Is La Z Boy rethinking its franchising strategy?

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 First Quarter Credit Analysis

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=

 

Amazon Pro Forma

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 30th 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=

Apple’s hidden asset

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.

 

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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

Where Amazon is headed!

While comparing Amazon as it stands today with what it was in 2001 (with reference to the Amazon case study), I was amazed at the growth of Amazon in these 11 years. Amazon’s revenue at the end of 2012 was $62B, 20 times the amount in 2001. However, what struck me was the net income, which hovered around zilch.

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I didn’t have to dig deep before I found CEO Jeff Bezos’s reasoning on the situation I was worried about. The CEO prefers to put every penny back into market expansion for Amazon. Bezos has iterated umpteen times that he is focused on the customer and not short-term profitability or Wall St. estimates. Experts have predicted that Amazon will be the 9th largest retailer in the world by 2018, without even having a single physical store. Probably this is where Bezos’s Amazon is headed!

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The above chart displays revenue segments that Amazon reports. Analyst Ben Evens explains, “These are in different industries, at different stages of development, and in different markets. It seems pretty likely that their underlying economics are different too.” Further Amazon is operating the same product lines in multiple regions or countries. They keep investing back for growth as lines of revenues have been increasing. If you look closely, Amazon seems like a bunch of start-ups. 

As with any company, some products work out and some don’t. This brings me to the latest developments at Amazon which might turn out to be a great source of revenue for Amazon – 

1. Investing in mobile advertisements to market its products – As online shopping on mobile devices increase, Amazon is luring app owners by offering 6% commission if a user buys Amazon product through their app.

2. AutoRip – If you ever bought a CD or Vinyl from Amazon after 1998, you get to digitize your music without paying a penny. This is a good marketing ploy to cross-sell its other service – pay a small fee to get an eBook for the physical book you have already bought at Amazon.  They hope to move every customer from physical book to eBooks.

3. Selling Fine Art online – Yes, you read it right. If you happen to have $4.5M, you can buy Norman Rockwell’s “Willie Gillis: Package from Home” right away. Online art sales are supposed to grow by 2.5 times to $2.1B by 2017. This is yet insignificant compared to the $56B art market.

The company has been growing by leaps and bounds, but it would be interesting to see when will it decide to throw a switch and make a profit. Do the shareholders care? Probably not.  Amazon shares have risen 5 fold in the last 5 years!

References –

http://ben-evans.com/benedictevans/2013/8/8/amazons-profits

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10245630/Amazon-is-Britains-most-influential-retailer-and-it-doesnt-even-make-a-profit.html

http://www.nasdaq.com/symbol/amzn/interactive-chart

http://www.ft.com/intl/cms/s/0/005a35a8-0f3d-11e3-8e58-00144feabdc0.html?siteedition=intl#axzz2gmTamMGM

http://www.theverge.com/2013/4/12/4217794/jeff-bezos-letter-amazon-investors-2012

http://www.sec.gov/Archives/edgar/data/1018724/000119312513151836/d511111dex991.htm

http://www.economist.com/news/business/21586588-internet-giants-fine-art-venture-unlikely-sell-many-masterpieces-enter-amazon

 

Unexpected quarterly loss for Amazon

ARTICLE: http://www.ft.com/intl/cms/s/0/38f60dae-f568-11e2-94e9-00144feabdc0.html#axzz2gfXnExC7

I thought this was an interesting article to respond to post-our Amazon presentation. This article was posted on July 25, 2013 and it reports a quarterly net loss for Amazon of $5 million or $0.01 a share in the 3 months to the end of June in 2013. This came as a surprise, as analysts predicted a net income of $28.8 million in the same quarter. The net loss was mainly due to the online retailer pumping money into warehouses and digital content, fueling sales growth at the expense of profit.

To be specific, the sales of the company soared by 22% to $15.7 billion which were the exact numbers predicted by analysts. The resulting net loss stems from costly investments that the company is making. CEO Jeff Bezos long term vision for Amazon is to steer it to digital products like the kindle tablet device and digital contents for its Amazon prime video streaming service. Other important investments include the money spent on warehouses to be closer to the customers ensuring efficient shipment as well as building a bigger presence in China.

