Author Topic: Buffett/Berkshire - general news  (Read 538925 times)

Spekulatius

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Re: Buffett/Berkshire - general news
« Reply #1370 on: November 15, 2019, 07:37:03 PM »
Restoration Hardware and Occidental Petroleum bought during 3Q.

https://www.cnbc.com/2019/11/14/warren-buffetts-berkshire-hathaway-reveals-new-stake-in-furniture-retailer-rh-shares-surge.html

Can't say I understand the RH purchase. CEO touting a new business model with magical 50+% ROIC for a furniture retailer, while borrowing heavily to repurchase shares and battling short sellers.

I guess that RH is a Weschler or Combs purchase, based on the size. One thing to consider is that the Berkshire folks should know a thing or two about furniture retail, since BRK owns a few furniture retailer (Nebraska furniture Mart, Jordan etc). So I am guessing Weschler/Combs and Buffet know the lay of the land in furniture retailing fairly well.
« Last Edit: November 16, 2019, 03:04:02 PM by Spekulatius »
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Cigarbutt

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Re: Buffett/Berkshire - general news
« Reply #1371 on: November 16, 2019, 05:35:54 AM »
Restoration Hardware and Occidental Petroleum bought during 3Q.
https://www.cnbc.com/2019/11/14/warren-buffetts-berkshire-hathaway-reveals-new-stake-in-furniture-retailer-rh-shares-surge.html
Can't say I understand the RH purchase. CEO touting a new business model with magical 50+% ROIC for a furniture retailer, while borrowing heavily to repurchase shares and battling short sellers.
I guess that RH is. Weschler or Combs purchase, based on the size. One thing to consider is that the Berkshire folks should know a thing or two about furniture retail, since BRK owns a few furniture retailer (Nebraska furniture Mart, Jordan etc). So I am guessing Weschler/Combs and Buffet know the lay of the land in furniture retailing fairly well.
Someboby I’ve learned to respect said the following, last May:

“I really don’t care whether Buffet buys are sells WFC stock. He has bought and sold many stocks, some of which performed well or poorly after he bought and sold.
Buffets buying a stock just means that there is something special about the company , that it’s cheap and that it’s not a fraud. Other than that it’s my opinion that piggy-packing on other investors never works, not even with Buffet.”
and
“Buffet buying is a much stronger factor than Buffet selling. For once, it indicates his assessment they it’s is a quality company within its industry. He is usually correct about this, especially about industries he knows a lot about and banking is one of them.
Anyways, I typically use buys from other investors as a starting point for research, not as a decision factor.”

Given the Restoration Hardware investment now called “RH”, let’s focus on the starting point for a minute.

-Investing in an investment that makes investments requires joint approval but also sometimes a level of confidence or even trust. I would say this luxury investment marks a certain departure from classic Buffett. This may eventually have an impact on BRK’s prospects and now is not a bad time to think about it, even if the position is considered ‘small’.

-Looking specifically at RH, furniture retailing investments can be profitable although it would seem that one has to start with a high burden of proof against it. Some retailers have done very well by capturing specific customer segments or sensing enduring trends (Costco, TJX, ULTA etc) and it is possible to make money in smaller players with regional advantages or special situations but retail is tough business and the moat can be elusive. Wal Mart has its own 'story' but I can't see how a parallel could be made with RH. The thesis (which obviously may be right) here implies that you believe (or understand?) that the “transformation” of the business by a “visionary” leader will translate in significant profitable growth going forward. The capital structure of RH also lives on this premise. At a basic micro level, the stores are unique and seem to offer a “special” environment (conducive to spending and high spenders) but one can find similar or equivalent products elsewhere for much lower prices. The discounting strategy (which is evolving) is a bet in a way that the high end consumer will continue to see RH items as Veblen goods (items for which demand will increase if the price increases, irrespective of the underlying value), which is a risky bet IMO, especially through a long-term lens. Moving higher in the industry analysis, one has to question the enduring essence of the size of their customer segment. Things have been roaring lately. Luxury items can be real winners but trying to grow in a period of temporary adjustments can have significant effects on liquidity for a retailer and I find RH not particularly well prepared for such a scenario. How they fared during the mortgage crisis is instructive in that regard. The next step would be to assess the funding story behind the customer purchases. I start with the assumption that it’s not all paid cash and some of the customers may be relatively extended as they may well belong to another class. Home Hardware also offers interesting stuff. I don't understand the RH purchase but so far I don't like it as a capital allocation decision.
Edit:
BTW, I'm told that RH furniture was popular at WeWork and we think that there may be excess inventory there. Perhaps unrelated but perhaps a sign of the times.
"It's a sign of the times
Welcome to the final show
Hope you're wearing your best clothes
You can't bribe the door on your way to the sky
You look pretty good down here
But you ain't really good"
« Last Edit: November 16, 2019, 05:43:34 AM by Cigarbutt »

sleepydragon

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Re: Buffett/Berkshire - general news
« Reply #1372 on: November 16, 2019, 08:17:02 AM »
One big differentiator of RH is customers will pre-order and wait for 3 months for the good to arrive (from China). The only inventory they have are those in the stores.

Cigarbutt

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Re: Buffett/Berkshire - general news
« Reply #1373 on: November 17, 2019, 12:43:07 PM »
One big differentiator of RH is customers will pre-order and wait for 3 months for the good to arrive (from China). The only inventory they have are those in the stores.
Excellent point.

Maybe this deserves a separate thread but here’s an additional and perhaps final comment.

On the above supply chain management and working capital comment, RH has done well since fiscal 2016 with a plan to improve sourcing and inventory management that worked. See numbers below. Characteristically, they’ve called this: the new architected, redesigned and reconceptualized operating platform but it basically means getting it right in terms of alignment between their inventory, what the customers want and the efficiency to deliver the product so that the client does not regret that a deposit has been made.

                                fiscal 2014            2015            2016            2017            2018            Q1Q2 2019
GPM (% of R)               37.0                  35.7             31.8             34.8             39.9                  40.4
OP (%)                         8.9                    8.8               2.5               5.4              11.5                 13.2
NPM (%)                       4.9                    4.3               0.3               0,1               6.0                   7.6
interest expense (%)      0.9                    1.7               2.1               2.6               3.0                  3.4

From 2014 to 2018, revenues have grown at a 7.6% rate. Q1Q2 numbers show a similar continuing trend. Shares outstanding have decreased very significantly but once dilution is taken into account, the cannibal is not as vociferous as it first appears.

For comparison between periods, using the gross measure of inventory over sales for WC management (careful: direct sales were important in the former period).
                           
                        fiscal 2006            2007               2016            2017            2018            Q1Q2 2019
inv/sales               27%                  28%                35%            22%             21%                18%

The positives: new market position with a brand formula meeting a relatively unmet need, as mentioned above an improved operating platform since 2016 which was matched by a period of market incredulity that allowed a massive share buyback, a loyalty program that reinforces the brand and a marketing strategy that involves (directly and indirectly) designers (quite brilliant in fact). However, the cash obtained from improved working capital needs and inventory was combined with a massive amount of debt to complete the share buybacks. So, after some review, there are clearly some positives in this ‘story’ but the thesis remains basically a (risky) bet on the jockey. Let’s take a look.

The early 2000’s is an interesting period and the CEO was the same person. This was a time of transformation and Restoration Hardware (was selling hardware then) reported 5 years of losses. The turnaround was partially a success with growing sales and, eventually, hope for potential enduring profitability but 2007 caused a significant decrease in customer traffic and in-store sales (then negative cashflows etc etc). The CEO scored positively with improved merchandise selection, effective store remodeling, appropriate store closures and debt decrease. The strategy included an increase in imports, a strategy (which has continued to this day, in fact even higher now, with more than 70% coming from Asia and about 41% sourced in China) which IMO is, in a way, hard to reconcile with the ‘classic’, ‘traditional’ and ‘authentic’ America brand but high spenders may not be really bothered by the apparent discrepancy perhaps the same way that wearers of certain caps may not appreciate that the manufacture of the symbol is, in fact, out-sourced. The strategy also focused on catalog and on-line sales dubbed direct-to-consumer sales which grew ++ up until the company disappeared from the public screen and, obviously, this part of the strategy has radically changed (I think for the better in this specific niche) with the on-line connection being defined not as a direct sales channel but as a “virtual extension of the stores”. Of note, however, is that the gross margin in the early 2000’s improved only temporarily from lowish 30% levels under the helm of the CEO, at least in part due to an inability to improve the supply chain management, an area where the CEO succeeded with changes implemented after things started to turn south in 2015-6.

