Today, despite my concerns about the economy, I bought 50 shares of GE, 330 shares of MMM, 100 shares of IF, and some shares of SCUR.
GE: I don't believe I can completely time the market, so I will average down if GE drops to the mid-20's.
MMM: I missed the ex-dividend date for MMM, but this company still looks undervalued at these prices. I hope to sell MMM when it goes to anywhere from 78 to 84. Although I like this stock, I am just too concerned that an overall market correction will bring down good names along with bad ones.
IF: Indonesia is going to be a good investment in the long term. My plan is to hold this fund for many years.
SCUR: This is a value play that contains quite a bit of risk. Its balance sheet looks stronger than what its stock price indicates. It is also trading below its book value. I will revisit this stock in a year or two. If we are coming out of a recession, small caps will be the first stocks to lead the way.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
"And if an epitaph be my story, I'd have a short one ready for my own: I had a lover's quarrel with the world." -- Robert Frost
Friday, May 23, 2008
Thursday, May 22, 2008
Trimble Navigation Systems Shareholder Meeting, May 22, 2008
I attended the Trimble Navigation Limited (TRMB) shareholder meeting, which was geared towards its employees rather than shareholders. Of the 100 or so people there, only about five of us were non-employee shareholders. There wasn't even a Q&A session at the end of the two hour meeting, which was highly unusual. The meeting seemed more like an internal company pow-wow, where the CEO was focused on motivating his employees, than an actual shareholder meeting.
I originally bought this stock a few months ago because it appeared to be the next GE and its price seemed too low (at the time). However, even to this day, I cannot understand the company's products very well. The CEO, Steven Berglund, spent the first part of the two hour meeting talking about how the company had "redefined" itself throughout the years and now focused on construction, advanced devices, mobile hardware, "ready-mix" solutions (just the first of very vague and confusing terms used throughout the evening), and precision agriculture. He said that TRMB does not have a growth strategy based on acquisitions, and only acquires companies to enter new markets. He focused on the fact that the "international marketplace is key to our success," and later referred to "aggressive internationalism" as the company's plan.
He indicated that he wanted to target customers in waste management, farming, forestry, and utilities. The CEO stated that in most of the markets Trimble was involved, the market penetration (a favorite phrase of CEOs) was low, and was usually around only 30%. Therefore, Trimble did not have to use words like "product life cycle" or "saturation." There was some pump-it-up phraseology of the "annihilation of complacency" and "humility and caution" being goals of the company.
Some very vague terms were used, such as saying that the company's products require "concept-selling capabilities," and Trimble "sells people things they don't know they need." For a value investor and Buffett acolyte such as myself, these phrases made me want to run for the hills.
After the CEO's presentation, there were several presenters, all of whom were touting some company product and who were unfortunately completely dull. I have heard of Six Sigma Black Belts, but now I got to hear about "Kaizen facilitators" and "customized improvement initiatives" and other terms only a business major could love. There were numerous graphs and pie charts showing how the company's products incorporated several different advantages for its customers. I felt like I was in a corporate Dilbert meeting.
But that's just it--Trimble is sort of like your Dilbert company. They are high-tech cost-saving consultants, like the guy who comes in your office and says you can save 100 million dollars by ordering fewer paper clips or by removing the olive from airplane meals. The difference is that Trimble sells high tech products that allow its customers to save money. There's no doubt that its product line is impressive--by having so many software and hardware engineers working in several different divisions, Trimble can deliver everything from its own IC Chip, boards that use other companies' IC chips, GPS systems (including ones that tell a farmer exactly where he is in his field), spatial imaging software, radios, antennas, GNSS sensors, and many other products.
There were some exhibits of the company's products, focusing on farmers, construction, GPS devices, highway projects, and reference design boards. Obviously, Trimble has a diverse product line and a diverse array of customers.
Because I still had a hard time understanding the business, and was very surprised at the lack of a Q&A session, and I went up to CEO Steven Berglund after the meeting to ask him some questions. I am not sure if it was the way I approached him, but he seemed upset that I questioned the lack of a Q&A session; to his credit, however, he did spend about 3 to 5 minutes answering my questions (in a defensive, brusque manner). I asked him about his employee breakdown. He asked which division I was talking about, but finally indicated that software engineers, then hardware engineers, then salespersons made up much of his workforce. I asked him who his major customers were. Again, he retorted that there wasn't any one big customer, not even the Caterpillar, CNH, and Nikon companies I mentioned (they were mentioned in the 10-K) . He replied that I should go read the 10-K. But he obviously hadn't read carefully all of the 10-K, because he would have known that I referred to CAT, Nikon, and CNH from page 20: "We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon and CNH Global."
By this time, CEO Steven Berglund was becoming more and more agitated, so I thought I'd ask him just one more question and move on. I had read in the 10-K that salespersons were paid in part on commissions, and asked him whether a significant number of his salesforce were independent contractors rather than employees. After some brusque comments asking me what I was talking about, he finally said that no, as far as he knew, the only independent contractors were "dealers," and that his salespersons were employees. That is a good sign, as it indicates that Trimble employees would be more loyal to the company as compared to independent contractors.
The food spread was fabulous, but lacked coffee and sweets. It was basically a buffett dinner style with shish kabobs, dips, bread, vegetables, and chicken entrees.
I was disappointed that CEO Steven Berglund was so brusque, as he appeared to be a good public speaker, but I suppose when you're in that position, and your stock has done well, you can afford to be that way. I am waiting on the sidelines on this stock because of its recent run-up. Many of the potential customers Trimble wants to sell to--such as local government and smaller businesses--may be cash-strapped if the economy doesn't rebound. If you believe that companies will be more likely to hire outside consultants to show them how to save money, you would probably like Trimble Navigation. There's nothing like seeing increased costs to make a CEO jump at the chance of finding more efficient ways of doing business. But if you believe that in a recession, all companies try to save money in ways that don't require paying for major products or new ways of doing things, then you may dislike Trimble's strategy. In addition, the company didn't seem to have any devices that relied on solar or nuclear power, or some other non-semiconductor-based environmental product. I kept thinking during the meeting that there must be some reason why there is such low market penetration in all of the areas Trimble is trying to sell into. Unless Trimble has re-invented the wheel--which it very well may have done, as I've never seen some of the products it offers--there will always be competitors going after the low-hanging fruit. It appears Trimble may be going after the more specialized, difficult-to-get rewards. A recession may not be kind to this company, but perhaps the big-ticket items Trimble sells will be recession-resistant. The CEO told me that his company "sells productivity." Personally, I am more of a skeptic, but if you like the sound of a company that is diversified and sells productivity, then this is the stock for you. I just wish CEO Steven Berglund hadn't been so brusque and understood that a shareholder meeting was also designed for non-employee shareholders to understand his company.
I originally bought this stock a few months ago because it appeared to be the next GE and its price seemed too low (at the time). However, even to this day, I cannot understand the company's products very well. The CEO, Steven Berglund, spent the first part of the two hour meeting talking about how the company had "redefined" itself throughout the years and now focused on construction, advanced devices, mobile hardware, "ready-mix" solutions (just the first of very vague and confusing terms used throughout the evening), and precision agriculture. He said that TRMB does not have a growth strategy based on acquisitions, and only acquires companies to enter new markets. He focused on the fact that the "international marketplace is key to our success," and later referred to "aggressive internationalism" as the company's plan.
He indicated that he wanted to target customers in waste management, farming, forestry, and utilities. The CEO stated that in most of the markets Trimble was involved, the market penetration (a favorite phrase of CEOs) was low, and was usually around only 30%. Therefore, Trimble did not have to use words like "product life cycle" or "saturation." There was some pump-it-up phraseology of the "annihilation of complacency" and "humility and caution" being goals of the company.
Some very vague terms were used, such as saying that the company's products require "concept-selling capabilities," and Trimble "sells people things they don't know they need." For a value investor and Buffett acolyte such as myself, these phrases made me want to run for the hills.
After the CEO's presentation, there were several presenters, all of whom were touting some company product and who were unfortunately completely dull. I have heard of Six Sigma Black Belts, but now I got to hear about "Kaizen facilitators" and "customized improvement initiatives" and other terms only a business major could love. There were numerous graphs and pie charts showing how the company's products incorporated several different advantages for its customers. I felt like I was in a corporate Dilbert meeting.
