Retailers good at passing bad-luck buck

By DAVID MOON, Moon Capital Management
June 6, 2004

Last week, Krispy Kreme blamed its $24.4 million first quarter loss (compared to a $13.1 million gain last year) on the low-carb diet craze. The next day, Lone Star Steak House announced poor results because of some calendar anomaly.

Does anyone else see the irony?

Over the course of my life, I've lost approximately 1,200 pounds. I have never seen a diet that recommended eating doughnuts. Buried in the Krispy Kreme press release was a $41.8 million charge related to sale of a bunch of stores the company bought only a year ago.

Dr. Atkins never told Krispy Kreme to buy those stores.

If there is an industry that compares to restaurants in its press release creativity, it is the general retail industry.

Retailers complain about their results when the weather is too hot. Or cold. They blame snowstorms and tornadoes. If Thanksgiving is too early in the year, they complain about a lack of early Christmas shopping enthusiasm. If Thanksgiving falls a week late, the Christmas shopping season is too short.

Just once, I'd love to see an honest press release following a poor quarter:

'During the third quarter, our same store sales declined 1.2 percent. We're not sure why this happened, but we think we bet too heavily on bell-bottom blue jeans and the market shifted to straight leg jeans. Now we have all these fat legged blue jeans that nobody wants and we have to figure out a way to get rid of them. We're going to slash prices on the bell-bottoms and try to make some room for our spring merchandise. It will probably take us six months or so to recover.'

Now that would be a truthful report. Instead, we get things like:

'Our quarter was negatively impacted by a rain storm one Tuesday afternoon in Kilgore, Texas. This, combined with the threat of terrorist activities around our largest store in Joplin, Missouri, pushed our same store sales down slightly, 1.2 percent. However, in stores open between 12 and 29 months in rural locations next to dry cleaners, sales of purple WWJD bracelets increased 17 percent. This trend is encouraging for next quarter.'

To retailers, the weather is like a motorcycle kickstand: a prop when results are disappointing.

Retailers spend a lot of money on ads in this paper to get shoppers bustling into their stores. Next quarter, they need their customers to re-bustle. Every three months, clothing retailers have to be smart. They have to buy well, advertise effectively and price appropriately ' over and over again four times a year.

I would much rather own a business that requires being smart only occasionally, depending the rest of the time on business execution. Pharmaceutical companies have to come up with new drugs, but not once a quarter. Wal-Mart probably only made three or four major decisions in the history of the company; the rest was execution.

Peter Lynch once recommended that investors only buy stocks of companies any idiot could run, because eventually one will. Retailers hardly fit that profile.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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