The press release for the second quarter ended June 30th 2013 is below:
http://www.ft.com/intl/cms/s/0/38f60dae-f568-11e2-94e9-00144feabdc0.html#axzz2gfXnExC7

The company’s operating margin was just 0.5 percent, as its operating expenses jumped 23 percent. Amazon has been spending heavily to expand internationally and beef up its Web services business. I couldn’t help but wonder what these figures would look like in a pro forma basis. The investment in warehouses and digital technology could be a one time expense and is not likely to occur in the next quarter, so the net income must have definitely been close to what the analysts predicted.

Revenues in the current quarter are predicted to be $15.5 billion to $17.2 billion. Jeff Bezos says that Amazon’s top ten bestselling products last quarter were all either Kindles, accessories for Kindles, or digital content for Kindles, which suggests the transformation is steadily having an impact, even if it’s proving expensive.

REFERENCES:

http://www.bloomberg.com/news/2013-07-25/amazon-posts-surprise-loss-after-spending-on-warehouses.html

http://www.cnbc.com/id/100904121

Apple in the news.

On October 1 an article appeared in the Financial Times, which talks about a push by Carl Icahn for share buyback by Apple. Carl Icahn appeared on CNBC stating that $150bln in cash that Apple has offshore can be returned to shareholders as he thinks that Apple can obtain a reasonable-interest loan to repurchase shares. Apple’s shares rose by 2.2%.

Mr. Icahn is known for “pushing” his policy when he obtains a large enough share of a company. At some point he even tried to force the sale of Yahoo!. Apple did not comment on the matter, however, it earlier announced that it was evaluating a $100bln program of returning cash to shareholders in the form of dividends and share buyback via a combination of both methods.

Certainly, as Apple’s cash pile continues to increase and interest rates are still very low, it makes sense for them to leverage the company sightly by borrowing funds and returning money to shareholders. When Apple does borrow, it will incur a liability (increase of liability, balance sheet will be affected), increase cash (assets increase, balance sheet effect). When it buys back shares,  Treasury stock will increase (equity section increase, balance sheet). In case of dividends, Apple’s cash will again decrease, Retained Earnings section will decrease (both are balance sheet effects). Income statement will not be affected except for the per share numbers, since the number of shares  outstanding will decrease.

If you would like to read more, please look at the article http://www.ft.com/intl/cms/s/0/4bdc4e02-2ac3-11e3-8fb8-00144feab7de.html#axzz2gZYnzEhu , you may have to login, though.

Reorganization, a better way?

 http://blogs.wsj.com/digits/2013/07/11/how-will-microsofts-shake-up-change-financial-reporting/?KEYWORDS=microsoft+financial+statements

The reorganization at Microsoft will lead to changes in financial reporting, the company said Thursday, and the question for investors is whether it will make it easier or harder to understand performance.

 The organizational changes announced by Chief Executive Steve Ballmer strip away a structure based around divisions overseeing particular products, such as Microsoft Windows, the Xbox videogame console or the Office bundle of workplace software. In its place, Microsoft is imposing a horizontal scheme with managers that oversee different kinds of functions–like engineering, marketing and finance–that would be applied to multiple product lines.

 Even though Mr. Ballmer told analysts on a conference call that the level of accountability we all feel rises as we all have to look at the integrated profitability of the company, and getting to a ‘One Microsoft’ strategy is very important, and we need to have strong financial accountability.

 In 2007 Microsoft recorded a liability related to legal claims against the company. This liability reflects an estimated exposure of $1.7 billion, less payments made to date of $500 million.  The $1.2 billion provision is carried on the balance sheet in Other Long-term Liabilities.  Commitments and contingencies is shown as a line on the balance sheet, however it does not carry a balance.  Rather, users are directed to the footnotes for details relating to this item. This happened in 2007 before this reorganization. We can see that company’s behavior is to refer such an important provision of $1.2 billion to footnotes, which most of investors might not notice.

 When the financial statements of all divisions come together, it might be harder to guide the investors to figure out the material information regarding the current business.