But that's just it--Trimble is sort of like your Dilbert company. They are high-tech cost-saving consultants, like the guy who comes in your office and says you can save 100 million dollars by ordering fewer paper clips or by removing the olive from airplane meals. The difference is that Trimble sells high tech products that allow its customers to save money. There's no doubt that its product line is impressive--by having so many software and hardware engineers working in several different divisions, Trimble can deliver everything from its own IC Chip, boards that use other companies' IC chips, GPS systems (including ones that tell a farmer exactly where he is in his field), spatial imaging software, radios, antennas, GNSS sensors, and many other products.
There were some exhibits of the company's products, focusing on farmers, construction, GPS devices, highway projects, and reference design boards. Obviously, Trimble has a diverse product line and a diverse array of customers.
Because I still had a hard time understanding the business, and was very surprised at the lack of a Q&A session, and I went up to CEO Steven Berglund after the meeting to ask him some questions. I am not sure if it was the way I approached him, but he seemed upset that I questioned the lack of a Q&A session; to his credit, however, he did spend about 3 to 5 minutes answering my questions (in a defensive, brusque manner). I asked him about his employee breakdown. He asked which division I was talking about, but finally indicated that software engineers, then hardware engineers, then salespersons made up much of his workforce. I asked him who his major customers were. Again, he retorted that there wasn't any one big customer, not even the Caterpillar, CNH, and Nikon companies I mentioned (they were mentioned in the 10-K) . He replied that I should go read the 10-K. But he obviously hadn't read carefully all of the 10-K, because he would have known that I referred to CAT, Nikon, and CNH from page 20: "We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon and CNH Global."
By this time, CEO Steven Berglund was becoming more and more agitated, so I thought I'd ask him just one more question and move on. I had read in the 10-K that salespersons were paid in part on commissions, and asked him whether a significant number of his salesforce were independent contractors rather than employees. After some brusque comments asking me what I was talking about, he finally said that no, as far as he knew, the only independent contractors were "dealers," and that his salespersons were employees. That is a good sign, as it indicates that Trimble employees would be more loyal to the company as compared to independent contractors.
The food spread was fabulous, but lacked coffee and sweets. It was basically a buffett dinner style with shish kabobs, dips, bread, vegetables, and chicken entrees.
I was disappointed that CEO Steven Berglund was so brusque, as he appeared to be a good public speaker, but I suppose when you're in that position, and your stock has done well, you can afford to be that way. I am waiting on the sidelines on this stock because of its recent run-up. Many of the potential customers Trimble wants to sell to--such as local government and smaller businesses--may be cash-strapped if the economy doesn't rebound. If you believe that companies will be more likely to hire outside consultants to show them how to save money, you would probably like Trimble Navigation. There's nothing like seeing increased costs to make a CEO jump at the chance of finding more efficient ways of doing business. But if you believe that in a recession, all companies try to save money in ways that don't require paying for major products or new ways of doing things, then you may dislike Trimble's strategy. In addition, the company didn't seem to have any devices that relied on solar or nuclear power, or some other non-semiconductor-based environmental product. I kept thinking during the meeting that there must be some reason why there is such low market penetration in all of the areas Trimble is trying to sell into. Unless Trimble has re-invented the wheel--which it very well may have done, as I've never seen some of the products it offers--there will always be competitors going after the low-hanging fruit. It appears Trimble may be going after the more specialized, difficult-to-get rewards. A recession may not be kind to this company, but perhaps the big-ticket items Trimble sells will be recession-resistant. The CEO told me that his company "sells productivity." Personally, I am more of a skeptic, but if you like the sound of a company that is diversified and sells productivity, then this is the stock for you. I just wish CEO Steven Berglund hadn't been so brusque and understood that a shareholder meeting was also designed for non-employee shareholders to understand his company.
Shutterfly Shareholder Meeting, May 22, 2008
Shutterfly's (SFLY) meeting was as simple as Netflix's but with a completely different attitude. The first thing you notice is that the employees are happy and actually like being there. The vibe is absolutely wonderful, and if you are looking for a job in Redwood City, CA, you may want to apply at this company. I've never seen so many friendly people at a shareholder meeting. Of course, I was the only person there not on the payroll, so I did look out of place. Rather than ignore me, however, the staff approached me with interest.
The format of the meeting was exactly the same as NFLX's. No presentation, just the company logo in the back. As soon as the formal part of the meeting was over, we went straight to the Q&A session. I was the only one who asked questions.
The formal part of the presentation was well-organized. Specific employees had been trained beforehand to make motions and second them. They even began their motions with "Mr. Secretary," which added to the professional atmosphere. The food was standard--some fruit, some cookies, and coffee. These food items were near some company products, such as children's books, mugs, and other merchandise, showing SFLY's diverse product line.
First, I have to say that I was impressed with SFLY's CEO, Jeffrey Housenbold. Mr. Housenbold is one of the most articulate and prepared CEOs I have ever met. His responses to my questions were detailed and on point. My first question actually combined three issues, and he methodically responded to each issue with statistics and easy-to-understand responses that bolstered the company's image. Not once did I feel as if I was getting a prepared line--he was a breath of fresh air, especially after the NFLX CEO's terse responses. (SFLY's meeting, by the way, was held at 11AM, another indicator that the company wanted to welcome shareholders rather than drive them away by holding the meeting at 3PM.) SFLY's proxy statement also contains pictures and bios of the management team, which is an astute business move, because the pictures personalize the company more.
Some background from the company's Yahoo's Finance profile page: Shutterfly "produces and sells photo books; personalized calendars; greeting cards; photo-based merchandise, including mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets, and keepsake boxes; ancillary products, such as frames, photo albums, and scrapbooking accessories; and photo prints. It also produces customized children's books. "
My first question was what competitive advantage SFLY had over Flickr, whether the company was going to enter into partnerships like Flickr and Yahoo's, and what strategies the company had for growth.
Mr. Housenbold responded that SFLY manufactured its own products and was capitalizing on demand for various products, such as calendars, mugs, scrapbooking, and other merchandise. [from 10K: SFLY owns production facilities in Hayward, CA and Charlotte, NC, and may open more facilities in Charlotte.] He said that SFLY's business model was "permission-based sharing of memories," versus the less personal Flickr model. He indicated that less than 1% of Flickr's users generated about 40% of their content (my number may be incorrect, as I was quickly taking notes--but it was a very high number) and unlike SFLY, Flickr's revenue came from advertising rather than directly from its users and customers. Also, because SFLY controls its own manufacturing, they can enforce high quality standards, while Flickr cannot. The CEO continued to focus on how his company delivered quality. It was a flashback to Peet's vision, where Peet's CEO was basically saying that the company was going to focus on quality and let the product speak for itself through word of mouth.
Mr. Housenbold then talked about "customer centricity," a fun phrase. He said that his company offered 49 combinations of designs and its software and website were easy to use. On the other hand, Flickr did not have a direct e-commerce model and relied on advertising revenue, which implied that Flickr would be more beholden to its advertisers than its actual customers and consumers.
He said that Yahoo/Flickr had achieved [only] around 4 million dollars of revenue from 100 million accounts through ad-based generation (these numbers was be off due to my slow handwriting and attempt to capture all of his responses verbatim). In fact, Yahoo had actually shut down part of Flickr because it wasn't generating sufficient ad revenue. Meanwhile, with respect to growth, in 1999, SFLY started with 2 million customers and now had 9 million customers. The company was benefiting from a "viral marketing effect," where its brand name was entering the public sphere through its reputation and word of mouth on the internet.
As far as partnerships were concerned, his company has partnerships with Amazon.com, Border's, Target, and many other major companies. 78% of SFLY's revenue came from existing customers, which is impressive but indicates that the company isn't growing its customer base very quickly.
