Richard Fisher, the CEO and President of the Federal Reserve Bank of Dallas, spoke at San Francisco's Commonwealth Club (595 Market St.) on May 29, 2008. Some highlights:
1. Mr. Fisher is a big fan of Bill [McChesney] Martin, known for his statement that the job of a central banker is to "take away the punch bowl just as the party gets going."
2. Mr. Fisher said that the Dallas Federal Reserve's inflation numbers incorporate food and energy/gas prices. See http://dallasfed.org/research/ for more information. I believe that what Mr. Fisher was referring to is the the "trimmed mean PCE" numbers, but I could be incorrect. What seems clear, however, is that the PCE numbers are probably more accurate than the CPI numbers, which are usually "excluding food and energy." As you can see in the next link, the PCE numbers are usually at least one percentage point higher than the CPI numbers. See http://www.dallasfed.org/data/pce/index.html
Mr. Fisher indicated that only his bank and the Cleveland Federal Reserve Bank published these more comprehensive numbers.
3. Mr. Fisher's speech sounded like a more number-heavy speech that the former Comptroller David Walker would give. He warned us to do something about government spending, saying that we are "falling victim to complacency and recklessness." He mentioned the "frightful storm of untethered government debt." [He probably meant to say, "unfettered," not "untethered."]
8 years ago, we had a surplus of 236 billion dollars, with a Republican Congress and Democratic president (Mr. Fisher emphasized that these issues were non-partisan.)
Today, the expected deficit in 2008 is at least 410 billion dollars.
Our underfunded liabilities, using an infinite horizon discounted value, is 13.6 trillion dollars for social services.
[Now, I don't pretend to know what an infinite horizon discounted value is. For more information on infinite horizon projections, see
http://www.factcheck.org/article302.html
That article says that an infinite horizon model is misleading, but Mr. Fisher mentioned an infinite horizon "discounted value," which may be different.]
Mr. Fisher said that Medicare was the biggest problem. Medicare has three parts, A (hospitals), B (doctor visits), and D (drug benefits/prescriptions). He estimated a projected deficit of 85.6 trillion dollars for Medicare. Including the projected deficit of Social Security benefits, Mr. Fisher expects a 99.2 trillion dollar deficit in unfunded portions of entitlement programs. He said that this debt works out to be more than 300,000 dollars per person, assuming a population of 304 million, which includes nonworking adults and children. Income taxes have to increase 68%(?) to cover deficits, which is basically reaches confiscatory levels.
What to do about all this? Well, he didn't have much to say, other than it was our responsibility, because we elect the people who run the government.
4. Mr. Fisher dissented in the last three interest rate cuts. He is an inflation hawk and said that "inflation is the most insidious enemy of capitalism and prosperity." He also said that "running the printing press" [of money] is the worst option, because that causes inflation, and stable prices are necessary for growth.
5. Mr. Fisher mentioned a humorous story where someone asked a researcher, "Is there a difference between the Republicans or Democrats [Congresses] in terms of who spends more money?" The answer was, "There's only one difference--Democrats enjoy it more."
6. Mr. Fisher was more relaxed during the Q&A session.
When asked what his bank does, he said that among other things, the Federal Reserve lends money at the discount window; clears checks (which is a declining function--he said his children had never used a paper check--people are moving to online banking); assists the U.S. Treasury; and processes cash (his bank recently processed 12 billion dollars--cash is used more in TX).
Mr. Fisher ran for a U.S. Senate seat and lost. In his funniest remark, he said he calls the legislative branch "the lower intestine." This was after he said the best part of his job was that he was allowed to speak the truth, and most government officials could not do that because they had to get elected, or balance competing interests. The difference between his position and the other branches was that he "could tell the truth."
He said that the FOMC meetings were a civil deliberation and a process that emphasized civility.
Comparing Greenspan and Bernanke, he said both of them had a great sense of humor. Bernanke was "perditiously smart," understanding the Depression more than any other living human being. He said Bernanke's best experience was serving on the local school board in Pennsylvania. On Greenspan: he "listened very well," perhaps because he played the saxophone.
Mr. Fisher said we are in for a period of "anemic economic activity," but said he would not call it a recession. He said the "debauching of our credit system" hurts small businesses, which create jobs in America.
He also said that we are experiencing inflation and our current economic climate because "we won." In his most passionate remarks, Mr. Fisher commented that "Chairman Mao is dead--I won't say God bless his soul. Hồ Chí Minh is dead. In November 1989, the Soviet Union filed for bankruptcy. We won." Everyone wants to imitate our lifestyle, which raises prices and leads to a period of more competition as other countries adopt our successful capitalist model.
A question was asked about implementation of the Basel II Accord, but Mr. Fisher said the writer of that question should come up to him afterwards and speak to him about it directly, because it was a technical question.
Mr. Fisher said he was instrumental in getting NAFTA passed and was "proud of NAFTA." He referred to Joseph Schumpeter and "creative destruction," saying that it drove each of us to our "competitive advantage." but said that the media was skewed in its reporting. If a company shut down, the media was there, but it wasn't there to record an instance when a completely new job opened for that person who was laid off or in general. He said that only 1% of our economy was based on agriculture; 5% on mining; 11% on manufacturing; and the rest (84%) was services. To give us an idea of how the economy has changed, Mr. Fisher said that lawyers "produced" more GDP than auto manufacturers [a sure sign of over-legislation].
A question was asked about whether he believed that the numbers from the BLS were accurate. He said that he was more concerned about sufficiency of the data than its accuracy. There are apparently large swathes of the economy that aren't reflected in the numbers he receives.
Overall, it was a fun experience. I asked him a question privately, about which currency he believed would be the most stable over the next five years. Mr. Fisher said that he couldn't predict that far out, and a basket of currencies would be the most stable way of managing risk. He did say that the European Central Bank had only one mandate, which was to control inflation, while the Fed had a dual mandate [maximum sustainable employment and price stability]. His comments seemed to imply that the Euro might be the most stable currency, but for the long term, he said he favored the U.S. dollar. His refusal to give me a clear answer was astute. To give you an idea of just how quickly things can change, remember than as recently as November 2003, Mr. Bernanke is on record as saying that "the current risk of increased inflation is, for the time being at least, quite small." See
http://www.federalreserve.gov/BoardDocs/Speeches/2003/
200311062/default.htm
The job of American central bankers--especially given their recent inability to predict bubbles and busts--is to respect savers while minimizing unemployment. Hopefully, Mr. Bernanke will get back to the "respecting savers" part of the mandate by raising interest rates at the next FOMC meeting.
FYI: The San Francisco Federal Reserve is right up the street from the Commonwealth. Call ahead of time, but for now, they have tours open to the public on Fridays at noon. Otherwise, they are closed to the public.
"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
Thursday, May 29, 2008
Ronald Reagan on Libertarianism
If you analyze it I believe the very heart and soul of conservatism is libertarianism. I think conservatism is really a misnomer just as liberalism is a misnomer for the liberals — if we were back in the days of the Revolution, so-called conservatives today would be the Liberals and the liberals would be the Tories. The basis of conservatism is a desire for less government interference or less centralized authority or more individual freedom and this is a pretty general description also of what libertarianism is. Now, I can’t say that I will agree with all the things that the present group who call themselves Libertarians in the sense of a party say, because I think that like in any political movement there are shades, and there are libertarians who are almost over at the point of wanting no government at all or anarchy.
