Thursday, May 31, 2007

Washington Post Tells Us: "Don't Fear the A-Word."

In a recent Washington Post article, a Eugene Robinson argued, “Don't Fear The A-Word”

Mr. Robinson said: “There are plenty of explosive words in this debate. When we talk about the 12 million or so people who are in this country on expired visas, or who never bothered to get visas at all, do we call them "undocumented migrants," which implies that the thing to do is get them proper documents? Or do we call them "illegal aliens," which implies that they are criminals who need to be punished?

I'm in the "undocumented migrants" camp, basically on aesthetic grounds -- I think it's dehumanizing to use the same noun for a Mexican day laborer who sneaked across the border that one would use for a six-armed visitor from another planet. Let's be honest, though. Coming into the United States on a tourist visa and staying for months or years after the visa expires is a violation of U.S. law. Crossing the border with no visa at all is another violation of U.S. law. "Illegal" is a harsh word, but accurate.

We can and should argue about issues of culture and assimilation -- I happen to believe that those cultural issues are a crock and that recent Latino immigrants are strengthening this nation, as did previous waves of Irish, Italian, Eastern European and Asian immigrants, but it's legitimate to debate that proposition.”

The 10Q Detective responds:

Mr. Robinson, I am afraid of the ‘A’ word for the following reasons:

  • You are dismissive of the demographic and economic implications of the mass migration across our southern border. Recognizing that the U.S. does not have the political will to say “NO!”—the government of Mexico is exporting their poverty to the United States.
  1. According to recent reports, demographics suggest than an average of 577,000 Mexicans migrated to the U.S. each year between 2000-2005, compared to 495,000 deaths a year in the same period. In 2006, 559,000 migrated and there were 501,000 deaths.
  2. Almost two-thirds of adult Mexican immigrants have not completed high school, compared to less than 10 percent of natives. Ergo, the primary effect of Mexican immigration on the U.S. labor force is to increase the supply of unskilled workers — 22 percent of all the high school dropouts in the U.S. labor force were born in Mexico. Albeit most Americans have completed high school, some 10 million adult native-born workers lack a high school education in the U.S. workforce. By increasing the supply of unskilled labor, Mexican immigration has reduced the wages of these workers who lack a high school education.
  3. Mexican immigration has added significantly to the size of the poor and uninsured populations, and to the nation’s welfare caseload.
  • When looking at the root causes of many civil wars, one issue that comes up time and time again in these conflicts is the language barrier. Sri Lanka (Sinhala and Tamil tongues), Balkans (Serbs, Croats, and Bosnians), East Timor (Tetum vs. Indonesian)—tell me again how flooding our nation with non-English speaking aliens is just an ‘aesthetic’ inconvenience?
  • Contrary to The Washington Post’s disinformation campaign, the wave of recent Latino immigration is not strengthening this nation. According to recent data from the Center for Immigration Studies:
  1. More than one-half (52.6 percent) of Mexican immigrants do not have health insurance, compared to 13.5 percent of natives, and Mexican immigration by itself accounts for 3.3 million or 29 percent of the growth in the size of the nation’s total uninsured population since 1987. Even among legal Mexican immigrants who have lived in the country for more than 20 years, more than one-third are still uninsured. Obviously, Messer. Robinson, you have not been to one of our overcrowded and understaffed emergency departments recently!
  2. Because of their much lower average incomes and resulting lower tax payments, coupled with their heavy use of means-tested programs, Mexican immigrants have a significant negative effect on public coffers. Based on estimates developed by the National Academy of Sciences for immigrants by age and education level at arrival, the estimated life-time net fiscal drain (taxes paid minus services used) for the average adult Mexican immigrant is negative $55,200.

I do fear the “A’ word.

This morning I called Comcast because I was having a problem with my landline. An automated voice in a monotone voice said: “Press #1 for English; Press #2 for Spanish.” Forced to press #1, I waited 20 minutes on hold.
I asked the service rep why—as an English-speaking native, did I have to press any number?
"Matt," I said. "Why couldn’t those in need of language assistance [Spanish speaking], press #1?
His answer: HE HUNG UP ON ME!
Here’s to you Mr. Robinson—Take your blinders off!
p.s. It might do all of us some good to learn the lyrics to Himno Nacional Mexicano, the national anthem of Mexico, and --soon-to-be--our anthem, too!