My second question was that I now understood how SFLY was different from Flickr (ad revenue business model vs. direct e-commerce model), but how was his company different from Snapfish? (a more similar competitor)
Mr. Housenbold first said that Snapfish (http://www.snapfish.com/) didn't own any manufacturing facilities, a hit on the quality of their products. He said that Snapfish has said they want to be the Walmart of online photos, and they are gearing their services towards consumers who are more "price-conscious." It was a very nice dig, i.e., if you're poor and dislike quality, you go to Snapfish, not us. He also politely attacked Snapfish's loyalty to its customers by saying that after 6 months of non-activity, Snapfish deletes all memory. Basically, SFLY was "Nordstrom," while Snapfish was Walmart. And if that style of polite dismantling of a competitor doesn't impress you, he ended with this riposte: as far as he knew, Snapfish has never been profitable, while SFLY has generated a profit. If I was Snapfish's CEO, I would have felt compelled to commit seppuku after hearing how different the companies were. Snapfish's own website states that it is the "best value in photography," which doesn't sound so great after hearing the comparison to Walmart. One wants a quality product when it comes to memories.
My friend, who has used SFLY's website, said that she was impressed with it. She said that the website, for free, allows users to modify their pictures, making them lighter, darker, etc. She said she was also impressed with the available products, such as the mugs. She hoped that SFLY would allow consumers to continue to keep their photos stored online for free. I indicated that the company had an incentive to allow free photo storage, because it would encourage consumers to buy SFLY's products in the future.
SFLY's 10K was one of the best-drafted 10Ks I've ever read. It had a great explanation of the U.S. Supreme Court ruling that established the principle of non-taxation for internet companies lacking a proper nexus with certain states. The 10K doesn't list any cases by name, but it is referring primarily to Quill v. North Dakota (1992). See the following webpage for more information on the list of other relevant cases, i.e. Oklahoma Tax Comm'n v Jefferson Lines (1995) and Complete Auto Transit v Brady (1977):
http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/
interstatetax.htm
Basically, a company needs to have a sufficient nexus with a state before being able to tax the company. A physical presence, such as a warehouse with employees, is obviously sufficient to form the necessary connection because the company derives benefits from the state, but there are many gray areas. SFLY states that it is collecting sales and use taxes where it has "property and/or employees." (10K, page 25)
If it's not obvious by now, I am very impressed with this company. However, its share price hovers near a 52 week low. Is SFLY a value play? Here is my thinking:
1) Why does this company need to be public rather than private? There are no major liability issues or a need for money to expand or build stores. The CEO never mentioned that he wanted to build retail stores to sell directly to the public. It seems very strange that such a company would prefer to be public and endure Sarbanes-Oxley compliance and other issues that divert resources from serving its customers. I predict that at some point, perhaps within five years, if the stock price remains stagnant, this company will be bought out, merge, or go private.
2) Flickr actually does allow permission-based photo sharing--you can set certain photos to be seen only by your friends and family and can restrict permissions. But that's a minor issue, because Flickr obviously doesn't allow its users to modify photos and is clearly geared towards a different audience, just as the CEO indicated.
3) The majority (52%) of SFLY's revenue comes in the last quarter of the year, probably in X-Mas and Thanksgiving sales. (From 10K, page 14)
4) If it can convince Wall Street that it will be able to grow at double-digit rates, SFLY's stock price will increase. For now, however, I don't see how SFLY is going to achieve a high growth rate. It doesn't really advertise--and it seems like it's taking the Peet's grass roots marketing model, where word of mouth drives growth. But the problem with a company like SFLY using Peet's marketing strategy of "quality + reputation + product-sells-itself = success" (my words, not theirs) is that Peet's has retail stores, making it is easier for others to recognize its products. I am sure you can all recognize a Peet's paper cup instantly if you saw one. But SFLY's products won't enter the mainstream as readily as a food item. Instead, the growth will probably happen as family members, the ones most likely to pay for products like children's books, get introduced to the services and products. If SFLY's strategy is focused on families and grandparents, that's a slower way to grow than trying to get national brand name recognition through general advertising and by directing traffic to its website.
5) SFLY is currently being sued by Fotomedia and Parallel Networks in the Eastern District of Texas. (What's so special about the Eastern District of TX? There's definitely some forum shopping going on there.) I suspect it may be difficult to see future prospects clearly until these lawsuits get resolved.
I will keep my eye on this company. The CEO was friendly and humble and came up to me after the meeting to talk. He indicated that he was a user of SFLY before he became the CEO, which is another plus. Another shareholder came late to the meeting, and the CEO sought him out and went to speak to him. This is a friendly company that should continue to have a great reputation.
See also, Interview with Mr. Housenbold: http://sramanamitra.com/2008/03/20/
shutterflys-strategy-a-conversation-with-ceo-jeff-housenbold-part-1/
The format of the meeting was exactly the same as NFLX's. No presentation, just the company logo in the back. As soon as the formal part of the meeting was over, we went straight to the Q&A session. I was the only one who asked questions.
The formal part of the presentation was well-organized. Specific employees had been trained beforehand to make motions and second them. They even began their motions with "Mr. Secretary," which added to the professional atmosphere. The food was standard--some fruit, some cookies, and coffee. These food items were near some company products, such as children's books, mugs, and other merchandise, showing SFLY's diverse product line.
First, I have to say that I was impressed with SFLY's CEO, Jeffrey Housenbold. Mr. Housenbold is one of the most articulate and prepared CEOs I have ever met. His responses to my questions were detailed and on point. My first question actually combined three issues, and he methodically responded to each issue with statistics and easy-to-understand responses that bolstered the company's image. Not once did I feel as if I was getting a prepared line--he was a breath of fresh air, especially after the NFLX CEO's terse responses. (SFLY's meeting, by the way, was held at 11AM, another indicator that the company wanted to welcome shareholders rather than drive them away by holding the meeting at 3PM.) SFLY's proxy statement also contains pictures and bios of the management team, which is an astute business move, because the pictures personalize the company more.
Some background from the company's Yahoo's Finance profile page: Shutterfly "produces and sells photo books; personalized calendars; greeting cards; photo-based merchandise, including mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets, and keepsake boxes; ancillary products, such as frames, photo albums, and scrapbooking accessories; and photo prints. It also produces customized children's books. "
My first question was what competitive advantage SFLY had over Flickr, whether the company was going to enter into partnerships like Flickr and Yahoo's, and what strategies the company had for growth.
Mr. Housenbold responded that SFLY manufactured its own products and was capitalizing on demand for various products, such as calendars, mugs, scrapbooking, and other merchandise. [from 10K: SFLY owns production facilities in Hayward, CA and Charlotte, NC, and may open more facilities in Charlotte.] He said that SFLY's business model was "permission-based sharing of memories," versus the less personal Flickr model. He indicated that less than 1% of Flickr's users generated about 40% of their content (my number may be incorrect, as I was quickly taking notes--but it was a very high number) and unlike SFLY, Flickr's revenue came from advertising rather than directly from its users and customers. Also, because SFLY controls its own manufacturing, they can enforce high quality standards, while Flickr cannot. The CEO continued to focus on how his company delivered quality. It was a flashback to Peet's vision, where Peet's CEO was basically saying that the company was going to focus on quality and let the product speak for itself through word of mouth.
Mr. Housenbold then talked about "customer centricity," a fun phrase. He said that his company offered 49 combinations of designs and its software and website were easy to use. On the other hand, Flickr did not have a direct e-commerce model and relied on advertising revenue, which implied that Flickr would be more beholden to its advertisers than its actual customers and consumers.
He said that Yahoo/Flickr had achieved [only] around 4 million dollars of revenue from 100 million accounts through ad-based generation (these numbers was be off due to my slow handwriting and attempt to capture all of his responses verbatim). In fact, Yahoo had actually shut down part of Flickr because it wasn't generating sufficient ad revenue. Meanwhile, with respect to growth, in 1999, SFLY started with 2 million customers and now had 9 million customers. The company was benefiting from a "viral marketing effect," where its brand name was entering the public sphere through its reputation and word of mouth on the internet.
As far as partnerships were concerned, his company has partnerships with Amazon.com, Border's, Target, and many other major companies. 78% of SFLY's revenue came from existing customers, which is impressive but indicates that the company isn't growing its customer base very quickly.
