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Borders Invoice Payment Delay: The Real Story

A lesson trying to get some facts before running a story..

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First, here is the story:
GalleyCat has received a copy of a “special alert” sent from a major book distributor specializing in independent publishers to its clients, warning them that Borders, whose financial difficulties are widely recognized, “now tell us that they will not be paying us for two months due to anticipated excessive returns,” a situation the company views with understandable concern. This distributor “typically carries receivables of approximately two million dollars with Borders,” the memo continues. “A default of that amount would by no means put [us] out of business, but it would be painful, weaken the short-term health of the company, and would mean we would have to defer some of our plans for future growth.”

Therefore, the distributor is telling its clients they need to make a decision this weekend: “Publishers must either instruct [us] not to ship their titles to Borders [or] accept the provision that [we], for Borders business only, will guarantee payment only for the publishers’ historical printing cost of books that are not paid for, rather than for the whole amount of any unpaid invoices.” (As the memo explains, the printing cost of a $14.95 paperback is roughly $1.50, compared to the $7.48 the distributor bills Borders.) The new policy is contrasted to what the company says other distributors do, asserting that some of its competitors are refusing to take any credit risk at all on inventory sent to the struggling chain.

The memo emphasizes, however, that this distributor does not actually recommend that any of its clients start denying Borders their titles:

“Borders has been paying [us], they are reported to have cash on hand and access to credit in the future, and the last thing anyone wants is to have only one giant chain in the retail book market. Borders may prosper, and even in the worst case, given [our] uniquely flexible policy, the value of your inventory would be preserved.”

Additionally, “this policy will stay in affect only while there are serious concerns about Borders viability.” Of course, given that Borders announced a new inventory display strategy earlier this year that would require cutting the stock at a typical outlet by as much as 10 percent, the overall impact of this development on small publishers may be difficult to fully ascertain at first.”

I spoke to people at Borders who told me:
Since books are a returnable item (unsold inventory can be returned to the publisher for credit) it is possible as they stay with their ongoing focus on inventory productivity that they could have a credit exceed the amount of an invoice, and that explains what happened here … it comes across as Borders being unable to pay this vendor, but it is a case where the returns outpaced the invoices.

Now anyone familiar with Borders know that one of the first items on CEO George Jones’ “to do” list was decrease the bloated book and music inventory in the stores.

Part of the inventory strategy does involve returns. Borders absolutely must get titles that don’t sell out of the stores to make room for titles that do sell. Toward this end, inventory teams have been doing a deep dive into the inventory of each store and removing unproductive inventory while adding productive inventory to the stores on a case by case basis where needed. In addition, they are looking at the inventory in their distribution centers and making appropriate returns.

Simply put, this is NOT a case of Borders delaying payments due to a cash crunch but simply not paying invoices that are going to be credited back to them eventually anyway.

Look at it from your point of view, would you pay an invoice sent by a vendor in full if you were returning items for a credit? Me either. This is just a common sense decision from Borders.


Disclosure (“none” means no position):Long BGP
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Citigroup To Buy Regional Bank: No Kidding!

File this under “tell me something I don’t know”.

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“Citigroup (C) is in talks to buy a regional bank that operates in areas that overlap with the New York financial-services company’s focus in the U.S. Northeast, California and Texas, people familiar with the situation told The Wall Street Journal. The move comes less than a month after Citi walked away from Wachovia (WB), which is trying to close its purchase by Wells Fargo (WFC), the Journal reported. The identity of the target bank couldn’t be determined, the paper said. But it said Citi Chief Executive Vikram Pandit wants to deepen the bank’s U.S. deposit base, which is a cheap and reliable funding source.”

In a post last month after talking to people at Citi in regards to the then Goldman Sachs (GS) / Citi rumors “So, the question then becomes. Where does Goldman fit? Answer? It doesn’t. Citi wants deposits and neither Goldman nor Merrill (MER) have any. Sources at Citi indicated to me if it does a deal it will be with a depository institution that has minimal branch over lap with current operations, not a broker.”

Citi buying a regional bank isn’t news. It just isn’t…If this was a secret, then I was the last to know it was a secret…


Disclosure (“none” means no position):Long GS, none
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Politics and Investing

So, I got the following comment from a reader.

