No Mean Sum

Long only, value
No Mean Sum
Long only, value
Contributor since: 2012
Company: WhiteTree Investment Management, LLC
How did you come up with the ~ 60% gross margin estimate for the royalty? They didn't mention that figure in the investor call, at least that I recollect.
Does anyone know or advise where one can find out about the costs of warm-stacking?
I agree with your article. They have had 10 years to get internet retailing right and they are on the cusp of actually making money and now they want to go smoke bit-crack in their new office.
The Mr. Byrne implied that he consulted Warren Buffett about how to think about the capex for building the new office. Well Mr. Byrne should go re-read Mr. Buffett's shareholder letters because I'm sure the oracle wouldn't advocate for any of his managers to go on several wild-goose chases if their core business wasn't VERY HEALTHY. I hope Prem Watsa helps them realign their priorities.
To clarify, it is not backdating when you write and date a letter on date (A) but don't send it until a later date (B). Backdating is when you write a letter on date (B) but actually put the date of the letter as a previous date (A). The difference is slightly technical but material. Ocwen did the former which is not backdating.
The new CEO is certainly fluent in corporate jargon.
I too noticed the timing. It is also worth noting that these letters were not "backdated" so much as late but backdated grabs lawsky and company more press coverage.
Still, a public bashing may be a prelude to a more public resolution involving a fine or at least another Lawsky gets his man headline.
Sorry. Long day. I'm sure you meant well.
Congratulations! You have successfully tooted your own horn without providing any additional information or insight!
I admit that they have done some things to move towards turning the business around but they are certainly not out of the woods yet. Taken together, their track-record and under-performance relative to their peers, makes the capital they hold more like a hostage than an asset.
Aside from their performance, it is their history of over-promising and under-delivering combined with a foolish emphasis on growth at the expense of Net Income that really bothers me. Growth would be nice, and I understand the concept of operating leverage but as a shareholder, I don't really care about growth. I care about Owners Earnings. If they could just grow their sales at inflation and achieve a real return on equity that would be fine with me and i'm sure the market wouldn't mind either.
HOFT has a 5% EBIT margin and a 3% Net Income margin on their case goods business. If STLY isn't there by next year, they should sell themselves to HOFT or someone else.
Mr. Prillaman has been talking about growth for 3 years now. Well it doesn't seem like they know how to execute on that kind of a strategy so why not focus on profitability or the shareholders for a change?
Growth is a crutch and a distraction that incapable management uses to try and distract shareholders from the abysmal record of capital allocation and current operating performance. If they want to grow something, how about growing the bottom line?
The board should be actively seeking an aquirer. At the very maximum, management should have 1 year at most to demonstrate Real Bottom Line Profitability without wasting shareholders capital on "new growth initiatives". SG&A needs to be cut to the bone, or the board needs to cut the management itself.
I really wish they would do something to improve the amount and quality of the reviews of products on their site. I realize their focus is more on home and furniture but i feel the reviews are a real competitive advantage of Amazon at this point. It is also clear that it's not just OSTK that struggles with generating quality and quantity in user reviews, other sites suffer from a paucity of consumer feedback as well. Nevertheless, as a shareholder I really wish they would devote more attention to this this aspect of their core business.
I hope they are considering putting the company up for sale. If, for instance, HOFT were to buy them and replicate their casegoods cost structure, STLY would make an attractive bolt-on aquisition.
The most relevant question would appear to be whether MGMT can reduce SG&A to the point where STLY is earning a solid ROE, and fast. If they cannot, and perhaps even if they can, putting the company up for sale may actually make the most sense for shareholders. I say this because as a stand-alone brand with outsourced manufacturing and excess cash, STLY would make an attractive bolt-on acquisition for another (larger) furniture company. To an established aquirer, STLY could be an attractive way to increase their operating leverage.
The stock to me is over-sold and under-followed, so every earnings announcement is a chance to increase awareness. I had hoped that the sale of plant assets would have a more positive effect. It seems like it's going to take more than a strong performance and asset sales to get Wall St's attention in this environment. If they were to pay a dividend like similar securities I'm sure the cult of dividend investors would begin to clamor over the company. Share buybacks could also be interesting but tend to generate less attention. Overall long term investors seem well positioned but as for short term speculation the market is fickle and anything is possible.