Mr. Friedman is potentially an outstanding owner-operator and one has to include character assessment. Mr. Buffett has been unusually clever in this regard and this may represent an opportunity to judge the flair of the next generation. After much reading and thought, I find that Mr. Friedman stands somewhere between Mr. Steve Jobs, Mr. Bernard Arnault and Mr. Adam Neumann. He has the salesman DNA and it all comes down to instinct (more on that later). I think the fundamental weakness lies in the fact that the experiential gallery stores (style, hospitality part etc) may be a well executed idea that may work for a while and hold some iconic value but the essence of luxury is only partially related to the place where you buy the product. IMHO, it’s THE product that really counts. In their specific market, RH will continue to be exposed to the risk related to the anticipation of customer preferences and I think that they may have a hard time with the high fixed cost business during volatility periods that will come from anticipation variance and from the fact that the top 5% may not be bailed out by the top 1% in times of discretionary lifestyle stress.
Here’s a link that helps to size the jockey:
https://images.restorationhardware.com/media/press/2019/Winter2019-BusinessofHome_PressPage.pdf

When reading the article, the underlying act of selling furniture is barely mentioned, the same way prices are not listed in certain restaurants. Speaking of restaurants, the last time I was in Chicago, we went to Bavette’s for a steak and did not particularly like it or at least thought that it wasn’t worth the price, not even the peer value potentially recognized by people reading my nonsense. That night, I enjoyed myself more at The House of Blues which, perhaps, tells more about the person writing than the investment itself.

So, all in all, there are positives and potential for some value that I’m missing but there are negatives. I would also say that the entry point is associated with a high price tag to find out but this is the territory. In the end, I conclude that this is likely to be a poor investment (and perhaps a very poor one given the capital posture and certain risks mentioned above) and what helped with the final assessment, the “this is it” moment, was the following excerpt, when choosing the real estate spot for the Chicago Gallery/Showroom, from the jockey himself:
“As a man in a long cashmere coat and an Hermès scarf walked by with a well-coiffed poodle, Friedman turned to RH’s president and chief creative officer Eri Chaya and said, “This is it.” As reported by the reporter who worked as a barista throughout high school and college.

Apologies for the long post but it was an exercise that was useful for me as I presently consider an investment in a furniture retailer that, somehow, shares many similarities with RH even if it sells to the mid and lower segments of the market, for instance, in the need to reinvent the brick and mortar model in order to better serve certain segments (through an on-line bridge and through a better on-site shopping experience). The target I'm looking at now though is more conservatively financed, has taken a more conservative take on the 'transformation', would actually benefit from a downturn as it has historically shown better inventory turnover management which will help to opportunistically gain market share and would relatively benefit from a general downturn as decreasing traffic from existing customers would be compensated by higher traffic from downgraded people lying higher in the class structure.
The end.

John Hjorth

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Re: Buffett/Berkshire - general news
« Reply #1374 on: November 17, 2019, 01:13:47 PM »
This is an awesome post, Cigarbutt,

I hope you'll take the initiative to make it a starting post for a separate topic in the Investment Ideas forum, so that it does not "drown" here in Berkshire forum. It may be of great value at a later point in time for CoBF members interested in RH.
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gfp

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Re: Buffett/Berkshire - general news
« Reply #1375 on: November 21, 2019, 04:51:06 PM »
Bolt on acquisition at Johns Manville - deal to purchase the Insulation systems business of Illinois Tool Works (ITW)  Not huge, only 100 employees -
https://business.financialpost.com/pmn/press-releases-pmn/business-wire-news-releases-pmn/johns-manville-announces-acquisition-of-itw-insulation-systems

gfp

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Dynamic

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Re: Buffett/Berkshire - general news
« Reply #1377 on: November 29, 2019, 06:31:30 AM »
It makes me wonder if Buffett chose to tell Becky Quick and reveal the timeline of events in order to remind investment bankers that Berkshire is in the market for cash acquisition opportunities but not for auctions and can give a very quick decision and make a deal very fast with little due diligence if a company has a brief shop around window.

It makes me wonder, as always, how many substantial potential deals come across the desk of Buffett and his deputies.

We know of one failed acquisition in Q4 2018 and this one in Q4 2019 plus the successful OXY funding deal secured in Q2 and closed in Q3 this year. I doubt it's anywhere near as low as three, and if one includes speculative approaches that don't remotely meet the acquisition criteria there could be 50+.

Gamecock-YT

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Re: Buffett/Berkshire - general news
« Reply #1378 on: November 29, 2019, 12:13:35 PM »
Trying to reverse engineer what made them attractive to BRK. ~15% ROIC on average sticks out with lots of FCF.

Spekulatius

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Re: Buffett/Berkshire - general news
« Reply #1379 on: November 29, 2019, 01:28:52 PM »
Trying to reverse engineer what made them attractive to BRK. ~15% ROIC on average sticks out with lots of FCF.

It’s similar to BRK’s TTS in a sense. I strongly believe that Warren is advertising BRK when he talks about this failed deal with Becky Quick. “ Hey we are open for business and can close a deal quickly!”
Life is too short for cheap beer and wine.