From Interview with President Reagan, published in Reason July 1975
http://en.wikiquote.org/wiki/Ronald_Reagan
One of the American public's worst misconceptions is that libertarianism calls for no laws. As I explained in my review of Milton Friedman's Capitalism and Freedom, Mr. Friedman himself stated the need for government: "The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the 'rules of the game' and as an umpire to interpret and enforce the rules decided on." See
http://willworkforjustice.blogspot.com/2007/08/capitalism-and-freedom-by-milton.html
Thus, anyone who states that libertarianism means anarchy or no laws is incorrect. Libertarianism merely means that you agree that interference with your ability to lead your life as you see fit--assuming your actions do not interfere with others' freedom--should be reduced as much possible.
More on government debt and the money we pay to the government: Richard Carmona, former U.S. Surgeon General (2002-2008), says that "75 cents of every tax dollar that you contribute [to health care] is spent on chronic disease, much of which is preventable" (The Commonwealth magazine, June 2008, page 44). Mr. Carmona singles out smoking and obesity as two of the largest scourges of health. One issue with having universal health care is how we regulate chronic disease--does an obese man get a free gastric bypass, or a free diet book? I wish I knew the answer.
One way to reduce the burden on any proposed national healthcare system is to have government workers use the premium + pay-as-you-go system (similar to Kaiser's HMO), while non-government workers use a separate, heavily subsidized health care system (similar to Britain's NHS). With most government workers not being "at-will" and therefore harder to terminate, they are best positioned to budget and pay monthly premiums. This type of carve-out is not unprecedented--postal and other federal workers, for example, do not get the same federal retirement benefits private citizens do because federal workers don't pay certain taxes. With more than 1.8 million civilian employees, the federal government, excluding the Postal Service, is the Nation’s largest employer. If you add in local and state government workers, you would have enough members to incorporate into a "closed system" of medical care (similar to Kaiser's HMO). In fact, you could probably leave the current HMO/PPO system intact, and then work with existing hospitals to provide heavily subsidized health care to private citizens while also investing in new hospitals. (There's no reason Thailand should have more hospitals than America per capita.) The out-of-pocket and insurance reimbursement system would shift to government members rather than private citizens, private citizens, especially blue collar workers, being the ones most required to be healthy so that they can be productive and pay taxes to sustain the government.
[Note: this post has been updated from its original content.]
From Interview with President Reagan, published in Reason July 1975
http://en.wikiquote.org/wiki/Ronald_Reagan
One of the American public's worst misconceptions is that libertarianism calls for no laws. As I explained in my review of Milton Friedman's Capitalism and Freedom, Mr. Friedman himself stated the need for government: "The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the 'rules of the game' and as an umpire to interpret and enforce the rules decided on." See
http://willworkforjustice.blogspot.com/2007/08/capitalism-and-freedom-by-milton.html
Thus, anyone who states that libertarianism means anarchy or no laws is incorrect. Libertarianism merely means that you agree that interference with your ability to lead your life as you see fit--assuming your actions do not interfere with others' freedom--should be reduced as much possible.
More on government debt and the money we pay to the government: Richard Carmona, former U.S. Surgeon General (2002-2008), says that "75 cents of every tax dollar that you contribute [to health care] is spent on chronic disease, much of which is preventable" (The Commonwealth magazine, June 2008, page 44). Mr. Carmona singles out smoking and obesity as two of the largest scourges of health. One issue with having universal health care is how we regulate chronic disease--does an obese man get a free gastric bypass, or a free diet book? I wish I knew the answer.
One way to reduce the burden on any proposed national healthcare system is to have government workers use the premium + pay-as-you-go system (similar to Kaiser's HMO), while non-government workers use a separate, heavily subsidized health care system (similar to Britain's NHS). With most government workers not being "at-will" and therefore harder to terminate, they are best positioned to budget and pay monthly premiums. This type of carve-out is not unprecedented--postal and other federal workers, for example, do not get the same federal retirement benefits private citizens do because federal workers don't pay certain taxes. With more than 1.8 million civilian employees, the federal government, excluding the Postal Service, is the Nation’s largest employer. If you add in local and state government workers, you would have enough members to incorporate into a "closed system" of medical care (similar to Kaiser's HMO). In fact, you could probably leave the current HMO/PPO system intact, and then work with existing hospitals to provide heavily subsidized health care to private citizens while also investing in new hospitals. (There's no reason Thailand should have more hospitals than America per capita.) The out-of-pocket and insurance reimbursement system would shift to government members rather than private citizens, private citizens, especially blue collar workers, being the ones most required to be healthy so that they can be productive and pay taxes to sustain the government.
[Note: this post has been updated from its original content.]
Zazzle dazzles!
I bought one custom-made shirt from Zazzle a few days ago, and it arrived today. I am very happy with the product. Many other custom shirt-printers require their customers to buy multiple (e.g., six or more) shirts before placing an order. Zazzle is more flexible. If you are interesting in buying a custom-made shirt or just want to buy a quality shirt, check out Zazzle:
http://www.zazzle.com/
http://www.zazzle.com/
Home Prices Nationwide and in Select Markets, Inflation-Adjusted and Actual Growth and Fall
From Barry Ritholtz at http://bigpicture.typepad.com/
http://www.nytimes.com/interactive/2008/05/28/business/
20071031_HOUSING_GRAPHIC.html
It's an interactive chart from the New York Times showing the decline and incline of housing prices over the past 20 years, both locally and nationally.
http://www.nytimes.com/interactive/2008/05/28/business/
20071031_HOUSING_GRAPHIC.html
It's an interactive chart from the New York Times showing the decline and incline of housing prices over the past 20 years, both locally and nationally.
Stocks Update
Last week, I bought MMM, IF, and SCUR on May 23, 2008.
I sold MMM this week, making around 0.5%.
SCUR was much better. I sold today, making a 15% gain in less than a week (May 23, 2007 to May 29, 2008).
IF is basically flat so far. No worries--that is a long term hold.
So here is my track record thus far in terms of round-trips:
MMM = 0.5% (less than seven calendar days)
SCUR = 15% (less than seven calendar days)
IF = (bought on May 23, 2008--not sold yet)
Keep in mind, most of these trades were in a Roth IRA, so I won't pay taxes on the transactions until I withdraw the money in my (hopefully) old age. My trades will not generally incorporate any tax analysis.
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.
I sold MMM this week, making around 0.5%.
SCUR was much better. I sold today, making a 15% gain in less than a week (May 23, 2007 to May 29, 2008).
IF is basically flat so far. No worries--that is a long term hold.
So here is my track record thus far in terms of round-trips:
MMM = 0.5% (less than seven calendar days)
SCUR = 15% (less than seven calendar days)
IF = (bought on May 23, 2008--not sold yet)
Keep in mind, most of these trades were in a Roth IRA, so I won't pay taxes on the transactions until I withdraw the money in my (hopefully) old age. My trades will not generally incorporate any tax analysis.
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.
