.

Source: http://news.cnet.com/8301-17938_105-57608184-1/neiman-marcus-offers-$1.5-million-outdoor-entertainment-system/

http://www.dallasnews.com/business/retail/20130909-dallas-based-neiman-marcus-sold-for-6-billion.ece

Neiman Marcus was founded in 1907. The company operates 41 Neiman Marcus stores, 2 Bergdorf Goodman locations, 36 Last Call stores and 6 Cusp Stores. Neiman Marcus also runs an upscale online retailing division under Neiman Marcus, Bergdorf Goodman, Last Call, and Horchow brands. On September 9, 2013 a Los Angeles private equity firm and Canada’s largest public pension fund announced that they are buying Neiman Marcus Group for $6 billion. The 2 parties hold an equal interest in the luxury retailer, and Neiman Marcus management led by CEO Karen Katz will retain minority stake. The final sale is expected to go through in the 4^th quarter of this year. Customers will not see any change of this buyout when shopping in Neiman Marcus stores because there has not been a lot of press coverage on this story.

Fort Worth based TPG and New York based Warburg Pincus have owned Neiman Marcus since 2005 as part of a $5.1 billion leveraged buyout. The parties were entertaining private buyers while the company was proceeding with plans for an IPO. Through this sale, the 2 buyout firms have reported a %150 profit on their combined $1.2 billion initial investment in Neiman Marcus. The parties are expected to receive about $2.75 billion in the sale on top of $400 million they got last year from a one- time dividend.  Part of the purchase price will be used to repay about $2.7 billion debt.

Neiman Marcus has been operating with a high debt-equity ratio. After 8 years of being owned by private equity firms, the business is used to operating with a reasonable amount of debt because the company has a lot of long-term investors who are not as concerned with quarter to quarter performance as with companies who publicly trade stock. Neiman Marcus’s new owners are expected to inject some capital into the business.

Finally, the article discusses how luxury retail is a challenging business because the business has to make a very select group of people happy. While Neiman Marcus has done very well with its online business it still needs showrooms to maximize their distribution and reach more shoppers.

Source: http://online.wsj.com/article/PR-CO-20131010-911027.html

La-Z-Boy recently acquired two franchised galleries of after their owners retired. What does this mean in terms of their business in general and, in particular, A/R management?

Well, La-Z-Boy corporate now owns these stores. Previously, they were managed by the franchise owners who would deal with daily management: A/R collections, payables, short-term funding, etc. As it works with most franchise businesses, the corporate offices provide basic services and the franchised stores pay an annual fee and/or a percentage revenues (or profits).

Now La-Z-Boy will have to install managers and fully integrate the accounting, purchasing, and distribution systems of these new locations to their existing systems. This, however, is the benefit of the franchise business model. Previously these two owners had to handle all these issues themselves. If customers aren’t paying, that is a meaningful loss to these private owners. But LZB corporate can diversify that risk over it’s entire store-base, which at this point is worldwide. This mitigates risk, allows them to access lower costs of financing, and essentially allows them to extend all their benefits of a large retailer to these two small locations.

Creating securities backed by cash flows from accounts receivable is a common activity in financial markets. Companies that have considerable balances on their accounts receivable and find it time-consuming to collect on them, often prefer to sell the receivables to a third party. By selling accounts receivable, the firm gets immediate access to cash.  The sale of the receivables transfers ownership of the receivables to the third party, indicating that the third party obtains all of the rights associated with the receivables.

Below is an example of two companies involved in buying and selling accounts receivable. Factual information is taken directly from the FBI website.

International Portfolio Inc. (IPI) and United Consulting were engaged in buying and selling accounts receivable, including medical debt portfolios since June 21, 2006. Another firm – Account Receivable Services LLC (ARS) invested in medical accounts receivable purchased from IPI using funds borrowed from investors interested in asset-based lending.

From December 2006 through June 2008, IPI paid more than $25 million to purchase over $4.1 billion in medical accounts receivable, comprising more than 3.8mm past due patient accounts that the hospitals and other entities selling the accounts had been unsuccessful in collecting. Beginning in June 2007, the two above mentioned firms began promoting an investment model to individual investors and investment fund managers.

They agreed that ARS, through IPI, would combine accounts receivable from IPI’s inventory into discrete debt portfolios with specified total outstanding account balances. These portfolios would then be offered for sale to investors. In addition, ARS and IPI would manage all the collection efforts for each debt portfolio IPI sold.