My second question was that I now understood how SFLY was different from Flickr (ad revenue business model vs. direct e-commerce model), but how was his company different from Snapfish? (a more similar competitor)
Mr. Housenbold first said that Snapfish (http://www.snapfish.com/) didn't own any manufacturing facilities, a hit on the quality of their products. He said that Snapfish has said they want to be the Walmart of online photos, and they are gearing their services towards consumers who are more "price-conscious." It was a very nice dig, i.e., if you're poor and dislike quality, you go to Snapfish, not us. He also politely attacked Snapfish's loyalty to its customers by saying that after 6 months of non-activity, Snapfish deletes all memory. Basically, SFLY was "Nordstrom," while Snapfish was Walmart. And if that style of polite dismantling of a competitor doesn't impress you, he ended with this riposte: as far as he knew, Snapfish has never been profitable, while SFLY has generated a profit. If I was Snapfish's CEO, I would have felt compelled to commit seppuku after hearing how different the companies were. Snapfish's own website states that it is the "best value in photography," which doesn't sound so great after hearing the comparison to Walmart. One wants a quality product when it comes to memories.
My friend, who has used SFLY's website, said that she was impressed with it. She said that the website, for free, allows users to modify their pictures, making them lighter, darker, etc. She said she was also impressed with the available products, such as the mugs. She hoped that SFLY would allow consumers to continue to keep their photos stored online for free. I indicated that the company had an incentive to allow free photo storage, because it would encourage consumers to buy SFLY's products in the future.
SFLY's 10K was one of the best-drafted 10Ks I've ever read. It had a great explanation of the U.S. Supreme Court ruling that established the principle of non-taxation for internet companies lacking a proper nexus with certain states. The 10K doesn't list any cases by name, but it is referring primarily to Quill v. North Dakota (1992). See the following webpage for more information on the list of other relevant cases, i.e. Oklahoma Tax Comm'n v Jefferson Lines (1995) and Complete Auto Transit v Brady (1977):
http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/
interstatetax.htm
Basically, a company needs to have a sufficient nexus with a state before being able to tax the company. A physical presence, such as a warehouse with employees, is obviously sufficient to form the necessary connection because the company derives benefits from the state, but there are many gray areas. SFLY states that it is collecting sales and use taxes where it has "property and/or employees." (10K, page 25)
If it's not obvious by now, I am very impressed with this company. However, its share price hovers near a 52 week low. Is SFLY a value play? Here is my thinking:
1) Why does this company need to be public rather than private? There are no major liability issues or a need for money to expand or build stores. The CEO never mentioned that he wanted to build retail stores to sell directly to the public. It seems very strange that such a company would prefer to be public and endure Sarbanes-Oxley compliance and other issues that divert resources from serving its customers. I predict that at some point, perhaps within five years, if the stock price remains stagnant, this company will be bought out, merge, or go private.
2) Flickr actually does allow permission-based photo sharing--you can set certain photos to be seen only by your friends and family and can restrict permissions. But that's a minor issue, because Flickr obviously doesn't allow its users to modify photos and is clearly geared towards a different audience, just as the CEO indicated.
3) The majority (52%) of SFLY's revenue comes in the last quarter of the year, probably in X-Mas and Thanksgiving sales. (From 10K, page 14)
4) If it can convince Wall Street that it will be able to grow at double-digit rates, SFLY's stock price will increase. For now, however, I don't see how SFLY is going to achieve a high growth rate. It doesn't really advertise--and it seems like it's taking the Peet's grass roots marketing model, where word of mouth drives growth. But the problem with a company like SFLY using Peet's marketing strategy of "quality + reputation + product-sells-itself = success" (my words, not theirs) is that Peet's has retail stores, making it is easier for others to recognize its products. I am sure you can all recognize a Peet's paper cup instantly if you saw one. But SFLY's products won't enter the mainstream as readily as a food item. Instead, the growth will probably happen as family members, the ones most likely to pay for products like children's books, get introduced to the services and products. If SFLY's strategy is focused on families and grandparents, that's a slower way to grow than trying to get national brand name recognition through general advertising and by directing traffic to its website.
5) SFLY is currently being sued by Fotomedia and Parallel Networks in the Eastern District of Texas. (What's so special about the Eastern District of TX? There's definitely some forum shopping going on there.) I suspect it may be difficult to see future prospects clearly until these lawsuits get resolved.
I will keep my eye on this company. The CEO was friendly and humble and came up to me after the meeting to talk. He indicated that he was a user of SFLY before he became the CEO, which is another plus. Another shareholder came late to the meeting, and the CEO sought him out and went to speak to him. This is a friendly company that should continue to have a great reputation.
See also, Interview with Mr. Housenbold: http://sramanamitra.com/2008/03/20/
shutterflys-strategy-a-conversation-with-ceo-jeff-housenbold-part-1/
Peet's Coffee and Tea Shareholder Meeting, May 21, 2008
I enjoy going to Peet's shareholder meetings because they always give away goodies, and their food and coffee are great (the "Special Offering" coffee, probably the Anniversary Blend, was great--much better than the Pike's Place Starbucks blend). This year, shareholders who attended the meeting in Emeryville, CA received a very sturdy bag made with some kind of recyclable material with "Peetniks" inscribed on it. Inside the bag were a pound of Peet's Coffee, Anniversary Blend, and a 1/4 lb. tin of Peet's Anniversary Breakfast Blend tea (Special Offering, 2008).
Patrick O'Dea, Peet's CEO, provided a lot of information in this 2007 interview:
Interview with O'Dea
This part of the interview was interesting:
Peet's is still true to its roots, when it was just a small company with a few employees. As a result of having many long-time employees, it runs its meetings like a big family event. This year, Gordon Bowker was honored for his contributions. He was one of the founders of Starbucks. As some of you may know, Peet's was the original Starbucks, and back then, Starbucks bought its beans from Alfred Peet. (Peet's first store opened in Berkeley, CA, but Peet's is still incorporated in Washington State, a vestige of the original Starbucks connection.) When Howard Schultz came in and bought the first Starbucks company from the founders, those founders then went on to found Peet's, due to the differences in philosophy at the time about whether consumers would pay 3 dollars for a cup of coffee. Mr. Bowker was ribbed for being the creator of the original Starbucks logo (with the ubiquitous mermaid). He is a soft-spoken man and accepted the award, which was a coffee tryer (looks like a Civil War pistol--it's used to taste coffee when its freshly roasted) mounted on a plaque. He told a story about how Mr. Peet went out of his way to ensure customer satisfaction, even with testy customers.
Here are the meeting's highlights:
The meeting took about two hours. The CEO mentioned that "coffee comes out of roasting like popcorn," and Peet's wanted their customers to be able to smell the coffee (Schultz expressed the same sentiment this year in SBUX's Seattle's meeting). The CEO said that Peet's was a "retailer who happens to sell coffee." Then, he touted the growth of the company. In 2002, Peet's had 1450 employees; now, Peet's has 3750 employees, a sign of how much it has expanded. Peet's emphasized that was upgrading its technology to improve retailing operations. It has an "ERP" system that allows it to coordinate and track not just inventory, but financial information, orders, and other aspects of the retailing operation. CEO O'Dea, after the meeting, even showed me that he had instant access to the Peet's retail managers by pulling out his Blackberry and instantly looking up the particular store I had indicated was not receiving enough vegan chocolate chip cookies.
Peet's touted its stock performance and said it had about 20% annual growth in earnings per share (this was non-GAAP, however), and had done well, especially when compared with the S&P 600 restaurant index. Then, a video was shown about the history of Peet's, broken up into different time periods, from 1966-1983, 1984-1996, etc.
After Mr. Bowker was presented with his plaque, another gentleman, a tall, red-headed male, Doug Welsh, got up to talk about Peet's beans and its efforts to search for the best beans available. This gentleman appeared to be a consummate professional, even more so than the CEO, who is prone to making some off-the-cuff statements (like, "Everything comes to Cincinnati 5 years late," in response to a question about why Peet's wasn't expanding in the Midwest). Mr. Welsh appears to be a vital part of the management team and would be my pick for the next CEO. A video presentation about Peet's in different countries ensued. The presentation focused on activities in Rwanda, Tanzania, and Nicaragua, and how Peet's had helped the local citizens basically become entrepreneurs, and now had exclusive rights to their coffee.
The Q&A session was insightful, but the problem was that no one went around the room with microphones, so it was hard to hear the questions, and the CEO didn't always repeat them.
