Restoration Hardware versus West Elm

Restoration Hardware competes against a company called West Elm, which is owned by the publicly-traded Williams Sonoma (WSM).  SEC 10-K filings disclose metrics for both companies.  Restoration Hardware’s metrics are far superior:

• Higher “comparable brand revenue growth” overall
• Roughly three times higher sales per leased square footage (by my calculation)

Yet there are some curious things about Restoration Hardware:

• According to Google Trends data, West Elm has been trending stronger than the supposedly faster-growing Restoration Hardware.
• I’ve never seen a hot retailer shrink its store count.  Hot retailers look like West Elm.  They open stores because the rate of return on new stores is likely very high.

Advertisements

(Malone) Tracking stocks versus spinoffs

Advantages of spinoffs

Spinoffs can hurt bondholders if the debt covenants are weak and allow the company to spin off significant assets backing the debt.  This benefits the equity as the spin-off that is unencumbered with debt can issue debt at lower rates.

Spinoffs make a company easier to understand and allow more institutional investors to own the stock (e.g. sector/industry-specific funds).  This may increase the share price.  This can generate value if the stock is used as acquisition currency in rolling up poorly-managed companies (e.g. LBYTA).

Advantages of tracking stocks

LMCA update May 2014

Previously, I predicted that Liberty would repurchase its shares.  I was dead wrong.  Instead of buying back shares, Liberty decided to buy $124.5M in Charter shares at around $138.8 per share (press release).

I believe that Malone wants to play defensively by gaining more voting control over Charter and ensuring that Tom Rutledge can run the business without interference from other Charter shareholders.  (I honestly can’t think of any other reason why LMCA would buy CHTR shares instead of LMCA.  In the past, Liberty has bought back shares in the $110-$130+ range.  Its stocks have gone up since then so Liberty’s intrinsic value is higher now than in the past.)

LMCA’s 1.375% Cash Convertible Notes due 2023

Here’s what I think is going on with these notes.

1. They are tax advantaged.
2. The Black-Scholes options pricing model has some flaws over long time periods.  To some degree, Liberty is on the wrong side of it.  However, the tax benefits likely outweigh the disadvantages.
3. I suspect that the covenants on the debt are weak.

Altius Minerals Post Mortem Part 2

Sometimes I will search a company’s website to see what PDF files and other files they have uploaded onto the website (e.g. use Google to search “filetype:pdf site:JuniorMiningCompany.com”).  Junior mining companies often repost analyst reports, presumably for stock promotion purposes.  It so happens that I did not bother to do this until after I closed my Altius Minerals position at a large profit.  Had I figured this out earlier, I’m not so sure I would have invested in Altius.

Who did dumb deals with Warren Buffett?

Previously, I wrote about Buffett’s brilliant derivatives deals.  He will be paid to borrow money.  The deals are structured so that Berkshire Hathaway avoids counterparty risk (people who make dumb deals have a very high chance of blowing up).  So who are the counterparties?

According to this 2010 news article, two of the counterparties are Lehman Brothers and Goldman Sachs.  Buffett knows who all of his counterparties are.  Presumably, he had somebody shop around Wall Street to figure out who would give him the best pricing on these derivatives deals.  He should know which companies were and weren’t willing to make dumb derivatives deals.  He knows that Goldman Sachs was willing to do a dumb deal with him.  So I find it incredibly interesting that he decided to invest $5B into Goldman Sachs for preferred shares and warrants.  On the preferred shares, Buffett is exposed to any other number of dumb things that Goldman Sachs may have done.  If Goldman was essentially giving him free money, it was likely that it was giving away free money to other people.

(LMCA/LBTYA) Malone’s cable strategy

Here’s how I see it.

Some people are superstars at operating a cable company while the majority of people are bad at it.  One way to figure out who the superstars are is to figure out how much money is made per home passed.  Liberty’s investor day presentation uses adjusted EBITDA per home passed, which is a rough proxy for this.  (I would prefer to subtract maintenance capex from adjusted EBITDA.)  Each home passed represents a potential customer.  Good operators will turn a high percentage of its homes passed into customers and sell them as many services as possible (television, premium channels, Internet, voice, video-on-demand, etc.).

Liberty’s investor day presentation (PDF) compares various cable companies: