In a brilliant article in The New York Times, the paper points out that of all the mistakes that Starbucks Corp. (NASDAQ: SBUX) made in its expansion, picking real estate locations may have been the worst. Much of the analysis for the piece came from talking to real estate brokers. The paper writes, "In some cases, brokers say, Starbucks misjudged the risks of putting stores close to each other, leading to the decline in same-store sales."
It is astonishing that Starbucks would make such basic errors and speaks to what happened to management during the period when founder Howard Schultz was absent from the CEO job. The team that replaced him said it believed the company would eventually have 40,000 store worldwide. It clearly cut corners in terms of planning to get there.
The real trouble with the real estate location decisions is that it may take a very long time to fix. Closing stores may be easy, but finding better spots, negotiated for the space, and building out new stores will be time consuming and, perhaps, expensive.
Schultz and his minions are paying for rampant growth, and the poor souls who worked for him are paying more. Almost 12,000 will lose their jobs.
Douglas A. McIntyre is an editor at 247wallst.com.
I've been critical of dividends for as long as I've been writing about stocks, most recently slamming the big banks for using dividends as a Potemkin village to inspire investor confidence -- while simultaneously raising cash at depressed valuations.
In a piece in their Exclusive Outlook newsletter (PDF File), the value investors at West Coast Asset Management explain the pros and cons of dividends in a way that I've never seen done before: their position on dividends is ambivalent (mine is that they're basically always bad.), but it's a great introduction for anyone looking to understand the capital allocation decisions that companies make. Here's the thought-provoking conclusion:
Cash is king, and the truth about dividends is that they are merely one optional use of cash flow. Share buybacks make great sense when the stock is cheap, but a regimented recurring distribution of dividends reduces a company's ability to invest opportunistically. Instead of making blanket statements about the superiority of dividends or share buybacks, investors should understand the context of each decision, and companies should consider eliminating recurring dividends in favor of situational, opportunistic cash flow decisions.
To me, the double-tax on dividends makes them impossible to rationalize -- if you'd rather pay extra tax to receive cash than own a larger stake in the company (via a share buyback) -- you should find another company to invest in.
Last year, actually 18 months ago now, James Cramer had enough faith in the Rite Aid Corp (NYSE: RAD) to include it in his 2007 picks. At that time the stock was trading for $5.49 per share. It closed yesterday at $1.56 and is trading further down today.
When I say RAD is wrong, wrong, wrong, I mean it literally. There is a store located a few blocks from my office that I shop at perhaps once a month. Yesterday I bought a few things and was amazed at how bad their accounting was.
My primary mission was to acquire some toothpaste, but there are always a few tempting sale items. When I was checking out I discovered that the sports drink for sale at "5 for $5 dollars" was a mistake and the sign in the store display should have been taken down because the offer had expired. Another item I purchased was marked down from $3.99 to $1.99, great deal! . . . but they told me that the sale price was placed on the wrong shelf for that product and what I wanted was not on sale.
While calling Arthur Levitt's tenure as chairman of the Securities & Exchange Commission ineffective would be an understatement, he could, and still can, be relied upon to say the right thing. Now that the SEC finally has the quorum necessary to take action on a variety of issues, they should take Levitt's advice about proxy access changes.
Earlier this year the SEC made it impossible for shareholders to change the way directors are elected -- one of the most anti-investor events in recent history -- and it's time for that to change. Levitt writes in The Wall Street Journal that "While not a panacea, giving shareholders a bigger voice in the companies they own would go a long way in helping to restore trust."
Exactly. Some critics of strong corporate governance say that the SEC shouldn't meddle in these affairs. I basically agree: but the problem is that the SEC has meddled, making it impossible for shareholders to take control of their own companies when necessary.
The Wall Street Journal was good enough to humiliate General Motors (NYSE: GM) CEO Rick Wagoner by pointing out that he still has his job. The company's share price is down almost 85% since he took over. The newspaper writes that Mr. "Wagoner's decision a few years ago to tilt GM's product mix more toward trucks and SUVs isn't looking good."
Fair enough. But there are two critical elements to Wagoner still having his corner office. One is that the rest of the US car industry is as bad off as GM, maybe worse. The other is that no CEO in his right mind would leave a good job to take over GM. Boeing (NYSE: BA) exec, Alan Mulally, moved to Ford (NYSE: F) as the head man and he must regret the decision every day.
Wagoner is part of the "dumbing down" of the American CEO. If the man can't do well, blame it on the industry. That makes it seem that individual companies are powerless to make decisions that will put them ahead of the competition, even in tough markets.
There ought to be a law. That would be legislation which limits what public company CEOs get when they are fired. Maybe the limit should be $1 million. How much is failure really worth?
The departing head of American International Group (NYSE: AIG), Martin Sullivan, will pick up $47 million as he hits that door. According to the FT, "Mr Sullivan's departure was deemed a resignation for "good reason", according to AIG." His "good reason" was that the board would not allow him to stay in the building. What better excuse can a man get?