The first question was about stock options. Peet's is involved in litigation for its stock option grant practices, so this question seemed a bit of a plant. In case you are interested, here is the CEO's salary:
O'Dea Compensation Report
The CEO mentioned that the company was reducing the level of options that the management team would be entitled to, and the goal was not to exceed 2% of the outstanding shares in order to keep it under the 2.8% institutional investor ownership goal. (The CEO's response was confusing, because a quick Yahoo finance search shows that institutional investors own 93.1% of the stock, and insiders own 3.91%.) The CEO said that initially, when new management is hired, option grants are high to attract key talent, but the level of option grants eventually decreases.
There was a mention that the Alameda facility was a gold-certified LEEDs facility, which means that it has achieved the highest level of compliance with environmental best practices.
The CEO said that he was looking forward to the Tanzania Kilimanjaro coffee.
A shareholder asked a question about costs, especially rising fuel costs. The CEO said that fuel wasn't a major cost.
14% of the expenses are related to buying coffee and tea (futures were pricing coffee at 1.38 and tea at 1.70--he didn't elaborate--see Futures Pricing for more)
3% of costs are related to milk.
Peet's buys its coffee 9 to 12 months ahead of time, so it is well-positioned to handle cost increases.
Peet's plans on having a total of 190 stores by the end of 2008. A question was asked about how many they planned on having in 2009. The CEO said he didn't know, but they had 140 stores in California. This is what steered the conversation into Peet's growth strategy. The CEO said that Peet's was focusing on growing its home delivery, office sales, and grocery store business/food services. (For an example of what might be sold to an office, see http://www.associatedcoffee.com/coffee_brands/peets.htm#colibri)
Peet's doesn't plan on television advertising at all. It wants to get the coffee in the consumers' hands and get business through word of mouth and quality. Its marketing campaign is basically a "grass roots" campaign (on the plus side, ad expenses will be low or non-existent). Basically, Peet's feels that its coffee speaks for itself.
I asked a question about whether Peet's planned on expanding internationally. I mentioned that Starbucks was closing some stores in the U.S. and opening stores abroad, and as a result, they might get a head start over Peet's in the huge international market in terms of brand-name recognition and consumer loyalty. Although I did not mention this, having international operations would also serve as a small hedge against inflation if the American dollar continued to plummet. The CEO said that Peet's had no plans to expand internationally.
The best response came from Mr. Doug Welsh about a question relating to Fair Trade coffee. Peet's said that Fair Trade wasn't as reliable anymore as an indicator of fair wages and sustainability. There were even competing certification firms for Fair Trade, implying that the name and Fair Trade "brand" were being diluted and would mean nothing in time. He said that it was better, such as the case of "Las Hermanas," Peet's experience and work in Nicaragua, to "tell the story directly." His response basically indicated that Fair Trade was a fad that would be declining. The real background is that Fair Trade doesn't always mean higher quality beans, and Peet's is interested in actual higher quality, not just a sticker or logo that indicates high quality.
All in all, the meeting was a very enjoyable experience. After the meeting, I spoke with a long time employee (14+ years). He ("Steve," one of the master roasters) was able to enlighten me about why Peet's wanted to go the direct sale route rather than the retail route. First, a new retail Peet's store costs 2 to 3 million dollars to build. A deal with Albertson's obviously doesn't cost Peet's anything. I mentioned that perhaps the profit margins were higher on sales made in the retail store, and he didn't know whether that was true, but he did say that coffee beans are cheaper in the grocery stores. Steve and I got to talking about Starbucks. He said that SBUX makes a profit of about 700K per store, while Peet's makes between 1.2 and 1.8 million dollars per store, twice as much. In addition, Peet's has much more room to grow because it only has about 166 stores, whereas Starbucks has thousands of stores. I mentioned that SBUX would probably become a media-type company focusing on music and other sales (chocolate, etc.) to boost revenue, while Peet's would remain more of a pure coffee operation. We both agreed that the institutional investors would eventually pressure Peet's to expand its retail stores. Because the current CEO, Mr. O'Dea, doesn't seem to favor this kind of quick expansion, there may be a conflict between some investors and the slow but steady growth Peet's currently has in mind. I remain neutral on the shares at the current price (P/E seems a bit high for the slow but steady growth Peet's is contemplating), but recommend that shareholders attend the annual meeting.
I reiterate that Peet's appears to be a great company, and one that is concerned about employee welfare. After my comments about Mr. Doug Welsh and whether he would be staying with Peet's, I received a phone call from Peet's indicating that they hoped Mr. Welsh would be around a long time, and, as he's wont to say, "I'm just getting started." Bravo.
Update on May 23, 2008: I spoke with a Peet's employee who told me that the reason Peet's isn't expanding quickly in terms of its retail stores is because they have only one roasting facility in the Alameda (the Emeryville building was converted into offices). Each roasting facility also requires a "master roaster" to supervise production and roasting of the beans, and currently, she knew of only one master roaster, "Steve," the employee I spoke with after the annual meeting. It is difficult to find and hire master roasters because they require at least 10 years of experience.
She reiterated Peet's main focus on quality, saying that Peet's doesn't want to make larger batches of beans because that would reduce quality (she mentioned Starbucks and how they may have started mixing beans to keep up their supply). That "small batch" strategy makes sense, because in order to preserve quality, you cannot ship more coffee beans cross-country without an extremely efficient shipping line and several major production facilities, and with only one roasting facility, Peet's doesn't have the infrastructure yet to preserve quality and ship beans to too many stores nationally. Therefore, its slow growth strategy seems to revolve around its commitment to quality, i.e. making sure the roasting facility is set up to produce just the amount of beans they currently need and not to increase production until another roasting facility is created. For now, because so many of Peet's stores exist in California (140 out of the planned 190), having one roasting facility is acceptable. If, however, Peet's wants to serve NY and other Eastern states, it will probably have to set up a roasting facility in Ohio, or another place where land is cheap, and use that facility to ship beans to the East Coast.
It is clear that Peet's must expand to the East Coast, because its stores are already present throughout California's high income cities, and in order not to cannibalize its own California sales, it needs to move to other areas where the average resident makes at least 65,000 dollars per year. Outside of California, such areas are present primarily on the East Coast. Thus, Peet's has to expand outside of California. That necessity of expanding to the East Coast makes its business strategy of focusing primarily on grocery store alliances and direct sales rather than more store openings curious. If Peet's wants to ship to grocery stores all over the U.S. and preserve quality, it needs to open another roasting facility near the East Coast anyway. Why not, then, pursue a strategy of opening more stores on the East Coast as well as targeting grocery stores? It seems that the two go hand-in-hand, especially if Peet's doesn't plan on any major advertising.
There is also another issue: because so many East Coast residents use public transportation, they tend to shop at corner markets rather than huge chain supermarkets. Peet's strategy may fail if it tries to target only major grocery stores on the East Coast. Perhaps Peet's has not focused on the East Coast because land is so scarce, and it would need to spend quite a bit of money to open a roasting facility. But such concerns could be alleviated by opening a facility near the East Coast, perhaps near Chicago (Northbrook, IL?), and/or Cleveland (cheaper land, high college student population, which has high disposable income). This is one reason the CEO's comment about Cincinnati seemed ill-advised--why aggravate a huge potential clientele base in the Midwest by casting a large city there in a less-than-complimentary light? In any case, it appears that Peet's may be slowing growth unnecessarily by not pursuing all of its options in terms of creating retail stores as well as alliances with local grocery chains. Peet's curious business strategy of not aggressively pursuing more store openings is why I am currently neutral on the stock, as well as the fact that many American consumers are heavily in debt and may have less disposable income in 2009 than they did in 2007 and 2008. But make no mistake--Peet's coffee is still the best because of its emphasis on quality.
FYI: Peet's Coffee Earnings Call Transcript
Patrick O'Dea, Peet's CEO, provided a lot of information in this 2007 interview:
Interview with O'Dea
This part of the interview was interesting:
How much of Peet's sales come from its stores?
Sixty-seven percent of our sales come from our retail stores. The other 33 percent comes from sales of whole bean coffee and tea through grocery stores, home delivery and foodservice.