They made fraudulent representations and omissions regarding purchase prices, collection results, and resale values of IPI medical debt portfolios in order to persuade investors to invest in those portfolios. The firms negotiated and agreed upon two different purchase prices for each IPI debt portfolio that hedge funds and other investors financed on behalf of ARS. IPI agreed to kickback the loan proceeds in excess of the true purchase prices to ARS and characterized the kickbacks as a refund for any unqualified accounts in the portfolio, such as when a debtor was deceased or bankrupt. Between June 2007 and March 2009, IPI paid ARS kickbacks totaling approximately $8mm.

Finally, in order to urge investors to buy and/or maintain their investment positions in IPI debt portfolios, and to further conceal substantially lower than projected collection results, the owners fraudulently repurchased and resold investors’ IPI debt portfolios at artificially inflated prices that neither corresponded to a particular debt portfolio’s actual collection results, nor to an asking price from a purchaser in the debt-buying industry. Owners of IPI and ARS represented to investors that the IPI debt portfolios sold to them or used as collateral were comprised of medical accounts receivable that IPI had purchased directly from hospitals and medical providers after those institutions had exhausted their efforts to collect from their debtor patients.

Owners of the IPI and ARS have been indicted by a federal grand jury on charges of conspiracy and wire fraud, in connection with a scheme to defraud equity investors and asset-based lenders.

Reference

http://www.fbi.gov/baltimore/press-releases/2013/two-indicted-in-275-million-investment-fraud-scheme-involving-the-sale-of-medical-accounts-receivable-to-hedge-funds-and-other-investors

The founders  of La Z boy originally intended the company to control every part of the retail process, from manufacturing to distribution to sales, in order to maximize margins and revenue. La Z Boy’s rapid expansion in the 2nd half of the 20th century, however, presented opportunities for La Z Boy to sell franchised retail stores and expand into new territory. A recent look into La Z Boy’s distribution chain reveals that of the 312 officially licensed La Z Boy furniture gallery stores, only 94 are currently owned by the company through its subsidiaries. In addition, many of its distribution centers are privately owned. This strategy of franchising stores has worked well in the past, but there are signs that La Z Boy’s management may looking to change this dynamic by buying back stores from owners.

A recent Yahoo Finance report released that La Z Boy is buying 2 La Z Boy retail stores from their private owners this fall.  Is this part of an overall trend to take back the entire distribution process or just an isolated incident?  In the case of the Ohio stores,  the owners, Ron and Marisa D’Alesandro, are retiring, and La Z boy is only stepping in to ensure that operations and sales continue to go smoothly in these two stores. The article quotes Kurt Darrow, CEO, as saying, ” We are pleased to acquire the two Youngstown, Ohio stores and I would like to thank Ron and Marissa, who have run a great operation since 1975… Given the Youngstown stores’ proximity to the company-owned La-Z-Boy Furniture Galleries® stores in southern Ohio and Pittsburgh, Pennsylvania, they are a natural extension of our retail footprint in the region.  In addition to realizing various synergies with our retail management team, we will service the stores from our Ohio-based, company-operated Regional Distribution Center, which will provide for efficiencies as well as giving the stores access to a greater in-stock position, ultimately enhancing service to the end consumer.”

It seems that the model of franchising retail stores is working effectively, and La Z boy is only buying stores when there is a vacancy in qualified ownership or other extenuating circumstances. La Z Boy has bought 5 other retail stores in the past year in the Las Vegas and Ohio areas, but these are all cases where owners are retiring.

Taking more control of retail stores does not seem to be a corporate strategy of La Z Boy’s. It becomes apparent in La Z Boy’s statement to shareholders that the corporation’s strategy for growth includes more privately owned retail franchises. The corporation is only stepping in when needed to keep profitability and operations going in individual stores. La Z Boy’s management would rather keep the status quo with regard to operational retail stores and instead focus on expanding into new territory and creating new product lines, all the while collecting lucrative franchise fees from the privately owned retail stores.

Sources:

http://www.monroenews.com/news/2012/aug/22/la-z-boy-acquisition-will-add-more-galleries-store/

http://finance.yahoo.com/news/la-z-boy-acquire-two-201000247.html

http://www.la-z-boy.com/Files/AnnualReports/annualReport10/annual_report.html

http://investors.la-z-boy.com/phoenix.zhtml?c=92596&p=irol-newsArticle&ID=1853969&highlight=

La-Z-Boy put out its Q1 results in August of this year, as reported in the Wall Street Journal. For what is generally a weak quarter for them (due largely to less retail demand in the summer months), La-Z-Boy reported strengthening sales and margins.

