Domino’s Pizza Conflicting Financing Activities. How Many Toppings are Available? $DPZ

English: Dominos Pizza in Spring Hill Florida

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Domino’s Pizza (NYSE:DPZ) came out with some boomer numbers and rewarded shareholders with a huge gap up. The press release was very light on the nitty-gritty. The press release was also very light on competitive conditions, sustainable and unsustainable factors as well as what may be expected from competitive forces. Investors must assume the competitors will try to fight back sooner rather than later. However in the meantime investors have bid the stock price up to 52 week highs. At the same time a new financing has been announced. Shareholders have been promised a special dividend.

The financial skeptic in me always finds is curious when companies announce a financing but never disclose the interest rate or the interest rate formula to be used. Debt markets are never wrong. So a perception of risk would work its way into the newly set interest rate. Domino’s seems to have side stepped the issue.

Speaking of debt Domino’s has worked down a huge debt load for the past few years and is still faced with a mountain. Look carefully at the sources and uses of cash. The two main categories are either debt/lease repayment and share buy back. Domino’s cannot sustain both at the levels shown for the past two years. They simply do not generate sufficient cash flow. Financing issues aside they will find it difficult to maintain capex spending to keep their stores fresh and attractive.

George Gutowski writes from a caveat emptor perspective.

Smuckers Comes Off Sugar High Surprised By The Sucker Punch – Analysts Fail Miserably $SJM

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J.M. Smucker (NYSE:SJM) came off a sugar high and surprised themselves as well as investors. At least that’s what management wants you to believe after reading the conference call transcript. The stock sold off on Thursday following surprisingly poor results. Despite product price increases Smuckers crashed and burned on volume. Management claims their price elasticity models showed they should be OK. But the cold water in your face reality diverged. [Note to quants: review reliability of price elasticity model, something is wrong]

After reading the earnings release and the formal management comments, investors are no farther ahead in understanding “What Happened”. There was a lot of rhetoric about understanding the dynamics of the business. So investors and analysts delved in and this is what happened.

Smuckers walked into a buzz saw. The market saw them coming and lined up a big fat sucker punch. The boys are still laughing about it. Here is what happened in this food commodity driven organization disguised as a consumer food products marketing company. Remember market share is all important as volume in food commodities allows greater economies of scale.

Heading into the key Christmas season Smuckers increases their pricing. The decision was based on higher commodity prices and the hope that during Christmas consumers would spend more vicariously. Competitors saw it coming and “reduced inventory”. In this business they call it pantry loading.

Here is what Vincent C. Byrd – President and COO had to say about it in his formal remarks on the conference call. “…consumer pantry loading of peanut butter in advance of our price increase was greater than we had originally estimated…” He then went on to say that while they watch market activities they chose to not make irresponsible short-term decisions. Also many retailers chose to promote their private labels at the expense of Suckers brands.

Eric Katzman of Deutsche Bank even went so far on the conference call to ask management “why do you think the Company was so – I guess was clucked so flat-footed versus competition in the last couple of months?” This was the lead off question from the lead off analysts. Management probably knew it was coming.

The bottom line is Smuckers was caught in the headlights like a deer. The question becomes can they recover and what do they need to do so? The next quarterly earnings report will be critical. Any weakness will be the death knell for management which seems to be top-heavy with middle-aged men with the Smuckers surname.

Note to analysts: You have all failed miserably. You could easily walk through stores and compare product prices. If you understand the industry you can see the “tells”. Who was advising customers to sell? Who at least was whispering about potential problems? No one had the nose to figure this one out.

George Gutowski writes from a caveat emptor perspective.



Baidu Near China Monopoly What is Sustainable? What Needs Outside Help? $BIDU $GOOG

Image representing Baidu as depicted in CrunchBase

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Baidu Inc ADS (Nasdaq:BIDU) announced eye-popping growth just missing EPS expectations because of some executive compensation costs. Market cap now sits around $47.4 Billion. Market share of the Chinese market is around 75% given Google‘s ineptitude of recent past.

Robin Li, chairman and chief executive officer said “…we closed the year with solid financial results as strong execution allowed us to benefit from exceptional market opportunities,” He later went on to say that mobile was the one big single compelling opportunity and they were working very hard to exploit it.  All makes sense and China is an exceptional market opportunity especially when you have the political support of Beijing to keep Google out of your hair.

The end all comment came from Robin Li who said “In 2012, we will continue to innovate and to solidify Baidu’s central position in China’s Internet ecosystem.” Most CEO’s and C suite executives speak at length about markets and risks. Robin Li does not have to do this. he has a gamed system.

The question becomes does he have a sustainable position.

Firstly look at senior management as reported by several western financial data base providers. There is just a small handful of seasoned pro’s. The board of directors does not have any depth. The C-suite officers seem to be non existent. Not enough good generals to lead the new army.