There seems to be some strategy shift. Peet's is now trying to move more into grocery stores and based on my understanding, trying to increase its share of coffee bean sales in grocery stores and by direct mail. Apparently, its beans are cheaper when bought in grocery stores vs. its retail stores, probably because Peet's stores offer fresher beans.Peet's is still true to its roots, when it was just a small company with a few employees. As a result of having many long-time employees, it runs its meetings like a big family event. This year, Gordon Bowker was honored for his contributions. He was one of the founders of Starbucks. As some of you may know, Peet's was the original Starbucks, and back then, Starbucks bought its beans from Alfred Peet. (Peet's first store opened in Berkeley, CA, but Peet's is still incorporated in Washington State, a vestige of the original Starbucks connection.) When Howard Schultz came in and bought the first Starbucks company from the founders, those founders then went on to found Peet's, due to the differences in philosophy at the time about whether consumers would pay 3 dollars for a cup of coffee. Mr. Bowker was ribbed for being the creator of the original Starbucks logo (with the ubiquitous mermaid). He is a soft-spoken man and accepted the award, which was a coffee tryer (looks like a Civil War pistol--it's used to taste coffee when its freshly roasted) mounted on a plaque. He told a story about how Mr. Peet went out of his way to ensure customer satisfaction, even with testy customers.
Here are the meeting's highlights:
The meeting took about two hours. The CEO mentioned that "coffee comes out of roasting like popcorn," and Peet's wanted their customers to be able to smell the coffee (Schultz expressed the same sentiment this year in SBUX's Seattle's meeting). The CEO said that Peet's was a "retailer who happens to sell coffee." Then, he touted the growth of the company. In 2002, Peet's had 1450 employees; now, Peet's has 3750 employees, a sign of how much it has expanded. Peet's emphasized that was upgrading its technology to improve retailing operations. It has an "ERP" system that allows it to coordinate and track not just inventory, but financial information, orders, and other aspects of the retailing operation. CEO O'Dea, after the meeting, even showed me that he had instant access to the Peet's retail managers by pulling out his Blackberry and instantly looking up the particular store I had indicated was not receiving enough vegan chocolate chip cookies.
Peet's touted its stock performance and said it had about 20% annual growth in earnings per share (this was non-GAAP, however), and had done well, especially when compared with the S&P 600 restaurant index. Then, a video was shown about the history of Peet's, broken up into different time periods, from 1966-1983, 1984-1996, etc.
After Mr. Bowker was presented with his plaque, another gentleman, a tall, red-headed male, Doug Welsh, got up to talk about Peet's beans and its efforts to search for the best beans available. This gentleman appeared to be a consummate professional, even more so than the CEO, who is prone to making some off-the-cuff statements (like, "Everything comes to Cincinnati 5 years late," in response to a question about why Peet's wasn't expanding in the Midwest). Mr. Welsh appears to be a vital part of the management team and would be my pick for the next CEO. A video presentation about Peet's in different countries ensued. The presentation focused on activities in Rwanda, Tanzania, and Nicaragua, and how Peet's had helped the local citizens basically become entrepreneurs, and now had exclusive rights to their coffee.
The Q&A session was insightful, but the problem was that no one went around the room with microphones, so it was hard to hear the questions, and the CEO didn't always repeat them.
The first question was about stock options. Peet's is involved in litigation for its stock option grant practices, so this question seemed a bit of a plant. In case you are interested, here is the CEO's salary:
O'Dea Compensation Report
The CEO mentioned that the company was reducing the level of options that the management team would be entitled to, and the goal was not to exceed 2% of the outstanding shares in order to keep it under the 2.8% institutional investor ownership goal. (The CEO's response was confusing, because a quick Yahoo finance search shows that institutional investors own 93.1% of the stock, and insiders own 3.91%.) The CEO said that initially, when new management is hired, option grants are high to attract key talent, but the level of option grants eventually decreases.
There was a mention that the Alameda facility was a gold-certified LEEDs facility, which means that it has achieved the highest level of compliance with environmental best practices.
The CEO said that he was looking forward to the Tanzania Kilimanjaro coffee.
A shareholder asked a question about costs, especially rising fuel costs. The CEO said that fuel wasn't a major cost.
14% of the expenses are related to buying coffee and tea (futures were pricing coffee at 1.38 and tea at 1.70--he didn't elaborate--see Futures Pricing for more)
3% of costs are related to milk.
Peet's buys its coffee 9 to 12 months ahead of time, so it is well-positioned to handle cost increases.
Peet's plans on having a total of 190 stores by the end of 2008. A question was asked about how many they planned on having in 2009. The CEO said he didn't know, but they had 140 stores in California. This is what steered the conversation into Peet's growth strategy. The CEO said that Peet's was focusing on growing its home delivery, office sales, and grocery store business/food services. (For an example of what might be sold to an office, see http://www.associatedcoffee.com/coffee_brands/peets.htm#colibri)
Peet's doesn't plan on television advertising at all. It wants to get the coffee in the consumers' hands and get business through word of mouth and quality. Its marketing campaign is basically a "grass roots" campaign (on the plus side, ad expenses will be low or non-existent). Basically, Peet's feels that its coffee speaks for itself.
I asked a question about whether Peet's planned on expanding internationally. I mentioned that Starbucks was closing some stores in the U.S. and opening stores abroad, and as a result, they might get a head start over Peet's in the huge international market in terms of brand-name recognition and consumer loyalty. Although I did not mention this, having international operations would also serve as a small hedge against inflation if the American dollar continued to plummet. The CEO said that Peet's had no plans to expand internationally.
The best response came from Mr. Doug Welsh about a question relating to Fair Trade coffee. Peet's said that Fair Trade wasn't as reliable anymore as an indicator of fair wages and sustainability. There were even competing certification firms for Fair Trade, implying that the name and Fair Trade "brand" were being diluted and would mean nothing in time. He said that it was better, such as the case of "Las Hermanas," Peet's experience and work in Nicaragua, to "tell the story directly." His response basically indicated that Fair Trade was a fad that would be declining. The real background is that Fair Trade doesn't always mean higher quality beans, and Peet's is interested in actual higher quality, not just a sticker or logo that indicates high quality.
All in all, the meeting was a very enjoyable experience. After the meeting, I spoke with a long time employee (14+ years). He ("Steve," one of the master roasters) was able to enlighten me about why Peet's wanted to go the direct sale route rather than the retail route. First, a new retail Peet's store costs 2 to 3 million dollars to build. A deal with Albertson's obviously doesn't cost Peet's anything. I mentioned that perhaps the profit margins were higher on sales made in the retail store, and he didn't know whether that was true, but he did say that coffee beans are cheaper in the grocery stores. Steve and I got to talking about Starbucks. He said that SBUX makes a profit of about 700K per store, while Peet's makes between 1.2 and 1.8 million dollars per store, twice as much. In addition, Peet's has much more room to grow because it only has about 166 stores, whereas Starbucks has thousands of stores. I mentioned that SBUX would probably become a media-type company focusing on music and other sales (chocolate, etc.) to boost revenue, while Peet's would remain more of a pure coffee operation. We both agreed that the institutional investors would eventually pressure Peet's to expand its retail stores. Because the current CEO, Mr. O'Dea, doesn't seem to favor this kind of quick expansion, there may be a conflict between some investors and the slow but steady growth Peet's currently has in mind. I remain neutral on the shares at the current price (P/E seems a bit high for the slow but steady growth Peet's is contemplating), but recommend that shareholders attend the annual meeting.
I reiterate that Peet's appears to be a great company, and one that is concerned about employee welfare. After my comments about Mr. Doug Welsh and whether he would be staying with Peet's, I received a phone call from Peet's indicating that they hoped Mr. Welsh would be around a long time, and, as he's wont to say, "I'm just getting started." Bravo.
Update on May 23, 2008: I spoke with a Peet's employee who told me that the reason Peet's isn't expanding quickly in terms of its retail stores is because they have only one roasting facility in the Alameda (the Emeryville building was converted into offices). Each roasting facility also requires a "master roaster" to supervise production and roasting of the beans, and currently, she knew of only one master roaster, "Steve," the employee I spoke with after the annual meeting. It is difficult to find and hire master roasters because they require at least 10 years of experience.
She reiterated Peet's main focus on quality, saying that Peet's doesn't want to make larger batches of beans because that would reduce quality (she mentioned Starbucks and how they may have started mixing beans to keep up their supply). That "small batch" strategy makes sense, because in order to preserve quality, you cannot ship more coffee beans cross-country without an extremely efficient shipping line and several major production facilities, and with only one roasting facility, Peet's doesn't have the infrastructure yet to preserve quality and ship beans to too many stores nationally. Therefore, its slow growth strategy seems to revolve around its commitment to quality, i.e. making sure the roasting facility is set up to produce just the amount of beans they currently need and not to increase production until another roasting facility is created. For now, because so many of Peet's stores exist in California (140 out of the planned 190), having one roasting facility is acceptable. If, however, Peet's wants to serve NY and other Eastern states, it will probably have to set up a roasting facility in Ohio, or another place where land is cheap, and use that facility to ship beans to the East Coast.