From company’s stock history, we can see that within 2007 and 2008,when Microsoft faced the “Xbox 360” charge and a $1.2 billion provision, the stock price had experienced a wide wave fluctuation and maintained a staggering price afterwards till now. Currently revenue for those efforts is reported in separate business divisions, and separate managers are accountable for profit and loss in those divisions. “When the money-losing Bing is blended into the same unit as Office, we’ll never know how much Bing is losing again,” Mr. Gillis said. The money-losing Bing can be disguised under the overall integration.The purpose of the reorganization might be associated with inciting the stock price. However, when all the divisions are integrated into one, it becomes harder to evaluate in retrospect which division contribute more and bite more of company’s profits. That will become harder to trace the origin of the problem with lower transparency especially combining all the divisions.

“One Microsoft”, Many Financial Reporting Questions

Article:  http://blogs.wsj.com/digits/2013/07/11/how-will-microsofts-shake-up-change-financial-reporting/?KEYWORDS=microsoft+financial+statements

Before announcing that he would be stepping down as CEO of Microsoft earlier this year, Steve Ballmer made some significant organizational changes to the company’s operations.  He had a vision he called “One Microsoft”, in which the lines dividing the different sectors of Microsoft’s operations were blurred.  Traditionally, different divisions within the company were responsible for overseeing specific products.  Instead, Ballmer wished to see managers within the company overseeing different kinds of functions related to multiple product lines.

In terms of fostering an environment of openness and communication which facilitates innovation, one could make the case – optimistically – that Ballmer’s idea was a step in the right direction.  However, in terms of financial reporting and transparency, this move poses problems for readers of financial statements.  As CFO Amy Hood explains in the article, accounting rules require companies to disclose revenues and earnings in a manner which illustrates how executives manage the business.  This has been accomplished by reporting separate performance figures for the different divisions in a company’s operations.  These separate figures are useful to financial statement users because they offer a better, more complete, picture of the company’s operations.  For example, users may be interested to know that Microsoft’s Windows operating system continues to generate significant margins, whereas the Bing search engine posted a loss for the quarter of $262 million.  The reason separate performance figures are useful is that it helps users further analyze information available to them.  It may affect how investors react to news such as the manager of a certain department being let go.  As Nomura analyst Rick Sherland speculates in the article, the company may move to a reporting method which simply reports performance figures in aggregate groups such as Devices and Services.  This would significantly decrease the transparency of the company’s financial statements.

The motivation for such a move is unclear.  While it may prove beneficial to the company over time should they begin to operate with more efficiency and fluidity across departments, the company will likely face criticism from frustrated financial statement users, and perhaps their auditors.

Microsoft’s Board Approves Retention Payments

Article:
http://blogs.wsj.com/digits/2013/09/23/microsofts-board-approves-retention-payments/
Referenced:
http://www.forbes.com/sites/annemariesqueo/2013/09/25/microsofts-lack-of-ceo-succession-plan-lesson-for-other-companies/

This article describes the type of compensation that Microsoft is offering to its most talented executives and the reasons why now. Steve Ballmer’s retirement and the name of his replacement still unknown has created an uncomfortable situation inside Micorosoft.The board of directors considers the transition period until a new CEO is elected as a critical one. It is not unusual for companies that go through this process to face some confusion among employees or uncertainty among senior executives of whose approval to get when it comes to important decisions. This is also the time that some of the talented executives loyal to the outgoing CEO and his ideas might decide to leave the company also.
Faced with the possibility of executives upheaval or employees unhappiness Microsoft’s board of directors approved a new type of stock grant. The purpose of stock grant compensations is to keep employees motivated and dedicated to the company. By offering these compensations the company tries to align its priorities with those of the workers and also enhance shareholders value. The company is showing that it is investing in employee’s future and wishes to employ him/her for many years s. The stock grant is usually restricted. The employee is the legal owner of the shares but cannot sell them until the restrictions are lifted, or also known as the time when the shares are vested.
According to SEC in the case of Microsoft filings these stock grants can be used to recognize the exceptional performance of certain executives. They are also known as retention payments. This form of recognition is important in trying to hold on to key and talented managers in the corporation. In the case of Microsoft the COO and the General Counsel were offered stock grants valued at $19.6 million and $15.2 million respectively.