I am just beginning to look at WTW and all I can't help but be reminded of HLF at every turn. I think whatever management has said about meetings being an ineffective or out-dated delivery system must be sheer nonsense. Just look at how HLF has leveraged peoples need for community and support systems to help sell product.
Nice writeup. Have you ever looked at NCT?
Does anyone know what would be close public comps for NCT? Seems hard to value without being able to estimate the intrinsic value of the CDO's and other assets. So it would be nice to see if there are public companies with comparable assets and what they are yielding.
Do you have a link to any articles or research citing how the adjustments to income would normalize income / debt ratios? Thanks in advance.
Just2look, you are right, I said FTC and I meant SEC.
SEC Hallmark 7, "No demonstrated revenue from retail sales. Ask to see documents such as financial statements audited by a certified public accountant (CPA), showing that the MLM company generates revenue for selling its products or services to people outside the program."
As for the FTC,
"The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture."
I believe Mr. Ackman displayed compelling evidence that at least some of the distributors make their purchases solely on the basis of whether or not they will be receiving downstream royalties. In either case, HLF has not demonstrated CPA validated data to the contrary.
Let me make it nice and clear for you, I didn't say that sales to distributors weren't "real", I said they were in network sales. As the CEO said, 90% of distributors buy for personal consumption. According to the FTC, one indication of a pyramid scheme is that the most of the sales occur within the distribution network for personal consumption or otherwise. Even if the 30% rule was correct, that still doesn't pass the hurdle for "most" occurring outside the network. Further, as Mr. Ackman points out in his presentation, HLF does not consider in network sales retail sales (slide 27, http://bit.ly/1etJFdv ) so I'm not sure how you've decided that in network sales now count as retail sales, "Under certain circumstances". But since HLF doesn't release the data, we don't know what the actual retail sales figures are, so I guess you can make up whatever you want (see slide 28).
Also, whether or not distributors leave HLF satisfied or not has no bearing on the pyramid criteria of whether or not the success rate is both extremely low and there is an emphasis on recruiting.
I'm sure it's clear to Mr. Ichan and others that HLF does in fact have all the attributes of a pyramid scheme but being intelligent investors they realize that, that may not matter in our present regulatory environment. It is that leap of understanding that separates savvy professional investors from the mob on SA arguing to that HLF is the Alpha and Omega of business models. The smart money is keeping their mouths shut and working behind the scenes to make sure HLF keeps the cash coming and not making presentations or posting on SA about whether or not it is in fact an pyramid scheme. Recognizing that, I suggest you emulate your betters and drop the subject, or at least come up with some more relevant arguments in favor of the long side.
1. "All royalty payments are based on sales produced by a downline."
That doesn't matter it is still income derived from another persons production which is not retail income and therefore indicative of a pyramid scheme.
2. "You have been lied to by the Anti-MLM cabal ... the amount of internal consumption does not determine if a company is running a pyramid scheme or not."
The CEO said on television that 90% of the product is consumed by distributors. End of story.
3. "There is nothing at all wrong with marketing a business opportunity. You have no clue as to a new distributor's motivations and expectations. You are being very arrogant in claiming to know what is worthwhile or not."
There is something wrong with marketing something as a business opportunity when the failure rate is > 90% and a significant portion of the earnings are based on recruiting people to undertake said opportunity after you.
Finally, I don't even know why I'm wasting my time responding to you when it is clear that you are probably paid by HLF or some MLM organization based on the fact that you have 800+ comments on only 2 stocks HLF and AVP. Such a history leads any reasonable person to conclude that you are either an employee of the company and/or lead a very sad existence spreading misleading information about MLM companies.
Yes, it is a non-negligible risk, especially as the valuation increases. I think a likely but not often mentioned outcome is that regulators impose some additional disclosure and/or transparency requirements on the company. Not wanting to be seen as asleep at the switch or supporting hedge funds, the regulators can be seen as having done something but not killing the stock. Ackman will be hoping that the model collapses under the strain of additional transparency - a "sunshine is the best disinfectant" strategy. Longs on the other hand, will argue that whatever the regulators make the company disclose is immaterial to the model and we'll be right back here arguing again :)
On another note, Ichan's lockup ends if the stock trades at over $75 for five consecutive days - so it will be interesting to see how long he stays in for after that expires. Although it is kind of personal for him so he might go along for the ride just to burn Ackman. Sort of a reverse version of the classic scene in Wall St 1 between Gecko and the rich Brit.