The opinions expressed herein are those of the editor of the 10Q Detective, David J. Phillips.

Wednesday, May 30, 2007

"En su condición de Presidente," Bush Surrenders to Illegals: Forget Amnesty, It's Time to Raise the Mexican Flag.

Miss USA Rachel Smith was jeered and booed [video] mercilessly at the Miss Universe pageant by a Mexican audience angry at U.S. immigration policy. Despite the howls and chants of "Mexico! Mexico!" by the natives, Ms. Smith managed to stay poised, offering her Spanish-speaking hosts an enthusiastic, "Buenas noches, Mexico. Muchas gracias!"

The boorish display of those assembled in the audience shines a light on a glaring weakness in the fabric of Mexican society—blaming the endemic ills (poverty) of what’s wrong with their third-world country on outsiders (no! blame the “imperialists/gringos"). Perhaps if the hapless spectators exerted equal energy addressing the corruptness and ineptitude endemic to Mexican politics—judges, police, etc.—we could empathize with their plight.

And, here at home, we are witness to the same behavior—“undocumented workers” [ha!] storming our streets, protesting for rights in a country that does not belong to them. One can only imagine a group of retired Americans parading through Mexico City, demanding civil rights—and social security checks—from the Mexican government.

Call me a bigot—but do not call me stupid! When—and it is a matter of when—the 15 million criminals in this country get their amnesty, where are their (expected) entitlement monies going to come from to pay for their social security benefits, Medicare, housing, schooling, etc, (for they never paid taxes)?

Read my lips: Amnesty = Citizenship. Can U.S. taxpayers absorb the costs of an influx of millions of unskilled, non-English-speaking, migrants in the next few years?

Heritage Foundation scholar Robert Rector recently released a new study, entitled, “The Fiscal Cost of Low-Skill Immigrants to the US Taxpayer.” In the report, Rector debunks two myths propagated by liberals and liars alike (a.ka. George Bush):
  1. Contrary to the purported economic benefits that immigrants bring with them when they cross the Rio Grande—“the doing work no one else will do argument” heralded by those pandering to special interest immigration lobbies—on average, low-skill immigrant households re­ceived $30,160 per household in immediate govern­ment benefits and services in FY 2004, including direct benefits, means-tested benefits, education, and popula­tion-based services. By contrast, low-skill immigrant households paid only $10,573 in taxes. Thus, low-skill immigrant households received nearly three dollars in benefits and services for each dollar in taxes paid (if at all).
  2. There is a common misconception that the low edu­cation levels of recent immigrants is part of a permanent historical pattern, and that the U.S. has always admitted immigrants who were poorly educated relative to the native born population. Historically, this was not the case. For example, in 1960, recent immigrants were no more likely than were non-immigrants to lack a high school degree. By 1998, recent immigrants were almost four times more likely to lack a high school degree than were non-immigrants.
  3. If the Bush-Kennedy amnesty bill passes, it is estimated that the burden imposed by low-skill immigrant households (per one-million illegal immigrant households) who get ‘probationary citizenship’ will raise the aggregate net tax by roughly 4 percent of each legal American household.
George Bush, were you not elected to protect our borders? Last October, Bush signed into law The Secure Fence Act of 2006, providing for 700 miles of border fencing. In the Roosevelt Room, upon signing the bill, Bush said: "The Secure Fence Act is part of our efforts to reform our immigration system. We have more to do. Meaningful immigration reforms means that we must enforce our immigration laws in the United States. It is against the law to hire someone who is here illegally. We fully understand that most businesses want to obey that law, but they cannot verify the legal status of their employees because of widespread document fraud. So we're creating a better system for verifying documents and work eligibility, and in the meantime, holding people to account for breaking the law."

To date, less than three miles of fencing have been built. And no people—read businesses—have been held accountable for breaking immigration law.

Bush, Ted Kennedy, big business—they all speak with blithe ignorance of the mess all their selfish interests have begotten upon this once-great country.

