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Nick Mulcahy  

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  • Five Below, Inc.: The Many Parallels With Other Overhyped Emerging Retailers That Have Disappointed Investors [View article]
    That's a fair point on the effect of incremental inventory (although 1Q doesn't compare so simply with the pcp, so there is something strange there) but I try to think about what I would do if I were managing the business. Why scale up so quickly when it requires burning significant cash and exposing the company to funding risks? As you say, there are other sources of capital but they can't keep looking for it indefinitely. Every quarter of negative cash makes bankers more nervous and the incremental dollar of external capital more expensive.

    FIVE is not a venture- or PE-backed business subject to the urgency of a closed-end fund. It's not a pharmaceutical business with a patent that is going to expire. It doesn't even have any particular advantage in retail (same merchandise and pricing strategies as just about everyone else but with slower inventory turns). So the only reason for the rush to grow can be the rating effect. There's just no value here for the external investor at 58x earnings.
    Aug 5, 2014. 02:31 AM | Likes Like |Link to Comment
  • Fast Times At ESI [View article]
    That may be so. I sold out in May when the disclosure Matt Brice and I were discussing above was so poor.
    Aug 5, 2014. 01:41 AM | Likes Like |Link to Comment
  • Bed Bath And Beyond Has A Compelling Opportunity Here And Now [View article]
    Thanks for the thoughtful article.

    On the perceived threat from AMZN, it is bizarre just how many investment banking analysts simply state that AMZN is going to dominate in all categories without looking more deeply at the trends so far. Here is an extract from my own recent investment case for BBBY:

    "AMZN’s annual revenue for North America in its Electronics and Other General Merchandise (EGM) segment - the most relevant to BBBY - rose by 29% in 2013 but this is a very broad category that includes many items that BBBY does not sell.[10] BBBY only competes directly in two out of the fourteen sub-categories AMZN refers to in EGM. AMZN’s annual revenue increases in North American EGM have also dropped sharply as it has expanded its selection, suggesting that the easy gains are now gone.[11]

    AMZN’s consolidated gross margin[12] is certainly much lower than BBBY’s (29% versus 40%), leading to concern that BBBY is vulnerable to direct price competition. But AMZN’s gross margins have actually increased significantly in recent years: from 23% in March 2010 to 29% in March 2014. In addition, AMZN hasn’t much room to reduce realised prices because its operating and net margins are incredibly thin even at the higher gross margins.[13] Since BBBY has increased its US annual revenue by c$3.7 billion and maintained its operating margin >14% since AMZN began competing directly with it in 2010, it is not apparent where the immediate vulnerability lies.

    The Census Bureau’s most recent estimates, which indicate that ecommerce currently represents c6% of total US retail sale value, are extremely low in the category of furniture and home furnishings stores.[14] Accordingly, either home furnishings is a category that is better suited to physical than digital retail (so BBBY’s store network would endure as a source of strategic advantage) or the US consumer’s adoption of ecommerce is slower there than in other categories like electronics. In the latter case, BBBY is not unduly disadvantaged because digital upgrades can be implemented relatively quickly. The company is already investing in these capabilities.[15]


    10. (AMZN Q1 2014 Earnings Conference Call Slides). The EGM segment includes computers and office, electronics, home and garden, grocery, health and beauty, toys, kids and baby, apparel, shoes and jewelry, sports and outdoors, tools, auto and industrial and digital devices.

    11. From 57% to 29% between 2010-2011 and 2012-2013. AMZN 2013 Annual Report.

    12. AMZN does not provide gross margins by segment.

    13. Witness the recent price increase for AMZN’s Prime service, which was significantly less than the increase originally floated:

    14. “US Retail Trade Sales - Total and E-commerce (1998-2012)” and “Estimated Quarterly US Retail Sales (Adjusted): Total and E-commerce” at The furniture and home furnishings category had only 0.5% of its annual retail sales value in the ecommerce channel in calendar 2012.

    15. Some investment is already occurring, see: In its 2013 annual report, BBBY noted that “...[we] enhanced the omnichannel experience for...customers by replatforming and adding improved functionality to [the] Baby and BBB websites, sites and applications and growing and developing...information technology, analytics, marketing and e-commerce groups; completed the construction of a new information technology data center and are engaged in equipping the facility which will enhance...disaster recovery capabilities and support...overall information technology systems...”
    Jul 15, 2014. 08:55 AM | 2 Likes Like |Link to Comment
  • Five Below, Inc.: The Many Parallels With Other Overhyped Emerging Retailers That Have Disappointed Investors [View article]
    Thanks for the excellent article. It's really useful to have some history.

    The immediate problem for FIVE is cash and liquidity. During the last quarter, the company burned $4.1 million in operations and used a further $10.2 million in capex for a net 19 new stores. Another quarter like that and the cash balance will be approaching zero: the company had less than $18 million in cash.

    The additional credit facility that the company refers to can only be a short-term solution to the liquidity problem. On page 61 of the most recent annual report, this is disclosed:

    "The Revolving Credit Facility includes a covenant which requires the Company to maintain minimum excess collateral availability of no less than the greater of (i) 10% of the then effective maximum credit and (ii) $3.0 million."

    At the very least, this means FIVE will have to build fewer stores, which will lead to a re-rating of the market's view of the company's growth prospects.
    Jul 1, 2014. 10:39 AM | 1 Like Like |Link to Comment
  • Fast Times At ESI [View article]

    The announcement to which you refer ( is very poorly done and makes a lot of this discussion moot.
    May 22, 2014. 10:55 PM | Likes Like |Link to Comment
  • Fast Times At ESI [View article]
    It's not clear from ESI's disclosures (which could be better in many ways, starting with the background to CPB) which way they went on the closed locations. If all of those locations were in fact leased, then the company has approximately 43 owned facilities. Those assets were carried, most recently, at $91 million. If ESI is selling 24, or 56% of them, for $119 million then they are worth c$200 million in total on a rough market value basis.

    The point is not whether the sale and leaseback is a good deal for ESI. That is difficult to know without looking at each parcel and checking against local land values and rents. My observation is simply that, even at the possibility of a "forced" sale, ESI's book value is likely to be significantly higher than currently stated due to its property assets. That may be part of the reason for the recent investor fund activity.
    May 21, 2014. 10:11 PM | Likes Like |Link to Comment
  • Disturbing Trends at Harley-Davidson: Why It's Time to Sell [View article];siteid=yhoof
    Apr 19, 2007. 05:59 PM | Likes Like |Link to Comment
  • Disturbing Trends at Harley-Davidson: Why It's Time to Sell [View article]
    "Much has been made of Frank H. Knight's (1921: p.20, Ch.7) famous distinction between "risk" and "uncertainty". In Knight's interpretation, "risk" refers to situations where the decision-maker can assign mathematical probabilities to the randomness which he is faced with. In contrast, Knight's "uncertainty" refers to situations when this randomness "cannot" be expressed in terms of specific mathematical probabilities. As John Maynard Keynes was later to express it:

    "By `uncertain' knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty...The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence...About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know." (J.M. Keynes, 1937)"
    Apr 10, 2007. 08:55 AM | Likes Like |Link to Comment
  • Buffett Misses In Hedge Fund Fees Comment [View article]
    The key phrase in this article is "But let’s assume for a moment that a hedge fund produces true alpha for its 2 and 20 fee...".

    As Wittgenstein wrote in a different context: "If you assume that, I'll grant you all the rest!".
    Apr 10, 2007. 08:22 AM | Likes Like |Link to Comment