It is clear that Peet's must expand to the East Coast, because its stores are already present throughout California's high income cities, and in order not to cannibalize its own California sales, it needs to move to other areas where the average resident makes at least 65,000 dollars per year. Outside of California, such areas are present primarily on the East Coast. Thus, Peet's has to expand outside of California. That necessity of expanding to the East Coast makes its business strategy of focusing primarily on grocery store alliances and direct sales rather than more store openings curious. If Peet's wants to ship to grocery stores all over the U.S. and preserve quality, it needs to open another roasting facility near the East Coast anyway. Why not, then, pursue a strategy of opening more stores on the East Coast as well as targeting grocery stores? It seems that the two go hand-in-hand, especially if Peet's doesn't plan on any major advertising.
There is also another issue: because so many East Coast residents use public transportation, they tend to shop at corner markets rather than huge chain supermarkets. Peet's strategy may fail if it tries to target only major grocery stores on the East Coast. Perhaps Peet's has not focused on the East Coast because land is so scarce, and it would need to spend quite a bit of money to open a roasting facility. But such concerns could be alleviated by opening a facility near the East Coast, perhaps near Chicago (Northbrook, IL?), and/or Cleveland (cheaper land, high college student population, which has high disposable income). This is one reason the CEO's comment about Cincinnati seemed ill-advised--why aggravate a huge potential clientele base in the Midwest by casting a large city there in a less-than-complimentary light? In any case, it appears that Peet's may be slowing growth unnecessarily by not pursuing all of its options in terms of creating retail stores as well as alliances with local grocery chains. Peet's curious business strategy of not aggressively pursuing more store openings is why I am currently neutral on the stock, as well as the fact that many American consumers are heavily in debt and may have less disposable income in 2009 than they did in 2007 and 2008. But make no mistake--Peet's coffee is still the best because of its emphasis on quality.
FYI: Peet's Coffee Earnings Call Transcript
Netflix, Inc. Shareholder Meeting, May 21, 2008
Netflix (NFLX) had one of the shortest and strangest shareholder meetings I've ever been to. I am now realizing the time and day a company sets its meeting is important in analyzing whether they even want people to show up. Netflix had its shareholder meeting on a day other than Friday; in addition, the meeting was held at 3:00PM, too late after lunch, and too early before getting off work for most people to attend. It looked like less than 10 non-employees appeared at the meeting. While short interest in Netflix is quite high, the stock has done very well compared to the rest of the market. You would think that Netflix would want to show off its comparative stock performance. You'd be wrong. There was no presentation whatsoever. Only the Netflix logo appeared in the background of what appeared to be an auditorium. The food--well, there wasn't any real food. Some sodas and cookies were on a table with napkins. Take all this together, and you've got a PR campaign opportunity missed for what is basically a media company.
The meeting was in Los Gatos, CA, NFLX's HQ. This is not a distribution center, so don't bring your DVDs to the building and expect them to take it. The CEO is Reed Hastings, and he went up to the podium, said that Netflix was a company that offered media content online and through a DVD subscription service. After that short statement, he immediately launched into the Q&A session.
One person asked how Netflix intended to grow, given that all the people she knew already had Netflix. Mr. Hastings replied that in the Bay Area, they had good penetration in the market. 20% of the people in the Bay Area were signed up already. However, in other cities, such as Chicago and Boston, market penetration and brand recognition were still not at high levels. Therefore, there was plenty of room to grow.
The CEO pointed out that NFLX had won a customer satisfaction award.
Another person asked how many distribution centers Netflix had, and their location. Mr. Hastings replied that they had 50 centers located in about the 50 largest cities in the U.S., covering 95% of their current subscribers.
The CEO pointed out that although the company has been around for about a decade, it named itself Netflix, not "DVD-by-Mail" because it knew that eventually, the real market would be online. Nevertheless, the DVD format is still very profitable for companies, who aren't yet completely on board with the online streaming media format. (The underlying current, as I interpreted it, was that media companies make so much money on DVDs that they have no incentive to change their business model.) As a result, Mr. Hastings said that the DVD market should remain in place and be profitable for the next 10 to 20 years. (This would be good news for Toshiba and its Blu-ray format; however, the CEO never mentioned Blu-ray at all.)
NFLX has 100,000 movie titles. One interesting question was about how Netflix would adapt to globalization in an age where anyone could relocate to a lower-cost locale and set up a competing company. This dove-tailed with a later question about whether Netflix had considered selling its service to other countries' citizens because of the scalability of delivering online content. The CEO said that to use each film, each country has to provide you with authorization and rights to use it; in other words, it's a "country by country" analysis, and NFLX was planning on staying in the U.S.
I asked two questions. One, what did Netflix think about the potential merger between Circuit City and Blockbuster, and how did it plan on responding to it? This caught the CEO somewhat off guard, and he said that I knew as much as he did about it, and that when and if it happened, he would take a look at it. My second question was what the company planned on doing with captions as it moved to more online delivery (most online delivery lacks captions, and on many older films, captions are non-existent, even on DVD--if someone is hearing impaired, they wouldn't be able to really enjoy the online delivery service without captions). The CEO replied that the caption was basically another file that had to be incorporated into the online delivery, but that the media companies hadn't yet focused on delivering that file. He expected that the media companies would eventually provide such files for online delivery, but given his earlier statement about media companies being happy with the status quo of DVDs, I'm not sure online content delivery will be accessible to older and/or hearing impaired persons anytime soon.
Almost right before the shareholder meeting, Netflix received publicity for its set-top box player, which allows its subscribers stream videos from the NFLX website into their TVs. This was a device developed with Roku, another company that was apparently founded by some NFLX ex-employees. 10,000 films and TV episodes will be offered for this service at this time. But NFLX may lose money the more people use its box and online service because it probably has to pay a fee or a higher fee to the media companies the more views its online films receive. With a DVD, once NFLX buys it, it belongs to NFLX and there's not much--at least under current laws--that the media companies can do to prevent NFLX from offering it to others. These would be good questions to ask at next year's meeting: Isn't it less profitable for NFLX to move its viewers into its online services? How is the fee structure set up between NFLX and the copyright owner of a film in terms of how the copyright owner gets paid for online delivery? Is it a one-time fee?
After the meeting, the CEO looked very uncomfortable talking to the remaining shareholders but humored us for a while. His main comments related to piracy, and how international expansion would be difficult because of all the piracy outside of the U.S. (However, a shareholder mentioned that online delivery was harder to steal because encryption could be more complex--you can't download an encrypted movie file as easily as you can copy a DVD--and that the encryption could have several layers that were constantly changing.) Another question was how NFLX was going to work with the X-Box and Microsoft. The CEO was very vague on that response. Once he was out of the auditorium, he practically bolted away, even cutting someone off in mid-sentence. I don't mean to say that Mr. Hastings is abusive or mean-spirited. He actually appears quite the opposite, i.e. he appears to be a good-humored, good-natured person, and went out of his way to make an older shareholder who wasn't a subscriber and who didn't quite understand the business feel comfortable.
All in all, a very strange experience. I got to thinking perhaps this company was going to be bought out and needed to keep mum. But given the recent alliance with Roku, a smaller company, and the level of short interest, that appears to be less of a sure thing. Still, a company like Netflix will definitely be one to watch, if only because they appear focused on their business--so focused, in fact, that they don't seem to want to have any shareholders show up and see what they're up to, at least not in person.
Update on May 25, 2008: I read the company's 10K. Here are some interesting highlights:
1. Netflix says it is calculating the value of options under a "lattice-binomial model" rather than the more popular Black-Scholes model. I have no idea what this means, but it's definitely interesting--is NFLX trying to hide something, or does it have cutting-edge economists on its staff?