Jamba, Inc. Shareholder's Meeting, May 28, 2008
Jamba Juice's (JMBA) shareholder meeting took place near the beautiful Berkeley marina at the Doubletree Hotel (Berkeley Marina). I attended Jamba's first ever meeting last year, and the same issues concern me today that concerned me then. See
Jamba Juice Shareholder Meeting (2007)
In that earlier post, I talked about futures contracts (for oranges), as well as a possible partnership with a major company. As we know, Jamba now partners with Nestle to produce read-made beverages sold in stores. As for future contracts, well, the CFO is opposed to it for reasons I think are illogical. At the same time, with all commodity prices being so high now, perhaps futures contracts are not currently a great idea. It's a CFO's job to monitor futures markets to increase price stability of key ingredients, and it deeply disappointed me to hear him almost reject outright the possibility of using futures contracts.
But back to the present. In contrast to last year, Jamba offered its products to shareholders at the meeting. It more than made up for last year. This year, shareholders got to sample the new ready-made juicies and smoothies, as well as "granola poppers," a yogurt-like smoothie with granola on top. At the end of the meeting, Jamba caps were given out, with a coupon for a free smoothie in the in-seam of the cap's tongue (a nice touch). I suppose when your stock goes from $10 dollars a share to around $2.50, public relations feels the need to upgrade the shareholder experience. Some may say that's pandering, but I am all for it. Despite my losses in this stock, I actually came out of the meeting with my bloodlust for management somewhat satiated. The fact that I had to cross the beautiful S.F.-Oakland Bay Bridge and spend some time near the water in Berkeley might have had something to do with the soothing feeling as well.
First, let's talk about the new products. Nestle's alliance with Jamba has produced two kinds of drinks: juicies and smoothies. Juicies are basically a little silkier (in Jamba-speak, "refreshing"), while smoothies are more filling (in Jamba-speak, "nourishing"). This is because smoothies use some low-fat milk, while juicies use some non-fat milk. On the smoothie side, Jamba had "strawberries wild" and "banana berry" flavors, and on the juicie side, "very berry" and "mango orange peach. " I liked the juicies better--they were more refreshing.
Attending the meeting were about 25 people, mostly management, and an African-American team of teenagers called "The Wall Street Wizards." (Se http://wallstreetwizards.org/) Mr. Thomason, the founder of the program, was there and ran a tight, professional ship. One of his students fell asleep during one presentation (no one seemed to notice except Mr. Thomason), and he asked a classmate to wake up the student. His students seemed to have quite a bit of fun and asked several intelligent questions, including one about hedging (apparently a high school student and I can figure out that hedging could be an important tool for this business, but not Jamba's CFO, Donald Breen. But to be fair, most formally educated economists agree that hedging does create more volatility in earnings).
Paul Clayton, President and CEO, and Paul Colletta, Marketing and Brand Development, had presentations. Mr. Coletta is the person responsible for changing the cluttered Jamba menu into the easy-to-peruse current menu--probably the single best accomplishment to date in terms of Jamba's consumer-friendliness. I would get headaches reading the old menu, trying to decide what to order.
Mr. Clayton is a consummate professional. I am happy he is the CEO of this company, and he truly seems to care about the company and consumers.
The meeting started inauspiciously when a shareholder asked why there weren't any female directors on the Board. Ouch. I hadn't realized there were no female directors on the Board, but having no female directors is not a good sign for a California company trying to appeal to progressive types. In all fairness, Apple, Inc. had the same complaint two years ago, and finally put Susan Decker on its Board. Steve Jobs responded at the time that women were smarter than men and thus didn't want the liability of being on a Board, so it was harder to find them. Mr. Clayton could have used a play from Mr. Jobs' book. For the time being, Mr. Jobs is correct--other than Susan Decker--a person who I respect a great deal and who adds instant credibility to any company that is lucky enough to hire her--there isn't a ready pool of female candidates to choose from in terms of Board participation. Jamba should start looking for female directors--it would add a nice boost to their image if by 2010, their Board was 1/2 female.
The formal part of the presentation included a comment that approximately 36 million shares were present out of the 52 million outstanding shares. This is a small company, in other words.
CEO Clayton's presentation was done by slides, along with extensive comments assisting the audience in understanding the material. First, probably due to more stores opened, Jamba's revenue has been increasing every year since 2003. Jamba is also into a joint venture with a Hawaiian company that is doing well, but Jamba owns only a 5% stake. Any good news, though, is nice at this point for suffering shareholders.
CEO Clayton's presentation included a detailed chart showing why margins, and therefore profits, had declined. Here is a breakdown of the basic margins in 2007:
COGS (ingredients, cups, etc.) = 27.5%
Labor (increases in minimum wage, worker's comp insurance, etc.) = 33.5%
Occupancy (rent, lease obligations, etc.) = 12.2%
Other (mainly marketing) = 13.2%
Profit Margins = 13.6% (last year = 18.6%--substantial decrease)
If you did the math, you'll see that 1% is somehow lost in these numbers, probably due to some rounding off. In any case, as a result of the increase in overhead, cash flow decreased from 18.6% to 13.5%. The main culprits were minimum wage increases (including an even higher local minimum wage in S.F.) and new store leases.
The rest of the slides focused on Jamba's brand name recognition. The MTO (made to order) market is a 2.29 billion dollar market. Jamba has a 19% market share in this market, with the next individual competitor, Freshens, being at only 6%. The category of "Other," or mom and pop stores and Hobee's, equaled 70% of the market share, which shows that Jamba doesn't have a high market penetration and will keep improving its market share. The ready to drink market--which Jamba is now entering--is only a 655 million dollar market, with Odwalla (owned by Coke) being the market leader. Nestle obviously wants a share of this increasing market and that's why it has partnered with Jamba.
Unfortunately for Jamba, outside of California, DQ/Orange Julius dominates in the public perception of MTO smoothies. Next in line, nationally, are Sonic and Starbucks. In California, however, Jamba is the leader with 86% brand name recognition (only 33% outside of California).
Jamba seems to be focusing on opening new stores in airports, colleges, and grocery stores.
Paul Coletta, Sr. VP of Brand Development, did the next presentation. He indicated he wanted to improve frequency of store visits and sales. His slide had a term, "J6 Store experience," which he did not explain. Mr. Coletta said that Jamba is a "healthy living company," with no high fructose corn syrup and no trans fat in any of its products. The healthy living pillars Jamba abides by include an all natural, balanced life and an emphasis on the goodness of whole fruit.
With respect to its athletic, balanced life image, Jamba is partnering with Nike in running events. I don't see any significant revenue from this alliance, however--it's more of an advertising move.
Mr. Coletta mentioned that he wanted to "innovate beyond the smoothie" into teas, juices, and meals in a blender. He said that advertising strategy had been flipped from in-the-store marketing to "sampling," which is giving away free samples to the public. Now, most of Jamba's "communication strategy" was marketing, which included billboards (I saw a huge Jamba wall-billboard in S.F. after the meeting--it was very well-placed--you can't miss it if you're driving down a particular highway exit in S.F.) and radio ads (Mr. Coletta indicated he wasn't too bullish on this method), in addition to sampling.
Jamba wants to become a "part of pop culture." What Mr. Coletta really means is that becoming a part of pop culture gets a company free advertising. For example, Campbell's Soup didn't have to pay anything to Mr. Warhol for its famous pictures. He ran a video showing some tv ads, including a hilarious SNL skit starring Keira Knightley as an energetic, enthusiastic employee who couldn't stop moving. Only when a customer, Amy Poehler, said she didn't want a free boost did the employee stop moving, even calling over other employees. (Ms. Poehler eventually changed her mind and did get the free boost.) Letterman is a fan of Jamba Juice and has incorporated some skits in his Late Show using Jamba Juice. A montage of stars caught with Jamba Juice products in their hands was shown, mainly from Hollywood-type and "People" magazines. One piece of bad news is that some of the images were taken from last year's meeting, but there were plenty of new images.