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“the blog was not about politics before and now after the election you take shots at the new admin, so you starting to dilute your blog focus, which I thought was about undervalued companies and business.

As a reader i am not really interested in your political views, actually I am not interested in politics at all. so you can choose to continue to obsess about obama and whatever and I choose to stop visiting and reading.”

Where to start? How about a quiz.

– Can anyone name the largest investor in US financial companies?
– Can anyone name the entity that forced shareholder dilution on US banks?
– Can anyone name the entity that has control of the US mortgage market?
– Can anyone name the entity that arbitrarily changed the basic rules of investing when it banned short selling, first in financials them a gamut of US businesses?
– Can anyone name the institution, that had it’s “bailout fund” been classified as a “Sovereign Wealth Fund” would be the world largest?

The answer to all of the above is the US government.

At no time in my adult life has the day to day action of the US Government had so much effect on investors. Perhaps one could argue the election of Ronald Reagan in 1980, but since I was 12 then, we’ll omit that. The reason politics rarely entered the conversation here before was that politics before had very little effect on it content.

I can understand and enjoy hearing differing views, but to ignore Washington now as a investor is to do so at your own risk. Shareholders of Fannie, (FNM), Freddie (FRE), and AIG (AIG) held by some of the greatest investor of all time and at the time called “undervalued” were wiped out by the actions of the US gov’t.

I’m not sure I have been anything but vicious in my criticism of Bush appointee SEC Commissioner Chris Cox and have begged Treasury Secretary Paulson to take a “time out” and have criticized the current bank injection plan. I have even come off my earlier in the year support of Ben Bernake and said he is trying too many things right now. All these folks are product of the current administration. In that respect, my criticism easily crosses political party lines.

The reader says I “take shots the new administration”. Not really. I have repeatedly trashed the media’s lap dog mentality to it. As a rule if the media in mass love something, I immediately become skeptical about it. For proof one need only go back the first press conference as President Elect. We were subject to hard hitting questions like “what kind of dog will you get”, “what book are you reading”, “where will your kids go to school”. Really? That is the best you got?

The world stands on the edge of global recession and we are wondering if Obama will get a beagle or a lab? Really?

My fear of the current administration is that we know nothing about what they will do. Why? The media did a pathetic job getting answers. Even Tom Brokaw admitted post election “I don’t know” in response to a question about what Obama will do now elected. Isn’t that their job in its most basic element, to find out?

If anyone read the Sunday papers this week they were full of articles guessing about what Obama will do. Guessing…Again, at no time in my adult life have these questions been asked AFTER and election. We knew where Clinton was going and we certainly knew what GW was going to do.

The reader then says I “obsess about Obama”. We’ll, he is the new President. He will be for the next 4 years. I think by default that requires he be top of the list? I will give Obama credit for one thing, he managed to be elected President without anyone really knowing what his plans are. Kudos..

What we do know is based on Barack’s record and his words. From that we know he has never voted for a tax cuts, has had a floating “tax increase” income target and wants to spend $1 trillion more . Other than that, nada. We have some grand plans but, thank to the media, we have scant, if any details.

At least in the 1980 election Reagan had been Governor of California so people had a good idea of his plans based on how he had previously governed. That and the media then at least asked him for specifics. The media was right about one thing in this election though. This is perhaps the most important election in a generation. I just wish they had attempted to give us the information necessary to make an informed decision.

For any investor to ignore politics today is to do so at their own peril. Does anyone think shareholders of Ford (F) or GM (GM) are not wondering if the gov’t will step in, and if they do if their shares will become worthless? Does anyone really think that based on the AIG, Freddie, Fannie episode anyone thinking about buying shares is not standing by waiting to see what the gov’t is going to do first?

Need value investors look any further that Friday’s press conference to see Berkshire’s (BRK.A) Warren Buffett standing onstage for proof that the political climate has the interest in and is of primary importance to investors of all types?

One could easily argue and be correct in saying that Bush 1, Clinton and Bush 2 (until 2008) only had an effect on the fringes of the economics of the country as none faced anything like what is in front of us today.