2. From 2006 to 2007, Netflix grew from 5,083,000 subscribers to 6,718,000 subscribers.
3. Netflix settled some litigation with Blockbuster and received 7 million dollars. I would have liked to see more about the content of that litigation, but it's settled, and so the parties probably have to stay mum.
4. See page 12 of the 10K for some information on the online delivery payment format. "Our ability to provide our instant-watching feature...depends on studios licensing us content specifically for Internet delivery...Unlike DVD, Internet delivered content is not subject to the First Sale Doctrine [where you can do whatever you like with a DVD once you buy one of them]. As such we are completely dependent on the studios providing us licenses in order to access and distribute Internet delivered content. In addition, the studios have great flexibility in licensing content. They may elect to license content exclusively to a particular provider...For example, HBO licenses content from studios like Warner Bros., and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix."
It looks more and more like Netflix has to be bought out by a major producer of content to move towards its goal of being primarily an Internet delivery company.
Update on May 26, 2008: looks like Netflix's meeting wasn't always so brief. See
http://www.hackingnetflix.com/2006/05/netflix_annual__1.html
The meeting was in Los Gatos, CA, NFLX's HQ. This is not a distribution center, so don't bring your DVDs to the building and expect them to take it. The CEO is Reed Hastings, and he went up to the podium, said that Netflix was a company that offered media content online and through a DVD subscription service. After that short statement, he immediately launched into the Q&A session.
One person asked how Netflix intended to grow, given that all the people she knew already had Netflix. Mr. Hastings replied that in the Bay Area, they had good penetration in the market. 20% of the people in the Bay Area were signed up already. However, in other cities, such as Chicago and Boston, market penetration and brand recognition were still not at high levels. Therefore, there was plenty of room to grow.
The CEO pointed out that NFLX had won a customer satisfaction award.
Another person asked how many distribution centers Netflix had, and their location. Mr. Hastings replied that they had 50 centers located in about the 50 largest cities in the U.S., covering 95% of their current subscribers.
The CEO pointed out that although the company has been around for about a decade, it named itself Netflix, not "DVD-by-Mail" because it knew that eventually, the real market would be online. Nevertheless, the DVD format is still very profitable for companies, who aren't yet completely on board with the online streaming media format. (The underlying current, as I interpreted it, was that media companies make so much money on DVDs that they have no incentive to change their business model.) As a result, Mr. Hastings said that the DVD market should remain in place and be profitable for the next 10 to 20 years. (This would be good news for Toshiba and its Blu-ray format; however, the CEO never mentioned Blu-ray at all.)
NFLX has 100,000 movie titles. One interesting question was about how Netflix would adapt to globalization in an age where anyone could relocate to a lower-cost locale and set up a competing company. This dove-tailed with a later question about whether Netflix had considered selling its service to other countries' citizens because of the scalability of delivering online content. The CEO said that to use each film, each country has to provide you with authorization and rights to use it; in other words, it's a "country by country" analysis, and NFLX was planning on staying in the U.S.
I asked two questions. One, what did Netflix think about the potential merger between Circuit City and Blockbuster, and how did it plan on responding to it? This caught the CEO somewhat off guard, and he said that I knew as much as he did about it, and that when and if it happened, he would take a look at it. My second question was what the company planned on doing with captions as it moved to more online delivery (most online delivery lacks captions, and on many older films, captions are non-existent, even on DVD--if someone is hearing impaired, they wouldn't be able to really enjoy the online delivery service without captions). The CEO replied that the caption was basically another file that had to be incorporated into the online delivery, but that the media companies hadn't yet focused on delivering that file. He expected that the media companies would eventually provide such files for online delivery, but given his earlier statement about media companies being happy with the status quo of DVDs, I'm not sure online content delivery will be accessible to older and/or hearing impaired persons anytime soon.
Almost right before the shareholder meeting, Netflix received publicity for its set-top box player, which allows its subscribers stream videos from the NFLX website into their TVs. This was a device developed with Roku, another company that was apparently founded by some NFLX ex-employees. 10,000 films and TV episodes will be offered for this service at this time. But NFLX may lose money the more people use its box and online service because it probably has to pay a fee or a higher fee to the media companies the more views its online films receive. With a DVD, once NFLX buys it, it belongs to NFLX and there's not much--at least under current laws--that the media companies can do to prevent NFLX from offering it to others. These would be good questions to ask at next year's meeting: Isn't it less profitable for NFLX to move its viewers into its online services? How is the fee structure set up between NFLX and the copyright owner of a film in terms of how the copyright owner gets paid for online delivery? Is it a one-time fee?
After the meeting, the CEO looked very uncomfortable talking to the remaining shareholders but humored us for a while. His main comments related to piracy, and how international expansion would be difficult because of all the piracy outside of the U.S. (However, a shareholder mentioned that online delivery was harder to steal because encryption could be more complex--you can't download an encrypted movie file as easily as you can copy a DVD--and that the encryption could have several layers that were constantly changing.) Another question was how NFLX was going to work with the X-Box and Microsoft. The CEO was very vague on that response. Once he was out of the auditorium, he practically bolted away, even cutting someone off in mid-sentence. I don't mean to say that Mr. Hastings is abusive or mean-spirited. He actually appears quite the opposite, i.e. he appears to be a good-humored, good-natured person, and went out of his way to make an older shareholder who wasn't a subscriber and who didn't quite understand the business feel comfortable.
All in all, a very strange experience. I got to thinking perhaps this company was going to be bought out and needed to keep mum. But given the recent alliance with Roku, a smaller company, and the level of short interest, that appears to be less of a sure thing. Still, a company like Netflix will definitely be one to watch, if only because they appear focused on their business--so focused, in fact, that they don't seem to want to have any shareholders show up and see what they're up to, at least not in person.
Update on May 25, 2008: I read the company's 10K. Here are some interesting highlights:
1. Netflix says it is calculating the value of options under a "lattice-binomial model" rather than the more popular Black-Scholes model. I have no idea what this means, but it's definitely interesting--is NFLX trying to hide something, or does it have cutting-edge economists on its staff?
2. From 2006 to 2007, Netflix grew from 5,083,000 subscribers to 6,718,000 subscribers.
3. Netflix settled some litigation with Blockbuster and received 7 million dollars. I would have liked to see more about the content of that litigation, but it's settled, and so the parties probably have to stay mum.
4. See page 12 of the 10K for some information on the online delivery payment format. "Our ability to provide our instant-watching feature...depends on studios licensing us content specifically for Internet delivery...Unlike DVD, Internet delivered content is not subject to the First Sale Doctrine [where you can do whatever you like with a DVD once you buy one of them]. As such we are completely dependent on the studios providing us licenses in order to access and distribute Internet delivered content. In addition, the studios have great flexibility in licensing content. They may elect to license content exclusively to a particular provider...For example, HBO licenses content from studios like Warner Bros., and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix."
It looks more and more like Netflix has to be bought out by a major producer of content to move towards its goal of being primarily an Internet delivery company.
Update on May 26, 2008: looks like Netflix's meeting wasn't always so brief. See
http://www.hackingnetflix.com/2006/05/netflix_annual__1.html
China and Pollution
My neighbor, who is retired, just got back from a trip across China. He enjoyed the Forbidden City (Beijing) and the terracotta warriors in Xian. His major complaint was the pollution in China. He indicated that the sky was basically gray everywhere he went, and the farther west he went, the sky didn't get better--he just ran into sandstorms (China has deserts like many other countries). Many of the tourists with him started wearing mouth-masks and taking cough drops because they were coughing due to the pollution. As China advances, it will have to incorporate good environmental policies to continue sustainable growth. Companies, such as Cypress Semiconductor (CY), who are already wise to the opportunities in China, may be able to keep growing by investing in creating sustainable energy rather than older semiconductor technology. By some measures, China is already doing this; apparently, Shanghai's goal is to be completely electric in terms of vehicles by a certain date.
Friday, May 16, 2008
One-Liner
Mike LaSalle, the SF Chronicle's movie critic, had this great line in his review of "Before the Rains":
The leading character "is excellent as a professional man, no worse than most men, but one embodying the moral carelessness inherent in the blithe assumption of superiority."
An astounding sentence--it tells you everything you need to know about the character.
The leading character "is excellent as a professional man, no worse than most men, but one embodying the moral carelessness inherent in the blithe assumption of superiority."
An astounding sentence--it tells you everything you need to know about the character.
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