Secondly look at R&D. They seem to be ramping in personnel and dollars. But what have they truly developed that is compelling? The economic moat seems to be their political sponsorship. R&D will be critical as tablets and smart phones carry more e-commerce. Baidu will need to be plugged into the technology eco-system. Compared to Google and or Microsoft they do not have a serious R&D effort. Games are played on a global level. Baidu will need to secure power positions in how technology is developed and exploited. Being good at Chines landing pages will not cut it at the next few levels.

Thirdly look at the foreign exchange risk. They operate in a controlled currency. Eventually the cat will come home and the state manipulated strength of RMB will not be defensible. The value of the Chinese market will shrink over night and US dollar traded ADR’s will drop. The open question will be how to short Baidu to gain a foreign exchange hedge on RMB.

Fourthly Baidu is accumulating vast amounts of cash and marketable securities. If we stay with the narrative that everything is in RMB than Baidu acquires the same risk as Chinese financial institutions. Liquidity and credit risk issues are already front and center. Baidu provides no tangible comments about what they are doing.

George Gutowski writes from a caveat emptor persepctive.

Sears Cash Burn Strategy Accelerates Battle of Canada Already Lost. $SHLD

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Sears Holdings Corp (Nasdaq:SHLD) seems to be enjoying a classic short squeeze for now. Many analysts are on public record about the negative cash flow implications. Management seems oblivious to the entire conundrum.

Check out the recent skirmish in the Canadian market where Sears has long been established and trusted. They just announced huge price reductions for about 5,000 items. Folks that’s a lot of price reduction. So why shoot your foot off?

Target will be opening up 100’s of new stores within the next year. Wal-Mart is already a major factor putting up huge stores everywhere and anywhere. So the best that management can come up with is to cut prices. No merchandising strategy. No customer experience strategy. No …well no strategy. Just cut prices and hang on.

Black Swans ahead!

George Gutowski writes from a caveat emptor perspective.

Fossil Big Tease Year End Results. Review Fundamentals To Verify Sustainabilty $FOSL

Fossil Inc (Nasdaq:FOSL) experienced some nose bleed price moves as it announced great Q4 and year-end results. The brand is on the march and surprised investors. This all follows a previously announced acquisition of Skagen Designs, Ltd.  Mike Kovar, Executive Vice President and Chief Financial Officer of Fossil, Inc. Also indicated they have an Asia expansion strategy which seems to be de rigueur for any sort of enterprise with two nickels to rub together.

The big trick for a company on the roll is to keep the fundamentals balanced thereby ensuring they have enough gas in the tank. Take a look at some of the fundamentals. Cash and equivalents is down. Debt is up. Accounts receivable are stretching out. inventories are up with this excuse: Lead times stretched out 5 days so some Q1 2012 stuff fell into the Q4 2011 numbers. Lets read the offending quote

“An approximate five day reduction in lead times in watch shipments in December 2011 resulted in approximately $30 million of inventory receipts shifting from the first quarter of fiscal 2012 to the Fourth Quarter.”

A little bit of colour is needed on that one. What is happening to your supply chain? What does it mean for investors? You need to talk about it or you increase volatility and surprise factors.

Oh by the way investors should not miss the huge share buy backs that absorbed a lot of the cash and drove debt levels upward. The fundamentals are not sustainable. You cannot get red-hot with revenues, do big acquisitions and expansions, increase inventories and reduce your float without hitting the wall hard very hard. Add in that this is a fashion business and always sits on a knife’s edge. not surprising there is no dividend and I do not expect one for a long time.

George Gutowski writes from a caveat emptor perspective.


Pepsi Capitulates On Commodity Costs. Becomes an Inverse Commodity Play $PEP

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PepsiCo (NYSE:PEP) came out swinging with Q4 results and a separate announcement about great initiatives to turbo-charge financial results. They threw in everything, including a dividend increase. Stock still sold off on what seems like a down day for the market in general. There was lots of discussion about additional marketing and advertising support particularly in North America. Ad agencies and media outlets will great this announcement warmly as more money is spent more quickly. If this is the solution why wasn’t this done sooner. Just buy some more ads and spend the money. No biggie.

The major cause for concern was their capitulation on commodity costs. They essentially came right out and said commodity costs will go up and our ability to pass through the costs to the end consumer is slim to none. Management has positioned the Pepsi as an inverse commodity play. Meanwhile the marketing guys are going to beat their brains out flapping their wings and quacking like ducks in water.

Agricultural commodity prices have been in an inflationary cycle for  some time now. Developing nations started to eat better and started to compete for better food. When you look at the list of Pepsi officers all you see is heads of geographical areas and former marketing soft drink career paths. None of the management team seems well versed in managing commodities. Not surprising that PepsiCo is painted into the corner. They do not know what to do. The marketing is just a smoke screen.