Today we are embarking on re-writing the basics of our economic and regulatory framework that has been in place for almost 80 years. We are also doing so with an incoming administration we know very little about at a time when things will have to be done rapidly. Does anyone think the rules the banking system follows are going to be the same at this time next year? Me either. If you don’t know what the rules will be next year, how can you value and entire sector of the economy?

Do I want Obama to succeed? Of course. His failure will be all investors and America’s failure. A Carter-like Presidency from Obama is bad for all of us and no one wants that (at least not here). That being said I am not going to sit back and say that a “new day has dawned” or the “world is better today” because we have a new leader who can give a hell of a speech. For the record, had McCain won I would be saying the same thing. Changing the driver does not mean the car works better right away.

I have not commented on Obama’s foreign policy or social programs, their effect on investing in general is negligible. I do get nervous when his people use words like “rule” to describe his readiness though..

Has anyone seen or heard a politician talk recently without them using the words “Wall St.”? Why should we as investors ignore Washington when clearly they are focused on us?

I can’t think of how it would be anything but irresponsible to ignore it and the effect it will have on investing going forward in the blog. If you disagree, feel free to talk about it in the comments section but to ignore the political landscape today I think may be costly..


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It’s Official: Circuit City Files Chapter 11 ($cc)

This has been a long time coming..

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In October 2007, I wrote a post “Circuit City on the Bankruptcy Express“. While they did not take the “express” there, they still got to their ultimate destination.

Circuit City Stores Inc. (CC) filed for Chapter 11 bankruptcy Monday in Virginia’s Eastern District bankruptcy court.

The Richmond, Va., consumer electronics retailer had long suffered under competition from its larger rival, Best Buy Co. (BBY).

Circuit City listed its amount of assets at $3.4 billion and its total debts at $2.3 billion, according to a bankruptcy document filed with the court. About 168 million shares of its common stock are held by about 4,463 shareholders, according to the filing.

The company said it had has more than 100,000 creditors. The largest single debt listed in the filing is $118.8 million owed to Hewlett-Packard Co. (HPQ).


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Berkshire’s Post Party Hangover ($brk.a)

The real story here isn’t the derivative contracts or the investment holdings, it is that indeed, “the party is over”.

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Thus was the quote from Berkshire’s (BRK.A)Chief Warren Buffett in his annual letter earlier this year in regard to insurance results.

Here are the details:
Net income fell to $1.06bn, or $682 per share of Class A stock, marking the fourth consecutive decline in net quarterly profits. Berkshire’s operating earnings, which exclude investment and derivatives losses that were recorded for accounting purposes but largely unrealised, slid 19 per cent to $2.07bn. Given the slide in the economy, the fall in operating earnings should not shock anyone nor be unexpected.

Berkshire Hathaway recorded $1.01bn in losses on the value of some investments and derivatives for the third quarter, compared with $2bn in gains in the third quarter of 2007. Berkshire said that the amount of investment and derivative gains or losses it reported “in any given quarter or year is usually meaningless”.

Most of those losses stemmed from unrealised losses on derivatives contracts. Again, true. Given the fall in the market, and the option contracts Buffett has written, one can only expect from quarter to quarter large swings in wither direction here.

Now we get to the real problem.

Berkshire said profit from underwriting insurance fell 83 percent to $81 million amid the most costly hurricane season since the record storms of 2005. Its reinsurance group, which sells catastrophe coverage to other insurers, posted a $166 million pretax loss for the quarter. Profit from selling policies at car insurer Geico Corp. fell 27 percent to $246 million. Berkshire typically gets about half its revenue from insurance.

Hurricanes Ike and Gustav cost insurers a combined $10 billion when they struck the Gulf Coast in September, according to preliminary data althought it is not clear what portion of this is Berkshire’s.

Berkshire, is, for all it various parts an insurance company.

Back in July I wrote:
“For all its holdings, Berkshire is essentially an insurance company. It has operated under “perfect” conditions for the last two years according to Buffett and eventually to run must end. Premiums are already falling and as houses are re-poed and fewer new cars are purchase, insurance premiums derived from those products will fall accordingly. I know people who are looking at homeowners and auto policies for way to decrease coverage and save money. Whether or not this is a good idea is irrelevant (I do not think it is), it is happening. Throw in a hurricane or two (we are due) and insurance could suffer quite a poor year.