Mr. Coletta mentioned that Jamba had been featured in the new film, "Baby Mama."
A gentleman from the Wall Street Wizard group asked about hedging. The CEO deferred to the CFO, who talked about how Jamba had contracted with a blueberry grower to get a consistent supply of blueberries. The CFO said that there was a "force majeure" clause in contracts relating to seasonal fruit contracts, so it was hard to hedge, and he preferred a "contracted price" directly with a supplier. I call tomfoolery on this answer. Southwest Airlines did a great job hedging its exposure to the volatile commodities market, and Peet's also uses futures contracts for its coffee and tea. As I indicated last year and again this year, had Jamba bought futures contracts for oranges, it would have avoided the debacle of January 2007 and onward, where it passed on the cost of higher orange prices to its consumers in the form of a 50+ cent increase. I can't tell you how unprofessional Jamba's stores felt in the past when I went there and was told if I wanted a drink with oranges, I had to pay more. The CFO wasn't done, however. In response to my question, "Wouldn't Jamba have avoided the debacle of January 2007 if it had hedged?," he actually said that Jamba would experience "more volatility" if it engaged in futures contracts because if the prices decreased, it would have to mark-to-market the contracts. This response upset me so much, I almost began to personally blame the CFO for the decrease in Jamba's stock price. I said it was the CFO's job to ensure a steady and stable business environment if possible, and if Jamba had a major ingredient like oranges it needed, the natural course would be to selectively use the futures market and then hedge further by contracting with local suppliers or even owning suppliers of fruits outright. The idea that futures contracts cause "more volatility" for a business seems just plain wrong [but see the comments section--an intelligent writer indicates that using futures would indeed increase volatility in a mark-to-market scenario with respect to earnings. I now understand the CFO was technically correct. I maintain that guaranteeing an actual delivery and price of a hedged product would increase stability, because it is easier to plan ahead when you lock in a major cost of doing business over the next 9 to 12 months. In this case, JMBA probably believes it can always get its ingredients somewhere, at some price, and won't ever be faced with an actual shortage of a fruit to the point where actual delivery on a futures contract becomes necessary. It must also believe that even higher prices of oranges will not disrupt its business, profits, or image, which is the sticking point between Jamba and myself]. Even if the price of the contracts decreased, many shareholders might consider that an acceptable risk because of the importance of delivery of an essential ingredient. In fairness, most of the fruit ingredients Jamba uses heavily don't seem to have an American futures market, like strawberries (Spain does have a futures market in strawberries, however). Still, it boggles my mind that Jamba's management hasn't explored all possible hedging strategies in depth. If it doesn't think that the orange price increase it passed on to consumers before hurt its image, Jamba is out-of-touch. There just isn't a culture of fear at the company, and that's a strange thing when the stock price is around 2 dollars a share.
The CEO took over the rest of the Q&A session. He said that Nestle was the one spending the money on advertising the new ready-made drinks. In response to another question, the CEO indicated that Jamba hadn't put more stores in the South because the key metric was "average unit sales," and most Southern cities didn't have the required "density" (of population) to make it a profitable venture. He expanded by saying that average unit sales were better in smaller cities, like Seattle, and even Chicago took some time to ramp up sales. He said the lower average unit sales were in Texas, a large state. This emphasis on finding the highest average unit means that the CEO is looking to expand not just in warm climates, but in areas where he believes consumers are "early adaptors," a neat phrase. He basically means he wants people who are fitness conscious and willing to try new things--which means that he will look to expand in cities with a high young population, which will also produce teenage employees willing to work for minimum wage. It's a smart move, but it still doesn't explain why Jamba only has 28 (twenty eight) stores in the entire state of Florida. That failure to expand in Florida is one indicator that Jamba just isn't focusing enough on location as a key metric in opening stores. A shareholder pointed out that Jamba had a store in Idaho, but no stores in several Southern states, where it was warmer. The CEO said that the "seasonality curve is the same," and referred back to his density (of population) issue. He said that he wants to open stores in D.C. Anyone who has spent a summer in D.C. knows that Jamba is correct in wanting to open stores there.
I asked about the impact of the outstanding warrants (derivative liabilities) on the diluted earnings per share, and whether they had any impact if the stock price stayed below 6 dollars a share. (See page 25-26 of the 10K.) The CFO said that it was better to view the warrants as increasing or decreasing revenue. As I understood his response, for every dollar reduction in the stock price, Jamba loses 17 million dollars; for every dollar increase in the stock price, Jamba gains 17 million dollars. You can see the problem when Jamba stock has decreased from $10 to $2.50 over the past year.
I asked why Jamba had bought back 34 stores from its franchisees (see page 34 of the annual report). The CEO said that he had expected same store sales to increase and had he known that profit margins would deteriorate, he may not have made the same decision. He said that "2008 is going to be a bumpy year" as Jamba tries to drive down costs and increase foot traffic in its stores. That's not something a shareholder wants to hear, but he gets points for being honest. He said Jamba would be focusing on improving margins to "drive top line sales." With 99 new stores, which will probably take about two to three years to recoup their investment and bring steady income, Jamba has quite a bit on its plate and seems to be re-trenching.
Someone asked whether Jamba wanted to expand internationally. The CEO answered that he had a staff of one person doing due diligence on international expansion. He prefaced that comment by joking that it was fun to imagine us going into different countries and planting our flag, sticking out his chest, but that other considerations warranted more due diligence. He got a laugh from that animated response.
I said that Jamba wasn't focusing enough on location, and that while I enjoyed Mr. Coletta's presentation (it was much better than last year's), a store could have the best product, but would go out of business if it didn't have a good location. I said Jamba might go bankrupt if it didn't focus on location over brand recognition. Here is my highlight of the meeting--the CEO said, "I promise you we are not going out of business." Shareholders, take note--Mr. Paul Clayton has put his own personal reputation on the line. I hope it works out.
Mr. Coletta took the last few questions. He said that Jamba needed to stay below 5 dollars for products--the consumer resistance point is five dollars. He was open to introducing hot products, and he was testing them, but they had to be complementary to the Jamba experience. In response to a question that Jamba stores were packed in the summertime, but dead in the winter, Mr. Coletta said that he understood that, and he was planning on 1) year round drinks (like the "Coldbuster," which had less of a seasonality problem), 2) hot (drinks and food); and 3) meals.
The CEO was friendly to me after the meeting, despite my tough questions. It looks like Jamba needs to focus more on the details, like location and menu items, rather than brand recognition, but overall, at $2.50 a share, it might be a value play. I do not plan on adding any new shares. Peet's just came out today with an email coupon advertising its new Berry Pomegranate Tea Freddo. It looks scrumptious. While Jamba is sitting on its hands and thinking about what new drinks to serve, and whether it should diversify its menu into hot and cold drinks, its competitors are adapting more rapidly to the market. You can have all the brand recognition in the world, but at the end of the day, what counts is your product and your ability to get that product into customers' hands.
You can write to Jamba's Board of Directors at the following address:
Board of Directors (or Chairperson)
c/o Corporate Secretary
Jamba, Inc.