Sullivan can hardly be blamed for taking the money and retiring about his yacht to hit golf balls into the ocean. The AIG board shoulders that burden. The chairman of that board, Robert Willumstad, took Sullivan's job. Maybe it was easier to move up to CEO with Sullivan fat and happy.
But, there ought to be a law.
Douglas A. McIntyre is an editor at 247wallst.com.
Marc Andreessen was only in his early 20s when he changed the world forever. Of course, he helped to create the Mosaic browser and was the cofounder of Netscape Communications (he even was on the front cover of Time).
No doubt, he learned some important lessons – especially during the dot-com bust. In fact, he has been able to deal with the adversity, having created such great companies as Opsware – which was sold to Hewlett-Packard (NYSE: HPQ) recently for $1.6 billion.
Well, now Andreessen is going to help another tech wunderkind: Mark Zuckerberg, who is the mastermind of Facebook. That is, Andreessen will join the company's board.
While such maneuverings are often cosmetic, I think this move is more substantive. Talking to a variety of Silicon Valley VCs, there's much skepticism about Zuckerberg's capabilities. Besides, is social networking really going to be a platform that can be monetized effectively – and justify the rich valuations?
No doubt, Andreessen understands the pressures and the importance of making key strategic decisions. So all in all, this looks like a pretty savvy move for Facebook.
A new study out of Stanford's law and business schools suggests that the increasingly popular corporate governance quotients provided by firms like the Corporate Library and Institutional Shareholder Services may not be so helpful. The researchers found little or no correlation between the ratings at different firms, and higher scores do not appear to correlate with strong performance. Indeed, firms that performed well based on ISS metrics were found to be more likely to face shareholder class-action lawsuits, which is mystifying.
The companies that provide governance data do, in my opinion, provide a valuable service, but investors who really want to know what's going on at their companies should go read the proxy statements themselves, straight from the SEC's Edgar database (Look for "DEF 14A"). Here are some questions to ask as you look:
Do the executives and directors own a large amount of stock in the company? Do they sell frequently or buy stock on the open market with their own money? An important, but often overlooked, area to look at is the ownership of the directors. Directors who own a large amount of stock are likely to be more vigilant in performing their duties.
How does executive pay change from year to year? Does it go up every year by leaps and bounds regardless of performance, or do the top guys take a hit with the shareholders?
Does the company have a staggered board, poison pill, or other devices designed to make it more difficult for shareholders to affect change?
Does the company disclose any significant related party transactions?
If you can come up with detailed answers to those questions, you'll have a much better idea of the company's governance strengths and weaknesses than you can get from reading any third-party report.
Reading the sports section, I'm marveling at how the Oakland Athletics have managed to stay in contention year after year in spite of a low payroll and the fact that every future star that they develop ends up leaving for a bigger contract with a competitor.
And then it dawned on me: when was the last time you saw a CEO at a major company leave for a higher-paying job somewhere else? I can remember talk that Meg Whitman might leave eBay (NASDAQ: EBAY) for Disney (NYSE: DIS) but musical chairs never seems to happen among 8-figure CEOs.
This absence of competition and free agency, I believe, helps expose what a joke executive compensation is. The only reason to pay a CEO $50 million is to prevent him from going elsewhere for more money, right? I mean, if the most he could make at at another company is $15 million, then why would he turn down an offer of $25 million? The fact that CEOs at top companies never go somewhere else for more money makes me think a lot of compensation committees are leaving a lot of money on the table. If you're the CEO of a billion dollar company, you pretty much stay there until you retire to spend more time with your family after you screw things up royally.
Here's one way to look at executive compensation: look at how much a CEO earns and then estimate how much he could earn doing something else. The difference provides an estimate of the margin by which he's overpaid and, given that S&P 500 CEOs never seem to leave leave for higher-paying jobs, you have to think that margin is pretty wide.
Citigroup (NYSE:C) will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system is "an effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate."
The set-up has all the hallmarks of failure. Senior investment bankers, money managers, and lending executives break their backs to make their operations successful because they can get multi-million dollar bonuses by doing so. Putting them into a pool where their own efforts are watered down by the bank's overall performance is a good way to get top talent to leave for greener pastures.
The most wrong-headed part of the thinking behind the program is that it does not account for the fact that banking executives do their best out of personal greed. The current system of having every operation in the bank strive for its own best results already maximizes overall earnings. The profits from a number of successful divisions within the firm adds up to better financial results for Citi as a whole. Bonuses based on the performance of the the bank as a whole simply makes star executives believed they are being robbed by being lumped in with the company's losers.
Bonus programs like this would not prevent problems like mortgage-backed investments. Each and every financial firm on Wall St. thought they were a good way to make money. Changing the Citi compensation system would not have changed that.
Douglas A. McIntyre is an editor at 247wallst.com.