We can figure out La-Z-Boy’s turnover by calculating Credit Sales / Average AR.  Taking numbers from the quarterly Income Statement and Balance sheet, we get:

$318,913,000 / [($160,005,000 + $139,186,000) / 2] = 2.131 turnovers per quarter

Compared to the data we saw for the case, this turnover is looking a lot better.  From the periods 1991 to 1994, we were looking at a A/R days outstanding of around 80-90 days.  At the turnover calculated from this most recent quarter, La-Z-Boy has an A/R days outstanding of about 42.23 days, about half of what they were looking at two decades ago.

It’s clear that La-Z-Boy’s credit crisis from the mid ’90s is resolved, but it would also be worth an investor’s time to compare this turnover ratio with that of other companies in the furniture industry.

Sources:

http://online.wsj.com/article/BT-CO-20130820-710063.html

http://investors.la-z-boy.com/phoenix.zhtml?c=92596&p=irol-newsArticle&ID=1848822&highlight=

Article: http://online.wsj.com/article/SB10001424127887323610704578628242628298324.html

I read an article in The WSJ about Amazon’s most recent earnings release. I wanted to see how pro forma reporting would change the amounts currently and if I would perceive the company’s earnings differently. If amazon excluded interest expenses, losses on equity investments, stock-based compensation expenses, amortization of intangible assets and write-downs for impaired assets today where would it stand?

In the July release for the Income Statement three months ending June 30^th shows a net gain before taxes of $17 million. Subtracting the added expenses of interest expenses and stock-based compensation Amazon would have decreased operating expenses by $298 million, coupled with eliminating $33 million in interest expense gives a net gain before taxes of $286 million.

In our case we mentioned that Amazon used this method to give a better understanding of cash flows and not just the bottom line. Having a better idea of where cash is going helps me understand that the company is making all excess capital work and are constantly building the business. Amazon may not use the pro forma method now but seeing it being put to use currently I can grasp what they were trying to do. When I see a company at a net loss over half of their net sales I want to dismiss the company as not profitable or underperforming.

For a company that is growing year after year, quarter after quarter, uninformed investors need to understand where the money is really going. I believe pro forma help investors focus on that aspect.

References:

http://blogs.wsj.com/digits/2013/07/25/amazons-earnings-what-to-watch-today/?KEYWORDS=amazon

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-newsArticle&ID=1841314&highlight=

Before 2009, for multi-element product, a company required to obtain the specific evidence of separate selling price of every element of the product. If it could not provide it as per the strict valuation requirements (EITF 0021), it has to sell the product as a single unit and estimate its revenue over extended period of the time i.e. life of the product.

In 2007, Apple released iPhone which had both hardware and software components. As per the contract, company was committed to customers to provide all the future updates of software free of cost.But it was very difficult to calculate the exact price of these future updates, because sometimes update had not been designed or its market price was unknown. Hence, company used to sell iPhone/ Apple TV as a single package of hardware, its required software and all the future upgrades and identify its revenue over a period of 2 years. As a result of this, most of the price of the product used to be a part of a deferred revenue. So, although with the sales of iPhone, company was growing exponentially, profit margin was considerably constant, which was directly affecting earning per share. This was clearly underestimating the company’s revenue and that’s why Apple presented Non – GAAP financial results along with GAAP results in Oct 2008.

In 2009, due to the constant demand by many tech companies, FASB approved two standards EITF 01-9 and 08-13. These standards permitted the company to break the product in multiple units and recognize its revenue at different time periods. Also it allowed company to ‘estimate’ the selling price of these units if actual value cannot be calculated. Apple, immediately used these standards. Thus, Apple’s earnings boosted and most of the selling price of the unit got accumulated in revenue part, leaving very little portion for the deferred revenue.

These changes got clearly reflected in the stock price.

In summary, although this revenue recognition method did not affect that on the cash activities, it certainly increased company’s retained earnings. As company adopted this standard just before the release of an iPad, it certainly offered a company a strong position in a market.

References:

http://blogs.wsj.com/marketbeat/2010/01/25/apple-earnings-the-iphone-accounting-issue/

http://finance.yahoo.com/echarts?s=AAPL+Interactive#symbol=aapl;range=20070103,20101231;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

http://tech.fortune.cnn.com/2009/09/24/apples-2009-earnings-up-nearly-44-under-new-accounting-rules-analyst/

http://www.apple.com/pr/library/2009/10/19Apple-Reports-Fourth-Quarter-Results.html

http://www.ft.com/intl/cms/s/2/2c9a239a-0a04-11df-8b23-00144feabdc0.html#axzz2gnQ5iF48