George Gutowski writes from a caveat emptor perspective.

Coinstar debt load concerns outweigh expansion announcements $CSTR $VZ $AAPL $AMZN

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Coinstar (Nasdaq:CSTR) announced a strong finish for Q4 and 2011 results. At the same time they announced a joint venture with Verizon (NYSE:VZ) and an acquisition from NCR (NYSE:NCR) to buy out their DVD business. Lots of flash and furry. Stock is up 20%. Stock is at the 52 week high. Wow that trifecta of announcements got the market excited.

Check out the balance sheet. This company makes its money primarily from the Red Boxes where customers can rent DVD’s  through vending machines. So like you have to believe the whole on-line iPad, tablet, Apple (Nasdaq:AAPL) and Amazon (Nasdaq:AMZN) thing can be beaten. That takes big cash. Really big cash. Coinstar has just doubled its long-term debt.

The announcements do not include any financials about proposed ongoing capital expenditures. The press release lets you know the acquisition price is $100 million. A nice round number subject to adjustments I’m sure. The press release also lets you know NCR will make $25 million per annum from the deal. An interesting tidbit. But what does the Coinstar shareholder make and when?

Coinstar has doubled is debt load and we know where $100 million is heading. The question becomes does Coinstar have the gas in the tank to achieve these high-sounding goals. No one knows what the price tags will be, but clearly they will be expensive. A few NASA engineers may conclude this rocket will not achieve velocity over a long-term basis. Some investors may learn this the hard way.

The company is pointing over the horizon without a road map. Time to ask for a lot more colour in the guidance.

George Gutowski writes from a caveat emptor perspective.

Caterpillar is very serious about union busting. London locomotive plant closes. Union is stunned. $CAT

Caterpillar (NYSE:CAT) makes no bones about cost reduction. It will happen. The union representing workers at the London Ontario electro-locomotive plant stuck to the standard union script and dragged out negotiations. The contract came due Dec 31. Caterpillar was seeking significant concessions. The union got it wrong. The plant is now closed permanently. 400 blue-collar guys just lost good paying jobs.

Caterpillar has no choice. High cost producers do not survive. If unions insist on intransigent stupidity they will be cleaved off.

The union? Why its the Canadian Auto Workers (CAW) a spin of from United Auto Workers (UAW). the same union theat General Motors (NYSE:GM), Ford (F) and Chrysler (XETR:FIAT) have been dealing with. You would think auto worker unions would understand the need for cost control and productivity?

George Gutowski writes from a caveat emptor perspective.

Blackstone. Who really understands the plumbing? Stephen A. Schwarzman does not add color. $BX

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Blackstone (NYSE:BX) released Q4 numbers. Lets be honest. Who understands it? Who can predict or forecast it. Basically its all about transaction fees, assets under administration (AUM) and carried interest. The earnings release provides a little bit of elevator commentary. This number was up. That number was down. Still cannot understand.

So in conclusion if the market cannot figure it out why is there value? Volatility and Wall of Worry issues abound.

So when the chief guy offers up this quote you know he is not trying to help you out. Stephen A. Schwarzman, Chairman and Chief Executive Officer, said,       “Despite volatile markets and struggling economies, Blackstone had strong performance in 2011. Our investors view us as a critical partner, helping them protect and grow their capital.”

That’s promotional if you ask me. By the way he also commented that investments made by Blackstone created employment but did not offer up any examples. You would think they could prove that one.

George Gutowski writes from a caveat emptor perspective.

Amazon – Who is stupid Management or Shareholders? $AMZN

Kindle Fire: Out of the Box

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Amazon (Nasdaq:AMZN) issued numbers and some investors claim to be disappointed. Revenues are up huge but margins are down. Spending on infrastructure was huge and guess what the Kindle Fire is being sold at near break even prices. That’s break even folks not huge losses.

Normally I criticize management. But this time I’m going for a double and will criticize management and investors. Amazon is notorious for not sharing information. They play it close to the vest and keep investors in the dark. This heightens volatility. Today the stock sold of because of bad news. management could have been more forthright and prepped market expectations.

Investors on the other hand are bailing because of a poor quarter. what went wrong. Revenues are up huge. Top line gets a big check market. Margins have squeezed. The finger points to the Kindle Fire being sold in record numbers. Each Kindle Fire represents a cash flow stream. So if you get a lot of cash flow streams started that’s not so bad. As a matter of fact that is excellent.

Amazon has been viewed as a tech stock, a growth stock and a disruptor. Somewhere along the way investors were expecting earnings growth to be uninterruptible. The assumption is nonsensical. The Amazon investor will have to decide if they are momentum oriented or if they are the classic value investor. Buy ugly and sell pretty.

In any event management needs to learn how to better communicate and reduce volatility.

Times are a changing for everyone.

George Gutowski writes from a caveat emptor perspective.