6475 Christie Avenue, Suite 150
Emeryville, CA 94608
Jamba Juice Shareholder Meeting (2007)
In that earlier post, I talked about futures contracts (for oranges), as well as a possible partnership with a major company. As we know, Jamba now partners with Nestle to produce read-made beverages sold in stores. As for future contracts, well, the CFO is opposed to it for reasons I think are illogical. At the same time, with all commodity prices being so high now, perhaps futures contracts are not currently a great idea. It's a CFO's job to monitor futures markets to increase price stability of key ingredients, and it deeply disappointed me to hear him almost reject outright the possibility of using futures contracts.
But back to the present. In contrast to last year, Jamba offered its products to shareholders at the meeting. It more than made up for last year. This year, shareholders got to sample the new ready-made juicies and smoothies, as well as "granola poppers," a yogurt-like smoothie with granola on top. At the end of the meeting, Jamba caps were given out, with a coupon for a free smoothie in the in-seam of the cap's tongue (a nice touch). I suppose when your stock goes from $10 dollars a share to around $2.50, public relations feels the need to upgrade the shareholder experience. Some may say that's pandering, but I am all for it. Despite my losses in this stock, I actually came out of the meeting with my bloodlust for management somewhat satiated. The fact that I had to cross the beautiful S.F.-Oakland Bay Bridge and spend some time near the water in Berkeley might have had something to do with the soothing feeling as well.
First, let's talk about the new products. Nestle's alliance with Jamba has produced two kinds of drinks: juicies and smoothies. Juicies are basically a little silkier (in Jamba-speak, "refreshing"), while smoothies are more filling (in Jamba-speak, "nourishing"). This is because smoothies use some low-fat milk, while juicies use some non-fat milk. On the smoothie side, Jamba had "strawberries wild" and "banana berry" flavors, and on the juicie side, "very berry" and "mango orange peach. " I liked the juicies better--they were more refreshing.
Attending the meeting were about 25 people, mostly management, and an African-American team of teenagers called "The Wall Street Wizards." (Se http://wallstreetwizards.org/) Mr. Thomason, the founder of the program, was there and ran a tight, professional ship. One of his students fell asleep during one presentation (no one seemed to notice except Mr. Thomason), and he asked a classmate to wake up the student. His students seemed to have quite a bit of fun and asked several intelligent questions, including one about hedging (apparently a high school student and I can figure out that hedging could be an important tool for this business, but not Jamba's CFO, Donald Breen. But to be fair, most formally educated economists agree that hedging does create more volatility in earnings).
Paul Clayton, President and CEO, and Paul Colletta, Marketing and Brand Development, had presentations. Mr. Coletta is the person responsible for changing the cluttered Jamba menu into the easy-to-peruse current menu--probably the single best accomplishment to date in terms of Jamba's consumer-friendliness. I would get headaches reading the old menu, trying to decide what to order.
Mr. Clayton is a consummate professional. I am happy he is the CEO of this company, and he truly seems to care about the company and consumers.
The meeting started inauspiciously when a shareholder asked why there weren't any female directors on the Board. Ouch. I hadn't realized there were no female directors on the Board, but having no female directors is not a good sign for a California company trying to appeal to progressive types. In all fairness, Apple, Inc. had the same complaint two years ago, and finally put Susan Decker on its Board. Steve Jobs responded at the time that women were smarter than men and thus didn't want the liability of being on a Board, so it was harder to find them. Mr. Clayton could have used a play from Mr. Jobs' book. For the time being, Mr. Jobs is correct--other than Susan Decker--a person who I respect a great deal and who adds instant credibility to any company that is lucky enough to hire her--there isn't a ready pool of female candidates to choose from in terms of Board participation. Jamba should start looking for female directors--it would add a nice boost to their image if by 2010, their Board was 1/2 female.
The formal part of the presentation included a comment that approximately 36 million shares were present out of the 52 million outstanding shares. This is a small company, in other words.
CEO Clayton's presentation was done by slides, along with extensive comments assisting the audience in understanding the material. First, probably due to more stores opened, Jamba's revenue has been increasing every year since 2003. Jamba is also into a joint venture with a Hawaiian company that is doing well, but Jamba owns only a 5% stake. Any good news, though, is nice at this point for suffering shareholders.
CEO Clayton's presentation included a detailed chart showing why margins, and therefore profits, had declined. Here is a breakdown of the basic margins in 2007:
COGS (ingredients, cups, etc.) = 27.5%
Labor (increases in minimum wage, worker's comp insurance, etc.) = 33.5%
Occupancy (rent, lease obligations, etc.) = 12.2%
Other (mainly marketing) = 13.2%
Profit Margins = 13.6% (last year = 18.6%--substantial decrease)
If you did the math, you'll see that 1% is somehow lost in these numbers, probably due to some rounding off. In any case, as a result of the increase in overhead, cash flow decreased from 18.6% to 13.5%. The main culprits were minimum wage increases (including an even higher local minimum wage in S.F.) and new store leases.
The rest of the slides focused on Jamba's brand name recognition. The MTO (made to order) market is a 2.29 billion dollar market. Jamba has a 19% market share in this market, with the next individual competitor, Freshens, being at only 6%. The category of "Other," or mom and pop stores and Hobee's, equaled 70% of the market share, which shows that Jamba doesn't have a high market penetration and will keep improving its market share. The ready to drink market--which Jamba is now entering--is only a 655 million dollar market, with Odwalla (owned by Coke) being the market leader. Nestle obviously wants a share of this increasing market and that's why it has partnered with Jamba.
Unfortunately for Jamba, outside of California, DQ/Orange Julius dominates in the public perception of MTO smoothies. Next in line, nationally, are Sonic and Starbucks. In California, however, Jamba is the leader with 86% brand name recognition (only 33% outside of California).
Jamba seems to be focusing on opening new stores in airports, colleges, and grocery stores.
Paul Coletta, Sr. VP of Brand Development, did the next presentation. He indicated he wanted to improve frequency of store visits and sales. His slide had a term, "J6 Store experience," which he did not explain. Mr. Coletta said that Jamba is a "healthy living company," with no high fructose corn syrup and no trans fat in any of its products. The healthy living pillars Jamba abides by include an all natural, balanced life and an emphasis on the goodness of whole fruit.
With respect to its athletic, balanced life image, Jamba is partnering with Nike in running events. I don't see any significant revenue from this alliance, however--it's more of an advertising move.
Mr. Coletta mentioned that he wanted to "innovate beyond the smoothie" into teas, juices, and meals in a blender. He said that advertising strategy had been flipped from in-the-store marketing to "sampling," which is giving away free samples to the public. Now, most of Jamba's "communication strategy" was marketing, which included billboards (I saw a huge Jamba wall-billboard in S.F. after the meeting--it was very well-placed--you can't miss it if you're driving down a particular highway exit in S.F.) and radio ads (Mr. Coletta indicated he wasn't too bullish on this method), in addition to sampling.
Jamba wants to become a "part of pop culture." What Mr. Coletta really means is that becoming a part of pop culture gets a company free advertising. For example, Campbell's Soup didn't have to pay anything to Mr. Warhol for its famous pictures. He ran a video showing some tv ads, including a hilarious SNL skit starring Keira Knightley as an energetic, enthusiastic employee who couldn't stop moving. Only when a customer, Amy Poehler, said she didn't want a free boost did the employee stop moving, even calling over other employees. (Ms. Poehler eventually changed her mind and did get the free boost.) Letterman is a fan of Jamba Juice and has incorporated some skits in his Late Show using Jamba Juice. A montage of stars caught with Jamba Juice products in their hands was shown, mainly from Hollywood-type and "People" magazines. One piece of bad news is that some of the images were taken from last year's meeting, but there were plenty of new images.
