<THE BORING PORTFOLIO>
Reviewing Past Sells
We're Not Dissatisfied
by Dale Wettlaufer (TMF Ralegh)
ALEXANDRIA, VA (April. 21, 1999) -- Today a couple former Boring holdings moved around, which we noticed. After we've sold something, we do pay attention because we want to know if our reasoning and the valuation we placed on the company at the time we sold made sense. For instance, TCBY Enterprises (NYSE: TBY) gained 18.4% after some guy mentioned it on a CNBC Buy, Sell, or Hold-type segment this morning. If we went straight by the numbers, yesterday it would have looked like we made a good decision selling TCBY and today we would look like schmucks.
We'll see how the decision looks over a longer time frame, but last quarter wasn't all that hot for TCBY, with sales up 9% and gross profit down 7.5%. Taking out the effect of record high milk prices, gross profit was up 2.2% year-over-year on a 1.8% increase in invested capital at quarter end. (While we can see why the company looks at milk prices like this, what do you want when your products have commodities in them? I'll bet $20, payable to Children's Hospital of Buffalo, that they don't mention the favorable comparison next year). Royalty income, meanwhile, was up 4.2%, which is a little anemic for our liking. We've never really thought the company was poorly run, but it's just not a dynamic company and we feel we received a fair price for our shares at a little above $6.
Borders Group (NYSE: BGP), meanwhile, lost 14.3% after the company's CEO resigned. I don't know what that was all about, but his name is Pfeffer and the company is really lost with regard to distribution in their core business. It just strikes me as very ironic that Eckhard Pfeiffer was booted from Compaq because they're struggling with lean competitors and now Pfeffer is out at Borders. I don't know who at Borders thinks they can pooh-pooh away the Internet, but it's an objective reality that the best demographics of the book-buying public are flocking to Internet retailers. And I know this is harsh, but Borders' site is lame. I'm willing to overlook as a fluke the poor ordering experience I had with their site and their phone operators at Christmas.
But let's just look at their music offerings. I've chosen a highly popular album that hit the charts well within the envelope of time in which Borders.com has been operating. It's the Miseducation of Lauryn Hill. At Amazon.com (Nasdaq: AMZN), the reviews from periodicals appear below the vital information and the customer reviews appear below that. At Borders, you have to click for another page. There you find eight reviews versus 511 reviews for the album at Amazon.com. Amazon.com's page features selections that other customers who liked this album purchased, at the top and bottom of the page. Borders' page suggests in almost transparent, tiny font on the left some other "suggestions," based on....? Amazon.com mentions, with a link, that Hill fronted the Fugees. Sure, Lauryn Hill fans would know that, but casual buyers at Amazon.com would know, too. Borders.com shoppers wouldn't have any idea.
The goal is to upsell customers. Why do you think McDonald's asks you if you'd like fries with that or why is it that most of the people at nice restaurants order dessert when asked? If the customer is in the buying mood, you work it. Very poor merchandising on Borders' part. That's fundamental. And very poor Web design and strategic planning. There's not even a link on Borders' to other albums by the artist. That's really bad. That's pretty much like putting Faulkner next to the Barbara Cartland books in the store. Plus, there's one review for this album, one of top sellers of all time, at Borders. There are 135 reviews from customers at Amazon.com.
This gets worse. Next I looked for Peggy Noonan's (a Reagan administration speechwriter) witty memoir at Borders.com. Yup. It's there. Zero links and no background. Amazon.com's links aren't all that great, but they're at least pertinent to the subject. And there are reviews. Ditto on Burr, Gore Vidal's devilishly good historical fiction on one of the Revolutionary War era's most interesting and weird figures. You wouldn't even know from Borders site that Vidal constructed an entire series on the U.S. You might even miss Lincoln, the spot-on historical fiction that's as good a historiography on Abe Lincoln as all the serious works I've read on him.
So, bad product, bad business model, bad cash flow, and the CEO leaves after less than six months at the company. Same-store sales for the first quarter were up less than GDP, and I assume some of the deferred revenues they took in last quarter from electronic gift certificate sales were unwound into this quarter. So growth is even worse than it looks. I'm pretty happy we sold our shares here. I just can't relate to the company in any way and I don't know why people think it's a great bargain here.
It's fairly priced, as far as I can see and there's significant danger that this company will continue to ignore the realities of the marketplace. That is, they're losing some of their best customers -- high income, technologically literate people who are pressed for time with professional jobs and kids -- who account for a lot of the company's sales. I've never liked the fact that Borders' executives have obsessed about Amazon.com's market price. Their eye is off the ball, almost totally as far as I can tell.
Moving from books to medical technology...
One company on our watchlist, Stryker Corp. (NYSE: SYK), which makes medical, surgical, and orthopedic devices, reported good numbers last night and gave some good guidance. I have no insight to report to you on this area, as I don't follow it, but I've heard great things about the company. A physician friend of ours offered up the following, and a more extensive analysis, on the Boring board late last year:
"Stryker, famous for its prior near-"monopoly" on hospital gurneys, is also a key worldwide player in the arthroscopic instrument and orthopedic implant businesses. Its products are perceived to be of a very high-quality, and as you can imagine, neither arthroscopy nor implants are a one-time pop transaction for hospitals. Unfortunately, none of these businesses is in a high-growth sector. That makes problems for J.W. Brown, Stryker's CEO, who has stated his objective is authentic 20% annual growth come what may. Over the past 15 years or so, Brown has easily met or surpassed his stated objective."
Tomorrow, one of the rare small caps on our watchlist, Computer Motion Inc. (Nasdaq: RBOT), will report. This company makes surgical robots and the system software that controls them. Investors already know that the company's first quarter revenues rose 90%, to $3.95 million. I'm listening to the conference call to get a little more idea on how things went and what the outlook is. Part of what this company does is a total layup. They sell robotically controlled endoscopes for minimally invasive surgeries. These endoscopes give a less shaky view of the area for the surgeon and you don't have to tie up a surgeon to hold the endoscope for hours on end. Which is not only a mind-numbing exercise for the assisting surgeon, but like Mickey Mouse, a computer-aided endoscope isn't going to ask for a raise.
I guess I'm running long here. By the way, the Bore port was up today. Pretty much all the boats on lake S&P 500 rose today, too. Have a good Wednesday night, go Sabres, and I hope to see you on the Boring board.
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Stock Change Bid APCC - 9/16 28.00 BRKb +49 2455.00 CSL +1 3/8 49.38 CSCO +6 3/8 107.94 GTW +4 1/4 65.75
Day Month Year History BORING +3.66% 0.73% 1.01% 35.63% S&P: +2.29% 3.87% 9.01% 122.29% NASDAQ: +3.26% 1.08% 13.48% 139.04% Rec'd # Security In At Now Change 6/26/96 225 Cisco Syst 23.96 107.94 350.57% 8/13/96 200 Carlisle C 26.32 49.38 87.56% 12/31/98 8 Berkshire 2244.00 2455.00 9.40% 4/20/99 230 American P 28.95 28.00 -3.29% 2/9/99 100 Gateway 20 72.38 65.75 -9.15% Rec'd # Security In At Value Change 6/26/96 225 Cisco Syst 5389.99 24285.94 $18895.95 8/13/96 200 Carlisle C 5264.99 9875.00 $4610.01 12/31/98 8 Berkshire 17952.00 19640.00 $1688.00 4/20/99 230 American P 6659.25 6440.00 -$219.25 2/9/99 100 Gateway 20 7237.50 6575.00 -$662.50 CASH $999.27 TOTAL $67815.21
</THE BORING PORTFOLIO>