It should be no surprise to anyone that despite all the ranting and raving to the contrary Mr. Carl Icahn, billionaire investor, shareholder white knight and corporate raider is heating up things in the Yahoo! Inc (NASDAQ: YHOO) boardroom.
It has been reported that he purchased a sizable chunk of the company in the neighborhood of $25 per share, hoping to make another fortune pushing Yahoo back to the negotiating table with Microsoft Corp. (NASDAQ: MSFT).
This morning AP reported that Jerry Yang, CEO and company are lobbying major shareholders to rally support for their position that Yahoo! should get a higher offer or stand alone as an independent company. It seems to me that they are standing on lose ground given that many large and small shareholders alike have already spoken, and they would have taken the deal.
The market has spoken as well, with Yahoo stock losing over a third of it's value recently and nearing $20 per share this morning Icahn is losing 20% of his investment as things look today. This is turning into the battle of the billionaires.
I think this whole saga might make a cute Neil Simon play if they would let him into the meetings to take some notes.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I do not own shares in the stocks mentioned in this story.
Funny how companies get religion when there is a takeover threat. It says a great deal about how poorly many big firms are run and how lax their boards are when it comes to supervision.
Anheuser-Busch (NYSE: BUD) now plans to cut 1,000 people and raise prices. It is trying to hold off a bid from InBev. Now that its independence is at stake, it is taking decisive actions. It may not work because the plan probably comes too late. According to The Wall Street Journal (subscription required), "The St. Louis brewer's strategy, laid out in a conference call with investors, included $500 million in new cost savings, and higher earnings targets."
Yes, and what took them so long? Shares of BUD have hung around the $50 range for a number of quarters. Operating profit growth at the brewer has been modest. The InBev offer has driven the shares as high as $62.77. It is not a bad bet that they will go back to $55 if InBev is not successful.
BUD wants investors to think it can simply raise prices in a tough economy and bring in more revenue. That probably won't work. It if would, the company should have done it a long time ago.
Douglas A. McIntyre is an editor at 247wallst.com.
Google, Inc. (NASDAQ: GOOG), after months of searching for a new Chief Financial Officer, has just named a new one as of this week. Bell Canada (NYSE: BCE)'s Patrick Pichette will take over for the retiring George Reyes. Reyes, who presided over Google's IPO back in 2004 and was very adept at telling the investor community only what Google wanted the world to know, will be an interesting person to replace indeed.
Pichette will begin with Google on August 1. His recent positions as president of global operations and CFO of Bell Canada no doubt was a large mark on his resume. Google did the right thing here -- searched for, and found, a seasoned global exec to represent the financial communications of the world's hottest internet company.
One area that will be interesting to see develop involves Google's stubborn approach to not laying it all out on the table. As in, giving all the inside guidance and other details analysts crave so that they can push GOOG shares up or down if those targets are hit or missed every quarter. Google has always been a financial communication maverick and has told the market to stick it many times by not coming forward with a bunch of granular detail about future quarters. What will Pichette do? We'll see on Google's Q3 quarterly results call later this year.
Microsoft Corp. (NASDAQ: MSFT) co-founder Bill Gates is riding off into the sunset today, at least he sort of is. The man who made nerds and geeks "cool" is shifting his focus away from the world's largest software company to his philanthropic work.
Gates contributions to modern society cannot be understated. When he gets older, my 20-month-old son will no doubt be surprised to learn that there was a time when computers were expensive, impersonal devices the size of several refrigerators. Gates helped make the computer personal. Of that there is no doubt. How he did it remains open to debate. The elite geeks despise Microsoft for developing expensive, inferior operating systems that are prone to crashes and computer viruses.
The shift by Gates, which has been expected for some time, comes as the Redmond, Washington-based company is at a crossroads. Back in the 1970s and 1980s, Microsoft was the underdog that upended the tech establishment lead by International Business Machines Corp. (NYSE: IBM).
Angelo Mozilo, CEO of Countrywide (NYSE: CFC) may be a thug and he may get in trouble with federal authorities due to the way he ran his company. But at least he was generous.
According to The Wall Street Journal, everyone from casino employees to retired pro athletes got sweet deals. The paper writes that, Mr. Mozilo regularly lined up loans for people he met, according to several current and former Countrywide executives. Said one: "Angelo would call in and say, literally, 'My maid needs a loan.'"
Mozilo even gave a loan to the buyer of hockey player Wayne Gretsky's home.
The big open question about these mortgages is whether the people could have gotten them in the normal course of business, or was Mozilo's help necessary. He also may have made certain that his pals got below market rates.
Based on most of what has come out about Mozilo's behavior, he should probably give back those tens of millions of dollars in cash he got from stock options.
And perhaps, spend a few years in the pen.
Douglas A. McIntyre is an editor at 247wallst.com.
Marc Andreessen was only in his early 20s when he changed the world forever. Of course, he helped to create the Mosaic browser and was the cofounder of Netscape Communications (he even was on the front cover of Time).
and 
. He also operates 
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
Starbucks: The next McDonald's