Curious as to why labor unions—think AFL-CIO—speak out in support of pro amnesty immigration ‘reform?’ Flooding the market with cheap labor would supposedly run contrary to their better interest. However, union leaders are not advocating on behalf of their current dues-paying members. They are—once again—positioning power to line their own pockets.

According to the U.S. Department of Labor, union membership rate declined from 20.1% in 1983 to 12.0% (of employed wage and salary workers) in 2006. So what if wages decline? Union bosses need numbers to boost aggregate dues payable (to pay for their own wages). “Give me your tired, your poor, your huddled masses”—and the Mexicans!

And, we will not even speculate on backroom deals made by union leaders to register—and deliver—Spanish-speaking voters to the Democrats.

In history an additional result is commonly produced by human actions beyond that which they aim at and obtain -- that which they immediately recognize and desire. They gratify their own interest; but something further is thereby accomplished, latent in the actions in question, though not present to their consciousness, and not included in their design. – German philosopher
Georg Hegel (1770 – 1831)

More than 150 years-ago, President Polk (a Democrat!) planted the idea of “Manifest Destiny,” which took root among the American people. The consequences of this belief that the U.S. had a God-given right to occupy and "civilize" the whole continent lead to the
Mexican-American War (1846-1848), known in Mexico as la invasión estadounidense (the United States Invasion).

Santa Ana’s defeat led to the signing of The Treaty of Guadeloupe Hidalgo (1848). The treaty called for the annexation of the northern portions of Mexico to the United States, which later became the U.S. states of California, Nevada, Arizona, New Mexico and Utah.

Not to devalue the injustices done to Mexicans more than a century ago—but, don’t blame me, my ancestors were laboring in wheat fields somewhere in the Ukraine (before they legally entered this country)

Sadly, I believe that historians will be re-writing the last chapter of the
Mexican Cession, the historical name of the present day southwestern United States ceded by Mexico in 1848.

What lands Mexico lost in war, they are winning back through their policy of a tacit invasion of the United States. With each passing day—as the number of illegal Mexicans in our country grows (compounded by births on U.S. soil), Mexico takes back a little bit more of their lost land(s) and culture.

Santa Ana, levantado de entre los muertos!

p.s. Dear Mr. Bush: You talk about "protecting our borders." When are you going to pardon Border Patrol Agents Ignacio Ramos and Jose Compean?--who never should have been sent to prison [for trying to actually protect our borders]! It speaks volumes when the drug dealer they were chasing has yet to see the inside of a jail cell.

The opinions expressed herein represent only those of the editor, David J. Phillips.

Sunday, May 27, 2007

Who Benefits from Glaxo's Drug Disaster?

Former chair of the FDA's Cardiovascular & Renal Drugs Advisory, Dr. Steven Nissen, whose challenges to the safety of several prescription medicines—both best-selling, Vioxx (rofecoxib), and drugs awaiting approval, Pargluva (muraglitazar)—limited or derailed their use, now has turned his sights on Avandia (rosiglitazone), a $2.2 billion diabetes drug from GlaxoSmithKline (GSK-$52.43).

In a
meta-analysis of 42 trials just published in The NE Journal of Medicine, the Cleveland Clinic cardiologist concluded, that as compared with placebo or with other anti-diabetic regimens, treatment with rosiglitazone was associated with a significant increase in the risk of myocardial infarction, and with an increase in the odds ratio of death from cardiovascular causes (not statistically significant).

Critics address these findings as another example of gaps in the FDA review process, specifically the system of post-marketing surveillance of drug safety, such as its reliance on voluntary reporting by drug manufacturers themselves, which by some estimates occur only about 10% of the time.

Sidney Wolfe, director of Public Citizen's Health Research Group, called the Avandia situation another example of why the FDA's division for evaluating postmarketing safety of drugs should be removed from under the auspices of the agency's Center for Drug Evaluation and Research and made an independent branch in the agency.

Nissen said that “patients and providers should consider the potential for serious adverse cardiovascular effects of treatment with rosiglitazone for type two diabetes.”

These findings represent a particular health concern because more than 65% of the deaths amongst diabetic patients are attributed to heart disease.