It has nothing to do with the Belgian Courts opinion. Here are my reasons.
1. HLF distributors on average derive the majority of their compensation by means of royalty payments.
2. The vast majority of HLF product is sold within the network. ( I realize that HLF claims that its product is consumed by network members, nevertheless this in network consumption fits the description of a pyramid scheme.)
3. A significant portion of HLF's marketing pitch is devoted to selling the "business opportunity" which an opportunity with an extremely low chance of being an worthwhile opportunity for it's prospects.
Thus I believe HLF fits the bill as a pyramid scheme. Whether or regulators will chose to enforce is another question entirely.
HLF does appear to be pyramid scheme but it doesn't look like anyone who matters cares. I think the more interesting question is whether or not HLF can sustain these levels of sales and profitability. As Ackman pointed out there is a certain fad aspect to the sales-distribution system. I believe the company called it "pop and drop".
I suspect Ackman Believes the model is unsustainable and hence he is willing to ride the short to its logical conclusion a.k.a the end of the earth. This stock is what happens when weak shorts meet weak longs.
I am short, but just because there is no Bejing Pingxu doesn't prove there is fraud. I wish it did but we need more evidence for proof.
I was just re-reading Phil Fisher tonight and came across this passage.
"Another method for insiders to enrich themselves is to get the corporation's vendors to sell through certain brokerage firms which perform little if any service for the brokerage commissions involved but which are owned by these same insiders and relatives or friends... There is only one real protection against abuses like these. This is to confine investments to companies the managements of which have a highly developed sense of trusteeship and moral responsibility to their stockholders. This is a point concerning which the 'scuttlebutt' method can be very helpful... Regardless of how high the rating may be in all other matters, however, if there is a serious question of the a lack of a strong management sense of trusteeship for stockholders, the investor should never seriously consider participating in such an enterprise." - Philip A. Fisher, Common Stocks and Uncommon Profits
Just to play devils advocate: This might indadvertedly raise TTS's profile with the SEC.
@ tomshiff
You say that employee has been dismissed, where did you get that information? What was the employee's name? When was this information released? Thanks in advance.
Well that's what makes a market isn't it. Good luck.
It does indeed seem to be the case that Gotham was wrong when it claimed that Beijing Pingxiu was a tile supplier when it is likely an export trading company. On the other hand, they were correct in asserting that it was an undisclosed related party, owned no less by the CEO's borther-in-law. This revelation, in addition to the declining insider ownership, the SPAC structure, and ongoing material weakness in financial reporting makes it seem plausible if not probable that this company is involved in dubious dealings. Last but not least the company is holding a massive amount of inventory, 75% more than Topps Tiles which has 320 stores in the U.K. and does ~25% more revenue than TTS. In my opinion, you'd have to be either very brave or very stupid to be long this stock for any extended period.
My understanding is that there is nothing abnormal about using an export trading company BUT not disclosing that it is owned by an employee and family member is definitely some kind of violation. So I guess the question is, if we've seen one cockroach, are there any more? In addition to that, TTS is running extremely high inventory levels. For instance, Topps Tiles based in the U.K. has never had an Days Sales Inventory level above 128 between 2010 and 2012. TTS DSI has been over 250 since 2007 and now stands at 411 on a TTM basis. On an absolute basis, Topps Tiles has 320 stores in the U.K., does and holds ~ $41 million (USD) worth of inventory. TTS on the other hand has 80 stores and $71.8 million of inventory, it also does 50% less revenue than Topps Tiles - so why is it holding 50% more inventory than a larger competitor?
Finally there is the gross margins. TTS has ~70% gross margins. At least 10% higher than any competitor, which begs the question how does it achieve that. Well we just don't know but when you see a company with massive gross margins, and massive inventory levels that has undisclosed related parties in China and a history of misrepresentation you have to wonder - is there something fishy going on....?
Thank you very much. I have zero legal experience and about as much with securities fraud so any perspective is helpful. Seems like there is nothing abnormal about using an export trading company BUT not disclosing that it is owned by an employee and family member is definitely some kind of violation. So I guess the question is, if we've seen one cockroach, are there any more? I am very surprised that many of these banks are recommending the stock at this point.