Mr. Coletta mentioned that Jamba had been featured in the new film, "Baby Mama."
A gentleman from the Wall Street Wizard group asked about hedging. The CEO deferred to the CFO, who talked about how Jamba had contracted with a blueberry grower to get a consistent supply of blueberries. The CFO said that there was a "force majeure" clause in contracts relating to seasonal fruit contracts, so it was hard to hedge, and he preferred a "contracted price" directly with a supplier. I call tomfoolery on this answer. Southwest Airlines did a great job hedging its exposure to the volatile commodities market, and Peet's also uses futures contracts for its coffee and tea. As I indicated last year and again this year, had Jamba bought futures contracts for oranges, it would have avoided the debacle of January 2007 and onward, where it passed on the cost of higher orange prices to its consumers in the form of a 50+ cent increase. I can't tell you how unprofessional Jamba's stores felt in the past when I went there and was told if I wanted a drink with oranges, I had to pay more. The CFO wasn't done, however. In response to my question, "Wouldn't Jamba have avoided the debacle of January 2007 if it had hedged?," he actually said that Jamba would experience "more volatility" if it engaged in futures contracts because if the prices decreased, it would have to mark-to-market the contracts. This response upset me so much, I almost began to personally blame the CFO for the decrease in Jamba's stock price. I said it was the CFO's job to ensure a steady and stable business environment if possible, and if Jamba had a major ingredient like oranges it needed, the natural course would be to selectively use the futures market and then hedge further by contracting with local suppliers or even owning suppliers of fruits outright. The idea that futures contracts cause "more volatility" for a business seems just plain wrong [but see the comments section--an intelligent writer indicates that using futures would indeed increase volatility in a mark-to-market scenario with respect to earnings. I now understand the CFO was technically correct. I maintain that guaranteeing an actual delivery and price of a hedged product would increase stability, because it is easier to plan ahead when you lock in a major cost of doing business over the next 9 to 12 months. In this case, JMBA probably believes it can always get its ingredients somewhere, at some price, and won't ever be faced with an actual shortage of a fruit to the point where actual delivery on a futures contract becomes necessary. It must also believe that even higher prices of oranges will not disrupt its business, profits, or image, which is the sticking point between Jamba and myself]. Even if the price of the contracts decreased, many shareholders might consider that an acceptable risk because of the importance of delivery of an essential ingredient. In fairness, most of the fruit ingredients Jamba uses heavily don't seem to have an American futures market, like strawberries (Spain does have a futures market in strawberries, however). Still, it boggles my mind that Jamba's management hasn't explored all possible hedging strategies in depth. If it doesn't think that the orange price increase it passed on to consumers before hurt its image, Jamba is out-of-touch. There just isn't a culture of fear at the company, and that's a strange thing when the stock price is around 2 dollars a share.
The CEO took over the rest of the Q&A session. He said that Nestle was the one spending the money on advertising the new ready-made drinks. In response to another question, the CEO indicated that Jamba hadn't put more stores in the South because the key metric was "average unit sales," and most Southern cities didn't have the required "density" (of population) to make it a profitable venture. He expanded by saying that average unit sales were better in smaller cities, like Seattle, and even Chicago took some time to ramp up sales. He said the lower average unit sales were in Texas, a large state. This emphasis on finding the highest average unit means that the CEO is looking to expand not just in warm climates, but in areas where he believes consumers are "early adaptors," a neat phrase. He basically means he wants people who are fitness conscious and willing to try new things--which means that he will look to expand in cities with a high young population, which will also produce teenage employees willing to work for minimum wage. It's a smart move, but it still doesn't explain why Jamba only has 28 (twenty eight) stores in the entire state of Florida. That failure to expand in Florida is one indicator that Jamba just isn't focusing enough on location as a key metric in opening stores. A shareholder pointed out that Jamba had a store in Idaho, but no stores in several Southern states, where it was warmer. The CEO said that the "seasonality curve is the same," and referred back to his density (of population) issue. He said that he wants to open stores in D.C. Anyone who has spent a summer in D.C. knows that Jamba is correct in wanting to open stores there.
I asked about the impact of the outstanding warrants (derivative liabilities) on the diluted earnings per share, and whether they had any impact if the stock price stayed below 6 dollars a share. (See page 25-26 of the 10K.) The CFO said that it was better to view the warrants as increasing or decreasing revenue. As I understood his response, for every dollar reduction in the stock price, Jamba loses 17 million dollars; for every dollar increase in the stock price, Jamba gains 17 million dollars. You can see the problem when Jamba stock has decreased from $10 to $2.50 over the past year.
I asked why Jamba had bought back 34 stores from its franchisees (see page 34 of the annual report). The CEO said that he had expected same store sales to increase and had he known that profit margins would deteriorate, he may not have made the same decision. He said that "2008 is going to be a bumpy year" as Jamba tries to drive down costs and increase foot traffic in its stores. That's not something a shareholder wants to hear, but he gets points for being honest. He said Jamba would be focusing on improving margins to "drive top line sales." With 99 new stores, which will probably take about two to three years to recoup their investment and bring steady income, Jamba has quite a bit on its plate and seems to be re-trenching.
Someone asked whether Jamba wanted to expand internationally. The CEO answered that he had a staff of one person doing due diligence on international expansion. He prefaced that comment by joking that it was fun to imagine us going into different countries and planting our flag, sticking out his chest, but that other considerations warranted more due diligence. He got a laugh from that animated response.
I said that Jamba wasn't focusing enough on location, and that while I enjoyed Mr. Coletta's presentation (it was much better than last year's), a store could have the best product, but would go out of business if it didn't have a good location. I said Jamba might go bankrupt if it didn't focus on location over brand recognition. Here is my highlight of the meeting--the CEO said, "I promise you we are not going out of business." Shareholders, take note--Mr. Paul Clayton has put his own personal reputation on the line. I hope it works out.
Mr. Coletta took the last few questions. He said that Jamba needed to stay below 5 dollars for products--the consumer resistance point is five dollars. He was open to introducing hot products, and he was testing them, but they had to be complementary to the Jamba experience. In response to a question that Jamba stores were packed in the summertime, but dead in the winter, Mr. Coletta said that he understood that, and he was planning on 1) year round drinks (like the "Coldbuster," which had less of a seasonality problem), 2) hot (drinks and food); and 3) meals.
The CEO was friendly to me after the meeting, despite my tough questions. It looks like Jamba needs to focus more on the details, like location and menu items, rather than brand recognition, but overall, at $2.50 a share, it might be a value play. I do not plan on adding any new shares. Peet's just came out today with an email coupon advertising its new Berry Pomegranate Tea Freddo. It looks scrumptious. While Jamba is sitting on its hands and thinking about what new drinks to serve, and whether it should diversify its menu into hot and cold drinks, its competitors are adapting more rapidly to the market. You can have all the brand recognition in the world, but at the end of the day, what counts is your product and your ability to get that product into customers' hands.
You can write to Jamba's Board of Directors at the following address:
Board of Directors (or Chairperson)
c/o Corporate Secretary
Jamba, Inc.