“Diabetes Drug Called a Potential Death Risk”USA Today

Albeit this story has been covered ad nauseam, the 10Q Detective is posting an article on Nissen’s analysis because we believe that the public—once again—has been done an injustice by newsrooms’ inflammatory coverage of the [publicity-seeking] cardiologist’s findings.

Remember the Maine
To hell with Spain.

Like the
yellow journalism that set us on a collision course to war with Spain in 1898, many journalists are sensationalizing Nissen’s opinions to sell newspapers and/or magazines—with little regard for those most likely to be impacted by the findings—type 2 diabetes mellitus patients currently taking Avandia (and who might make unilateral decisions to stop taking a drug controlling there blood sugars, without notifying their doctors).

You can't serve the public good without the truth as a bottom line. ~~ Watergate journalist Carl Berstein

In June 2004, more than 3,000 people
surveyed by the respected Pew Research Center expressed skepticism toward news outlets and those who run them. More than half (53%) agreed with the statement "I often don't trust what news organizations are saying." Nearly as many (48%) believe people who decide on news content are "out of touch."

The 10Q Detective argues that the Avandia controversey epitomizes why circulation continues to decline at national dailies—like The New York Times, LA Times, and The Washington Post. Trust issues and lazy reporting are the corrosive causes of subscription losses—not reader flight to the Internet.

Rarely were the statistical flaws/ endemic biases in Nissen’s methodology mentioned in press accounts:
  1. Restriction of coverage issue: Nissen’s trial selections were not free of bias--trials of Avandia in which patients had no adverse cardiovascular events in either group were excluded from analyses;
  2. The pooled results were culled from a group of trials that were not originally powered to detect cardiovascular outcomes;
  3. It has been observed that the conclusions of a meta-view can be shown to be different from a subsequent, larger, randomized clinical trial. Nissen’s observed results were based on a relatively small number of events (86 myocardial infarctions in the rosiglitazone group and 72 in the control group); and,
  4. Fallibility of broad applicability for Nissen’s observed conclusions. Nissen said—and the press ran with his one comment—that rosiglitazone was associated with an increase in the risk(s) of cardiovascular morbidity and mortality.

The mean age of the subjects was approximately 56 years and the mean baseline glycated hemoglobin level was about 8.2 percent. We note that reporters failed to ask a salient query, such as, “how long were the blood sugars of the observed patients uncontrolled?”

The 10Q Detective reminds our readers that (a) diabetics are more prone to CHD and other cardiovascular events and (b) the longer the trial participants had the disease, the greater the risk of an observed CVD event!

A more widely recognized source of potential bias that can affect every type of medical study, including a meta-analysis, is a financial one. As an example, a researcher authoring any type of study would routinely tend to have a personal bias favorable to the company's product underwriting the study.

Nissen did disclose that he consults for, and receives research support to perform clinical trials through the Cleveland Clinic Cardiovascular Coordinating Center from Eli Lilly (LLY-$59.36) and Takeda—marketers of Avandia’s key (and only competitor) in the
thiazolidinedione class, the $2.6 billion seller, Actos (pioglitazone).

It is not our intent to impugn Nissen’s deserved reputation. Nonetheless, few—if any!—news outlets reported his potential conflict of interest, or any suspicion that the study was done in order to achieve a desired result.

Why did not one reporter mention that the interpretation of a meta-analysis is potentially subject to an author’s inherent bias? When an advocate of a particular position conducts a meta-analysis, it is more likely to be biased in concordance with the author's previously advocated opinion, rather than refute one’s prior conclusions. [It is well known within the pharmaceutical community that Nissen has been a vocal critic of Avandia for years.]

Facts are stubborn, but statistics are more pliable. ~~ Author/Humorist Mark Twain (1835 – 1910)

On reading the NEJM meta-view, we were troubled with Nissen’s comment that the observed risks of rosiglitazone might not be a "class effect" of thiazolidinediones:

“Pioglitazone is a related agent also widely used to treat type 2 diabetes mellitus. However, unlike rosiglitazone, pioglitazone has been studied in a prospective, randomized trial of cardiovascular outcomes, called Prospective Pioglitazone Clinical Trial in Macrovascular Events (PROACTIVE). The primary end point, a broad composite that included coronary and peripheral vascular events, showed a trend toward benefit from pioglitazone (hazard ratio, 0.90; P=0.095). A secondary end point consisting of myocardial infarction, stroke, and death from any cause showed a significant effect favoring pioglitazone (hazard ratio, 0.84; P=0.027).”