For more on Berkshire’s insurance read this former post:”

So what about the future? Buffett has invested billion in Goldman Sachs (GS), Dow Chemical (DOW) and GE (GE). These bets will all pay off long term. But, in the next year or two, one has to believe that the insurance industry must turn around if you are to believe Berkshire is.

There really isn’t anything one should be able to point to on the horizon that would return the industry to its 2005 -2006 glory years. Those were in essence “bubble years” in insurance also. as housing has fallen, so have results there. If that is true, then 1/2 of Berkshire’s results will suffer.

Is Berkshire “in trouble”? No. To say other wise would be foolish.

Buffett’s investments will pay off down the road. But, rather than helping earnings grow, they just may have the role of slowing or mitigating the decline.


Disclosure (“none” means no position):Long Dow, GE, none
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Monday’s Links

Rahm, Thank-you, Leder, Brokaw

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– Just what does Obama’s Chief of staff believe?

– Thanks for the mention

Nice job Michelle

– Wow….both Brokaw and Rose admit, post election, they “don’t know about” Barack. Perhaps if they had just asked him questions other than “what’s your favorite color”?


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"Money, Banking and the Federal Reserve" (video)

From the Mises Institute

. From Feb. 2006. This is a great video on the damage inflation does.
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Derivatives and Their Role In the Current Crisis

This is a long video but it is crucial if you want to understand what happened.

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Hat Tip to the blog “Distressed Volatility” for finding it


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Ambac CEO: Liquidity Issue Solved

Ambac (ABK) CEO David Wells addresses the Moody’s (MCO) downgrade.

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So, now we know Ambac has talked to the Treasury about the TARP program. Does this “solvency” vs “liquidity” argument sound eerily like the AIG (AIG) fiasco?


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Mort Zuckerman on the Markets

Boston Properties (BXP) Chairman, the nations largest office landlord ought to be listened to.

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Don’t want to watch and want the cliff notes….don’t be too optimistic.


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One of The Funniest Things I Have Ever Seen

I had tears coming down my face….

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Obama Win Causes Obsessive Supporters To Realize How Empty Their Lives Are


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AutoNation Earnings Call Notes ($an)

Notes from yesterday’s AutoNation (AN) earnings call

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CEO Mike Jackson said:

“In the third quarter total US industry new vehicle retail sales declined 31% based on CNW research data. In comparison, in the third quarter AutoNation’s new vehicle unit sales declined 24%. This performance relative to the US retail total is attributable to a combination of increased market share as well as the benefit of our geographic and brand mix relative to the total market.”

“We have shifted our capital allocation strategy from share repurchase to debt reduction. So far this year we have repaid $589 million of combined non-vehicle debt and floor plan debt. This was made possible by strong operating cash flow including a significant contribution from working capital improvements. Going forward we have targeted an additional $500 million of total debt reduction.”

“Finally, prior to the third quarter of 2008 we operated as a single operating segment. During the third quarter of 2008 in response to changes in the automotive retail market including the disproportionate decline in revenue and earnings from our domestic franchises relative to our import and premium luxury franchises, we made changes to our management approach and divided our business into three operating and reportable segments: Domestic, import and premium luxury.

Beginning in the third quarter resources are allocated and performances assessed based on financial information from each of these segments. We believe that our segment-related disclosures will improve the transparency of our financial reporting.”

“Despite the impairment charges, we remain in compliance with all the covenants under our debt agreements. Our consolidated leverage ratio at September 30 which measures non-vehicle debt to EBITDA was 2.65 versus the covenant limit of 3.0. Our capitalization ratio which measures floor plan plus non-vehicle debt divided by total book capitalization was 61.5% at September 30 versus the 65% cap. We believe that our aggressive costs and cash-flow management will enable us to continue to reduce debt and remain in compliance with our covenants.”

Other notables:
– Compared to the quarter a year ago, revenue per new vehicle retail of $30,000 was off $530 or 2% primarily driven by a decline in truck pricing that was highly incentivized in a shift in car/truck mix. Same-store gross profit per new vehicle retail of $1,975 was off $184 or 9% impacted by compressed truck margins which were pressured by the liquidat5ion of low demand inventory.

