It rains on both sides of the street

By DAVID MOON, Moon Capital Management
October 16, 2005

Every time I think of Goody's going private, I think of Richard Nixon ("You're not going to have Dick Nixon to kick around anymore") and Mark Twain ("Everybody talks about the weather but nobody does anything about it").

I'm going to miss Goody's-which plans to be acquired by an affiliate of Sun Capital Partners-and I'll miss its press releases explaining sales results.

In the ten years from 1996 to 2005, the company offered an explanation for poor or unexpectedly negative results in 22 quarters. Remember, there are only 40 quarters in ten years. Of those 22 negative quarters, weather was at least a part of the excuse in almost 75 percent of them.

In the first quarter of 2005, the company blamed its 8.1 percent comparable-store sales decline in part on "unseasonably cool and wet weather patterns during portions of the quarter." Interesting. Cooler and wetter first quarters didn't seem to hurt before. In the first quarters of 1997, 1998 and 2003 temperatures were cooler and there was more precipitation in the company's geographic markets than in early 2005. But in those previous years, Goody's had increases in comparable-store sales, compared to that 8.1 percent decline during the first quarter of 2005.

For the immediately preceding period, the fourth quarter of 2004, Goody's blamed an 0.4 percent comparable-store sales decline on "periods of unseasonably warm weather in November, 2004'" While it is true that temperatures in all three of Goody's operating regions were above average in November 2004, temperatures had actually been higher in all three regions in November 2003. But during the fourth quarter of 2003, Goody's same-store sales increased 0.4 percent.

Just before that, in the third quarter of 2004, Goody's reported a 2.7 percent decline in comparable-store sales, offering "unseasonably warm weather patterns during portions of the quarter" as a partial explanation for the results. However, a year earlier, the average temperatures for the quarter were very similar, but same store sales increased 3.4 percent.

Indeed, in four consecutive quarters ending in the first quarter if 2005, the company blamed weather for poor results, even though during similar periods a year earlier, the weather had been worse - but the results were significantly better.

Is it possible that the weather had nothing to do with the results during those four quarters? Or did management simply manage the weather better in 2003?

Lest you think that suggestion is offered tongue in cheek, it appears that competitors were able to post operating gains while Goody's blamed the weather for its poor results. In many of the 40 quarters analyzed, other southeast retailers often generated comparable-store sales increases during periods when Goody's blamed the weather for comparable-store declines.

The point is not to crucify Goody's Family Clothing. (Although if you were a Goody's shareholder and had seen the price of your shares decline 70 percent, you might be tempted.) There is more to the Goody's example than "gotcha" commentary.

It's not healthy when a company spends an awful lot of energy making excuses. If a business is in an industry that is so battered by factors outside its control that it seems almost impossible for it to post consistently positive results, an investor has to ask herself if she really wants to commit her capital to that type of business.

A more cynical analyst would suggest that an investor should avoid companies that spend significant energy making excuses for poor results. If a company is regularly blaming extraordinary events for results that are supposedly non-recurring in nature, perhaps disappointing results aren't non-recurring.

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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