6475 Christie Avenue, Suite 150
Emeryville, CA 94608
Long's Drugs Stores Corporation Shareholder Meeting, May 29, 2008
The Longs Drugs Stores shareholder meeting (LDG, 2008) took place at the Shadelands Arts Center in Walnut Creek, CA. Walnut Creek is a storybook kind of city, with trees, churches, and friendly people seemingly on every corner. The Shadelands Center in Walnut Creek is a room that is part of an overall community center. There were about 160 chairs in the room. Food was practically non-existent. Pepperidge Farm's basic "Milano" cookies were served with some coffee and water. (Of all the Pepperidge Farm products to bring, why, oh why, did it have to be the basic Milano?) Needless to say, I was not impressed with the food offerings, and with the meeting being held in a community center, and no company products being given away, I was ready to call "cheapo" on Longs. I was pleasantly surprised, however, by the quality of the presentation. Longs is an old-school company, but if you're dealing with drugs, maybe old-school is just fine.
First, some definitions: PDP = prescription drug plan; PBM = pharmacy benefit management services; and front-end sales...we'll get to that later.
Longs Drugs first began by introducing its Board. The actual presentation was done by slides. Longs' CEO, Warren Bryant, talked about "superior customer service" being an "important differentiator." He seemed bullish on Hawaii. Longs opened six new stores there, while shutting down stores in other states. A slide indicated that Longs opened its first store in Hawaii in 1954.
Rx America, LLC (http://www.rxamerica.com/) is Longs' real jewel. Longs doubled its Medicare beneficiaries from the previous year.
Longs touted its share buybacks and community service (local charities and Governor's Council on Fitness and Sports).
The Q&A session had exactly one person who asked questions, and yes, it was yours truly. I asked what "front end sales" and "front end merchandise" meant. (See 21-23 of 10K, etc.) The CFO said it basically meant "everything other than prescription sales." This is an important term and should be defined more clearly in the 10K--other drug stores (e.g., Rite Aid) have been hit with accounting scandals, so drug companies need to be as clear as possible in their accounting terminology.
I asked the CEO about Longs' reliance on AmerisourceBergen (Symbol: ABC), which supplies them with most of their drugs (http://www.amerisourcebergen.com/cp/1/). (ABC's numbers are difficult to decipher because of the acquisition of Bellco in October 2007 as well as its share buybacks.) I asked why Longs didn't take a minority stake in such an important partner, and only did a 50% joint venture with them. CEO Bryant said that ABC was a publicly traded company and that Longs had no investment stake in it. He deferred the joint venture question to the CFO, who said that about eight years ago, ABC and Longs started a joint venture to open a "central fill operation" in Sacramento, CA, which was completed about three(?) years ago.
I asked whether Longs had a "poison pill" provision to prevent a takeover from CVS or Walgreen's. The CEO made some comments but basically said that it was a matter for the Board of Directors. The general counsel chimed in and said that after a stockholder's rights plan amendment a few years ago, there was no "poison pill" as the term is generally understood. I am betting CVS eventually makes a bid for Longs.
Before I get to the annual report, one interesting tidbit--I heard some directors talk about Dubai. One said, "I was just in Dubai--fabulous." Dubai is getting a good reputation among businesspeople.
Here are the highlights from the 10K:
Pages 14-38 are about compensation. (The first part of the 10K pamphlet is a compensation audit.)
The actual 10K report begins on a separate page 1 after the compensation audit. Longs was founded in Oakland, CA in 1938 (page 1).
Pages 39-40 would be fun to read for employment lawyers. Longs talks about what a "for cause" departure is for severance package purposes.
Longs has 510 stores, mainly on the West Coast and Hawaii (447 stores in CA: see pages 6, 13).
Here's an interesting part: RxAmerica, Longs prescription benefit subsidiary, is buying an insurance company (which it openly refers to as a "shell" company). Longs has to buy such a company because the new Medicare rules require all prescription plan providers to do so--although I can't figure out why, other than the reference to plan providers shouldering some of the risk and the expiration of Medicare and Medicaid waivers. The company is Accendo (page 2), which used to be Nutmeg Life Insurance (page 5). Now, here's the issue--presumably, these insurance companies have issued policies to customers. What happened to all those policies, especially the life insurance ones? I should have asked this question at the meeting, but I really didn't have much information about the insurance company transaction, so I refrained.
See also pages 11-12: For 2009 and forward, "in accordance with the federal statutory mandate [Medicare Prescription Drug, Improvement, and Modernization Act of 2003], the insurance company [Accendo] will provide the Medicare prescription drug plans." Apparently, Accendo has to make a bid to CMS (Center for Medicare) for 2009. Seriously, could Longs be more vague?
Longs completed a distribution center in Patterson, CA (I've never heard of that city before).
Longs has 21,900 employees, with 55% being part time, and non-union (page 5).
Medicare and Medicaid = 24% of pharmacy sales (page 6).
Longs 4Q sales increase not only generally because of the holidays, but because of the cold and flu season--when people need drugs and flu shots (see page 6). I had forgotten that Longs and other drug makers love it when we get the flu. What's also interesting is that the report implies that the fourth quarter seems to be when Longs does much of its non-pharmacy business, but that reading could be a mistake on my part. I need to see the quarterly reports to confirm this overall 4Q-concentration, because it seems counterintuitive.
As indicated previously, AmerisourceBergen (ABC) is Longs major supplier of drugs (page 6). A joint venture is mentioned on page 28.
Page 7 indicates that Longs fears competition from mail order services. (Really? I wouldn't want to get my drugs by mail from an unknown company. Perhaps Canada is operating reputable mail order facilities?)
Page 5--no international sales.
Page 8--Longs plans on closing 31 stores in 2008.
For all you job-seekers and college hopefuls--on page 9, Longs says there is a "shortage of licensed pharmacists."
Page 14: this is why people hate lawyers. See Rankin v. Longs Drugs Stores California, Inc. (legal name). Basically, the lawsuit alleged that Longs employment application violated Labor Code 432.8 by inquiring about criminal convictions over the last seven years, without carving out an exception for marijuana use more than 2 years old.
LC 432.7, which is where 432.8 derives from:
But enough against lawyers--how else would a bloke like me make money?
Longs has properties located in CA, UT (pharmacy benefits), and NV (call center).
Page 19--Longs expanded in Reno by buying out some other company's stores. Nice move--with all the hangovers from gamblers and revelers, Longs should do good business there.
Page 24--more generics lead to better profit margins for Longs. Retail drug store gross profit was 26% of retail drug store sales in 2008.
See page 24-25: as a result of the way Medicare Part D works, Medicare doesn't actually provide any fees to the drug company until after a Medicare recipient spends more than $2,510 on prescriptions. Then, from $2510 to $5726, the recipient covers all costs. Then, from $5726 onward, the drug provider is responsible for 15% of the drug costs. So basically, until grandma spends $5726, Medicare isn't very profitable for a drug provider, and it takes several months to get there--another reason why Longs makes much of its money in Q4.
So there you have it--Longs is going to be a good company and attractive takeover target, assuming its insurance company purchase works out. It's too difficult for new entrants to get into the pharmacy business, so there seems to be a wide moat here. Also, no one (except maybe Walgreen's) has the stores in California that Long's has, so CVS is going to be knocking one of these days. As long as anti-trust issues don't harm any possible deal, Longs should be a decent long term investment. I will look to add shares if Longs falls to the low 40's and will also be looking at AmerisourceBergen (ABC).
