Tuesday, March 15, 2011

HP Makes it Up: Wall Street Cheers


Well, Hewlett Packard finally gave Wall Street’s Finest what they wanted.

Ever since Mark Hurd’s unceremonious dismissal, WSF have been pestering HP to define itself and its prospects, in much the same way that IBM defines itself and its prospects.

And yesterday HP finally did just that.

The answer, in case you haven’t seen it already, is this: HP will generate “at least” $7.00 in earnings per share by Fiscal Year 2014.

How, exactly, HP will get there is left somewhat to the imagination.

It does involve things like “connectivity” and “cloud” computing—two buzz words that are today’s version of the Internet Bubble-era “eyeballs”—and it relies, apparently, on the same kind of accounting hocus-pocus HP perfected during the Hurd years. (See “Hurd by Numbers” from August, 2010: http://jeffmatthewsisnotmakingthisup.blogspot.com/2010/08/hurd-by-numbers.html)

That’s because the $7.00 in “EPS” is a “Non-GAAP” figure—that is, it uses accounting principles that aren’t generally accepted by accountants.

For example, HP routinely excludes expenses related to past acquisitions to arrive at “Non-GAAP” earnings, even though it routinely includes the revenues from those acquisitions in its “Non-GAAP” sales.

If money managers could do that, they’d never have a down day, let alone a down year.

Still, Wall Street’s Finest like few things more than perceived certainty, and in this case the comfort of a specific earnings figure they can plug into their spreadsheets appears to be enough given the huzzahs from various quarters.

We will see how HP does in the next few years meeting that target, but we’ll make one bold prediction: since HP can exclude pretty much anything the company wants to exclude from “Non-GAAP” earnings so long as Wall Street’s Finest buy it, we will bet dollars to donuts the company will “beat the number” by at least a penny.


Jeff Matthews
I Am Not Making This Up

© 2011 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, March 04, 2011

Best Buy Part II: “Great Write-Offs, Guys!”

Wall Street loves a good write-off, and, sometimes, for good reason.

After all, stocks (and even, at times, Wall Street’s Finest) often anticipate news well in advance of when a company management team actually wakes up and smells the coffee—as, for example, when Best Buy recently announced it was closing its “Big Box” Best Buy stores in China.

Indeed, Best Buy more than once touted the expansion potential of its stores in that famously ruthless and price-sensitive consumer electronics market, as the following stories from our Bloomberg over the years demonstrate:

“Best Buys Says China is ‘Major Source of Growth’ as U.S. Slows”
John Liu, Bloomberg, February 22, 2008

—Best Buy Co., the largest U.S. consumer-electronics chain, will speed the rate at which it adds stores in China to tap surging growth in the Asian nation amid slowing sales momentum in its home market.
``China is without a doubt our major source of growth'' outside the U.S., Robert Willett, head of the company's international division, said at a briefing today in Shanghai by video conference. The nation will be ``the most dominant market for us outside the U.S.'' in three to five years, he said, without giving financial figures…


“Best Buy May Open 5 China Stores this Year”
John Liu, Bloomberg, August 29, 2009

—``China is the biggest growth opportunity in the world outside the U.S.,'' Bob Willett, head of Best Buy's international business, told reporters last night in the company's second store in Shanghai…
Sales and profitability at the company's first store in Shanghai's Xujiahui shopping district have exceeded the company's expectations, Willett said. ``We're delighted to be where we are,'' he added…


Still, Wall Street wasn’t convinced. And for good reason: not only didn’t China become “the most dominant market for us outside the U.S.” (that would be Canada, as of today), the company’s “delight” turned out to be wildly premature, as the more recent press report made clear:


Best Buy Shuts China Stores to Expand Five Star Retail Brand
Bloomberg News, February 22, 2011

—Best Buy Co., the world’s largest consumer electronics retailer, will close all of its nine Best Buy branded stores in China to focus on expanding the more profitable domestic chain it acquired five years ago.
“Store openings will be focused primarily on the profitable growth platforms of its Best Buy Mobile business in the United States and its Five Star business in China,” it said today in a statement…


One interesting point about that news item is that the press release on which it is based hit the Bloomberg at a little after 9 p.m. EST on the evening of President’s Day, a stock market holiday.