– At September 30 we had a 62-day supply of new vehicle inventory favorable to the industry at 72 days. At 62 days our day supply increased 14 days compared to the quarter a year ago resulting from a slowing of sales in September. Since June 30 we’ve managed our inventory down by 6,600 units ahead of our target for the second half of the year.

– Turning to used vehicles, we retailed just over 45,000 used units in the quarter up 13% compared to a year ago. Same-store revenue per used vehicle retail was down 7% as consumer demand for value or lower-priced vehicles continued to trend upward. Truck pricing remained under pressure but began showing signs of improvement as gas prices started to drop.

– Gross profit per used vehicle retailed was down 8% or $136 with used cars and trucks having approximately the same margin and each accounting for about half of the margin decline.

– As we look at the rest of 2008 we believe the market will remain extremely challenging. We also believe that in 2008 new vehicle sales for the industry will decline to the low 13 million unit level.

– New vehicle sales for 2009, the most conservative industry forecasts are in the range of 12 million new vehicle units. Even at a 12 million unit sales rate, AutoNation will remain profitable and we are confident that we will remain in compliance with our debt covenants.

The key phrase it the bold highlight above…”increased market share”. We know An is not going under and neither is Berkshire’s (BRK.A) Buffett pick in the sector, CarMax (KMX). The key is how strong do they come out of it. I have yet to find any evidence that these dealer groups are not going to be a substantially better position when we come out of this than when they went it.

Since that seems to be true, it is just a matter of buying shares and waiting. It’ll happen..

Disclosure (“none” means no position):Long AN, None
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Friday’s Links

Free Bold, Severance, FireFox, Deflation

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Leave it Wal-Mart

– Is anyone surprised it sucks?

20% share

Panic?


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Fairholme "In Discussions" with AmeriCredit ($acf)

Luecadia (LUK) owns 28% so together with Fairholme (FAIRX), this could get interesting.

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From the 13-D
“The Reporting Persons are in discussions with the Issuer’s management concerning (i) the exchange of certain debt securities of the Issuer held by the Reporting Persons for additional Shares, (ii) the acquisition by the Reporting Persons of asset-backed securities of the Issuer or its affiliate offered in a future securitization transaction, and (iii) an agreement under which the Reporting Persons will refrain from taking certain actions with respect to the Issuer for a specified period and will acquire one seat on the Issuer’s board of directors, and the Issuer will waive the application of the Texas Business Combination Law. The Reporting Persons reserve the right, at a later date, to consult with management and other shareholders of the Issuer from time to time to evaluate the business prospects of the Issuer as well as its present and future intentions.

Except as set forth above, the Reporting Persons have no plans or proposals
that would relate to or would result in: (a) any extraordinary corporate transaction involving the Issuer; (b) any material change in the present capitalization or dividend policy of the Issuer; (c) any material change in the operating policies or corporate structure of the Issuer; (d) any change in the Issuer’s charter or by-laws; (e) the Shares of the Issuer ceasing to be authorized to be quoted in the over-the-counter security markets; or (f) causing the Issuer to become eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934. The Reporting Persons, however, reserve the right, at a later date, to effect one or more of such changes or transactions in the number of Shares they may be deemed to beneficially own.”

“As of the date hereof, Fairholme may be deemed to be the beneficial owner of 22,853,914 Shares (19.6%) of the Issuer, the Fund may be deemed to be the beneficial owner of 16,692,000 Shares (14.0%) of the Issuer and Bruce R. Berkowitz may be deemed to be the beneficial owner of 22,850,413 Shares (19.6%) of the Issuer, based upon the 116,312,936 Shares outstanding as of August 26, 2008, according to the Issuer.”


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Leucadia Files 10-Q: Pershing Losses Disclosed

Wow

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In its annual report in February Leucadia (LUK) booked an $85 million loss on the investment in Target (TGT).

In the most recent 10-Q for the first nine months of 2008 Leucadia is booking another $27.7 million dollar loss on the investment.

Pershing head, Bill Ackman recently unveiled his plan for the retailer. One has to assume as his options, dated 1/2010 get closer to coming due he will begin to put real pressure on the retailer.


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