First, some definitions: PDP = prescription drug plan; PBM = pharmacy benefit management services; and front-end sales...we'll get to that later.
Longs Drugs first began by introducing its Board. The actual presentation was done by slides. Longs' CEO, Warren Bryant, talked about "superior customer service" being an "important differentiator." He seemed bullish on Hawaii. Longs opened six new stores there, while shutting down stores in other states. A slide indicated that Longs opened its first store in Hawaii in 1954.
Rx America, LLC (http://www.rxamerica.com/) is Longs' real jewel. Longs doubled its Medicare beneficiaries from the previous year.
Longs touted its share buybacks and community service (local charities and Governor's Council on Fitness and Sports).
The Q&A session had exactly one person who asked questions, and yes, it was yours truly. I asked what "front end sales" and "front end merchandise" meant. (See 21-23 of 10K, etc.) The CFO said it basically meant "everything other than prescription sales." This is an important term and should be defined more clearly in the 10K--other drug stores (e.g., Rite Aid) have been hit with accounting scandals, so drug companies need to be as clear as possible in their accounting terminology.
I asked the CEO about Longs' reliance on AmerisourceBergen (Symbol: ABC), which supplies them with most of their drugs (http://www.amerisourcebergen.com/cp/1/). (ABC's numbers are difficult to decipher because of the acquisition of Bellco in October 2007 as well as its share buybacks.) I asked why Longs didn't take a minority stake in such an important partner, and only did a 50% joint venture with them. CEO Bryant said that ABC was a publicly traded company and that Longs had no investment stake in it. He deferred the joint venture question to the CFO, who said that about eight years ago, ABC and Longs started a joint venture to open a "central fill operation" in Sacramento, CA, which was completed about three(?) years ago.
I asked whether Longs had a "poison pill" provision to prevent a takeover from CVS or Walgreen's. The CEO made some comments but basically said that it was a matter for the Board of Directors. The general counsel chimed in and said that after a stockholder's rights plan amendment a few years ago, there was no "poison pill" as the term is generally understood. I am betting CVS eventually makes a bid for Longs.
Before I get to the annual report, one interesting tidbit--I heard some directors talk about Dubai. One said, "I was just in Dubai--fabulous." Dubai is getting a good reputation among businesspeople.
Here are the highlights from the 10K:
Pages 14-38 are about compensation. (The first part of the 10K pamphlet is a compensation audit.)
The actual 10K report begins on a separate page 1 after the compensation audit. Longs was founded in Oakland, CA in 1938 (page 1).
Pages 39-40 would be fun to read for employment lawyers. Longs talks about what a "for cause" departure is for severance package purposes.
Longs has 510 stores, mainly on the West Coast and Hawaii (447 stores in CA: see pages 6, 13).
Here's an interesting part: RxAmerica, Longs prescription benefit subsidiary, is buying an insurance company (which it openly refers to as a "shell" company). Longs has to buy such a company because the new Medicare rules require all prescription plan providers to do so--although I can't figure out why, other than the reference to plan providers shouldering some of the risk and the expiration of Medicare and Medicaid waivers. The company is Accendo (page 2), which used to be Nutmeg Life Insurance (page 5). Now, here's the issue--presumably, these insurance companies have issued policies to customers. What happened to all those policies, especially the life insurance ones? I should have asked this question at the meeting, but I really didn't have much information about the insurance company transaction, so I refrained.
See also pages 11-12: For 2009 and forward, "in accordance with the federal statutory mandate [Medicare Prescription Drug, Improvement, and Modernization Act of 2003], the insurance company [Accendo] will provide the Medicare prescription drug plans." Apparently, Accendo has to make a bid to CMS (Center for Medicare) for 2009. Seriously, could Longs be more vague?
Longs completed a distribution center in Patterson, CA (I've never heard of that city before).
Longs has 21,900 employees, with 55% being part time, and non-union (page 5).
Medicare and Medicaid = 24% of pharmacy sales (page 6).
Longs 4Q sales increase not only generally because of the holidays, but because of the cold and flu season--when people need drugs and flu shots (see page 6). I had forgotten that Longs and other drug makers love it when we get the flu. What's also interesting is that the report implies that the fourth quarter seems to be when Longs does much of its non-pharmacy business, but that reading could be a mistake on my part. I need to see the quarterly reports to confirm this overall 4Q-concentration, because it seems counterintuitive.
As indicated previously, AmerisourceBergen (ABC) is Longs major supplier of drugs (page 6). A joint venture is mentioned on page 28.
Page 7 indicates that Longs fears competition from mail order services. (Really? I wouldn't want to get my drugs by mail from an unknown company. Perhaps Canada is operating reputable mail order facilities?)
Page 5--no international sales.
Page 8--Longs plans on closing 31 stores in 2008.
For all you job-seekers and college hopefuls--on page 9, Longs says there is a "shortage of licensed pharmacists."
Page 14: this is why people hate lawyers. See Rankin v. Longs Drugs Stores California, Inc. (legal name). Basically, the lawsuit alleged that Longs employment application violated Labor Code 432.8 by inquiring about criminal convictions over the last seven years, without carving out an exception for marijuana use more than 2 years old.
LC 432.7, which is where 432.8 derives from:
(a) No employer, whether a public agency or private individualSo the lawsuit alleged that job applications must specify that a company is asking for non-Mary -Jane-related convictions. Can you say, "technicality"? Unfortunately, that's how many (most?) lawyers make money in state court--by doing what they were taught in law school, which is to parse everything and abuse technicalities. (State court is far more nurturing of the technical than federal court, which tends to look at the substance of a complaint.) Go legislators! Don't stop until you've made it impossible for any small business to survive in California without having an army of lawyers. (If this were a Tom Toles cartoon, the bottom right hand side of this piece would say, "You're almost there...")
or corporation, shall ask an applicant for employment to
disclose, through any written form or verbally, information
concerning an arrest or detention that did not result in
conviction...
But enough against lawyers--how else would a bloke like me make money?
Longs has properties located in CA, UT (pharmacy benefits), and NV (call center).
Page 19--Longs expanded in Reno by buying out some other company's stores. Nice move--with all the hangovers from gamblers and revelers, Longs should do good business there.
Page 24--more generics lead to better profit margins for Longs. Retail drug store gross profit was 26% of retail drug store sales in 2008.
See page 24-25: as a result of the way Medicare Part D works, Medicare doesn't actually provide any fees to the drug company until after a Medicare recipient spends more than $2,510 on prescriptions. Then, from $2510 to $5726, the recipient covers all costs. Then, from $5726 onward, the drug provider is responsible for 15% of the drug costs. So basically, until grandma spends $5726, Medicare isn't very profitable for a drug provider, and it takes several months to get there--another reason why Longs makes much of its money in Q4.
So there you have it--Longs is going to be a good company and attractive takeover target, assuming its insurance company purchase works out. It's too difficult for new entrants to get into the pharmacy business, so there seems to be a wide moat here. Also, no one (except maybe Walgreen's) has the stores in California that Long's has, so CVS is going to be knocking one of these days. As long as anti-trust issues don't harm any possible deal, Longs should be a decent long term investment. I will look to add shares if Longs falls to the low 40's and will also be looking at AmerisourceBergen (ABC).
Subscribe to:
Posts (Atom)