What better time to deliver news that doesn’t seem to jibe with previous PR?

A second interesting point about that news item is that is also carried word of a write-off:


The company estimates that these restructuring charges, which include asset impairments, settlement of lease obligations, facility closure costs, severance costs, and inventory adjustments [emphasis added] will total $225 million to $245 million, including approximately $60 million of cash settlement costs...

—“Best Buy Announces Actions to Generate Improved Returns for Shareholders”, February 21, 2011


What is interesting about that write-off, pleasing as it must have been to those among Wall Street’s Finest who had been hoping for some sort of something out of a company that has been plowing ahead with Old Economy store openings as if the Internet hadn’t happened, is the inclusion of “inventory adjustments” in the list of charges.

It seems like only a few months ago the company’s CFO was reassuring Wall Street’s Finest that Best Buy’s inventory items were “of good quality” and that the company “did not expect a significant risk from actions required to rebalance our inventory positions.

Why, it was just a few months ago!

“Rounding off the impact in our domestic segment from the softer sales performance, inventory levels naturally ended higher at quarter-end. Comparable domestic inventory levels finished up approximately 8%. The increase was largely driven by the revenue softness versus our expectations for categories such as TVs, notebook computers, and gaming. Looking ahead to the fourth quarter, we do not expect a significant risk from actions required to rebalance our inventory positions. We have a significant volume of business ahead of us -- still ahead of us in the largest quarter, and have the ability to moderate future purchases. In addition, the items currently on hand are of good quality.”

—Jim Muehlbauer, CFO, Best Buy, December 14, 2010


That was during the prepared comments; when pressed during the Q&A, the CFO elaborated:

“So, looking at what inventory trends are sitting there today -- and more specifically, what the specific inventory is, we feel that we're in a good position to move that inventory through the balance of Q4, and actually moderate purchases of future inventory. A lot of that stuff that's in our balance sheet today, 30 days from now, it will be gone. So we're really talking about what's our reorder pattern going forward.”
—Jim Muehlbauer, CFO, Best Buy, December 14, 2010


Now, the “inventory adjustments” included in the near-quarter-billion worth of charges announced in the late-night February 21 President’s Day press release may well have no bearing on the “stuff” that was on Best Buy’s balance sheet on December 14.

But we’ve always marveled at the number of green Insignia boxes and blue Dynex boxes on the shelves at our local Best Buy. Those Insignia and Dynex brands, of course, are Best Buy brands—part of the reason Best Buy’s gross margins have held up so well in a ruthless business.

“Inventory adjustments” aside, the most amusing part of the press release titled ‘Best Buy Announces Actions to Generate Improved Returns for Shareholders’ is, we think, the fact that roughly half the actions announced as being designed to “Generate Improved Returns for Shareholders”—closing Best Buy-branded stores in China and Turkey, and slowing new store openings in the U.S.—were 180 degrees opposite what the company had been talking up not long ago.

Indeed, here’s how CEO Brian Dunn reacted when one of Wall Street’s Finest dared suggest that Best Buy was evolving from “a growth story” into “more expense and return focused” on the December 14th call:

I have to jump in. We sort of reject the notion that we're not a growth Company as well. You're absolutely right that we're focused on expanding on our margin rate and extracting value for what we're able to do for customers, and actively pursuing businesses where we can make a difference that are margin-rich. But we absolutely see ourselves as a growth Company.

—Brian Dunn, Best Buy CEO, December 14, 2010


To which we anticipate Wall Street’s Finest saying, on the next conference call, “Great write-off, guys!”


Jeff Matthews
I Am Not Making This Up

© 2011 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.