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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mark Marcellus who wrote (16069)	1/4/2003 5:32:22 PM
From: Don Earl	Read Replies (1) \| Respond to of 78595

Mark, In general, an established retail operation will typically see annual growth in the 4-6% range. 5% is about average and is about what they have to do to maintain a constant customer base while making up for inflation. Anything under 2% suggests problems, and a negative 10% is a blood bath. I spend a lot of time reading SEC filings and virtually the only reason I read them is to find reasons why not to buy stock in a particular company. What I'm looking for are places where the numbers don't add up, and places where accounting tricks make things look better than they are. It's often hard for me to communicate exactly why the numbers don't add up after a quick look because the process has become so automatic it takes place more at a gut level, but if there is adequate disclosure, I can normally dig it out through some number crunching. After recent discussions, I pulled up the 10K for FY 1992 as I'm sometimes able to hit pay dirt by going through older filings. The most interesting item I ran across was disclosure on average new store costs. In 1992 the average cost to build and stock a new store was a tad under $16 million each. In 2002, capex was expected to be $3.6 billion to open 200 new stores, which works out to $18 million each. It just plain isn't possible for them to be building stores for only 15% above the costs of 10 years ago. The cost of building materials, labor and real estate have at least doubled in that period of time. At $30 million per store, which I would consider to be a low estimate, the cost to build 200 new stores a year is $6 billion. Their operating results don't come any where near covering that cost, but the money has to come from some place. The bottom line is there is absolutely no good business reason to create special purpose entities to shuffle liabilities off the balance sheet except to deceive shareholders. Being the cynical individual that I am, I also tend to assume I'm just looking at the tip of the iceberg when I run across these kind of discrepancies. What it comes down to is if a company is afraid to disclose the true condition of their company, I'm afraid to invest in it. <<<I think the moves that Nardelli has made are intelligent responses to the current environment that will pay off in the long run.>>> For $30 million a year in compensation, Nardelli has managed to get same store sales down 10% so far by cutting inventory by 15% and keeping staffing levels below the minimum needed to service customers. You can't blame it on the economy, because they service the only part of the economy that has remained strong. This is against a back drop of Lowe's producing respectable same store sales growth in areas which are demographically identical in most cases. The so called canibalization spin doesn't account for the drop, because both companies use the strategy, and where HD used to be up in that area, LOW is still up. Nardelli tried to fix something that wasn't broken and got clobbered.