In plain English, “a trend toward benefit” is not material. Specifically, the primary end point occurred in 21% of patients on pioglitazone, compared with 25.5% of the patients on placebo. Pioglitazone's total risk reduction of 10% was not considered statistically significant. The study was powered to show a 20% reduction in the composite of primary end-point events.

Albeit the secondary end point—death, nonfatal heart attack, and stroke—was statistically significant, Nissen failed to mention heart failure occurred more frequently in the pioglitazone group (10.8% of patients) than in the placebo group (7.5% of patients), with 5.7% versus 4.1% being hospitalized.

In our view, the Avandia affair illuminates, too, the ignorance of many of Wall Street’s (purportedly) ‘best and brightest” health-care analysts.

"We certainly do not see any negative spillover to Actos," said Merrill Lynch pharmaceuticals analyst Masatake Miyoshi in a note to clients. "If anything, we believe that evaluation of Actos' effectiveness in reducing cardiovascular events and its safety will only improve," he added.

As the precise mechanisms underlying the actions of thiazolidinediones (TZDs) are largely unknown, it is a quantum leap to say that one drug in the class is safer than the other.

Contrary to Nissen’s aforementioned “class effect” comment, there are no published, double blind-trials directly comparing the safety and efficacy of Avandia and Actos as monotherapy or in combination with other anti-diabetic agents. And, both TZDs can cause fluid retention, which may exacerbate or lead to heart failure.

To his credit, Nissen did note, “the rapidity and magnitude of the apparent hazard was not consistent with an effect produced by lipid changes alone.” In other words, the build-up of unstable plaque in one’s arteries is a life-long event—not the result of 26 weeks of drug-induced, lipid raising therapy.

Again, the press was silent on this latter point—choosing instead to link Avandia [itself] directly to CVD risk and death.

It seems to me that just in the ratio that our newspapers increase, our morals decay. The more newspapers, the worse morals. Where we have one newspaper that does good, I think we have fifty that do harm. We ought to look upon the establishment of a newspaper of the average pattern in a virtuous village as a calamity. –Mark Twain

Editor, David J. Phillips does not hold any financial interest in the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Wednesday, May 23, 2007

10Q Portfolio Updates

Sold Short 200 Shares of Usana Health Sciences (USNA)

500 Shares of PenGrowth Energy Trust (PGH)

2,000 Shares of China Natural Gas (CHNG)


"We are very pleased with our performance through the first quarter of 2007. Approximately 14 filling stations contributed to our revenue performance in the first quarter of 2007. Additionally, we are completing construction of 3 new filling stations in the second quarter of 2007, and will have a total of 17 filling stations contributing to our third quarter 2007 revenue," stated Mr. Qinan Ji, Chairman and CEO of China Natural Gas.

Funny thing most investors missed, the Company had previously stated its targeted goal was to be operating approximately twenty-one company-owned natural gas filling stations by the first-quarter of 2007. Stopped-out.

1,500 Shares of Neurochem (NRMX)






Neurochem reminds me of a battered boxer holding onto the ropes to stay vertical. The company's recent plan to offer $80 million in toxic convertible notes was the latest in a series of blows, signaling that Alzhemed was finished. If management had confidence in the clinical results of its Alzheimer's disease treatment, would it not have waited until after the release of the Phase III data to seek additional financing (on more favorable terms)? My trainer threw in the white towel to stop the bloodletting.

Blue Nile, Inc. (NILE) Aug-07 $50 Put

Tuesday, May 22, 2007

Is the Luster off Blue Nile?

The French are glad to die for love.
They delight in fighting duels.
But I prefer a man who lives
And gives expensive jewels.

Blue Nile (NILE-$52.50) recently reported net sales of $67.9 million in the first quarter, representing year-over-year growth of 34 percent. The increase in net sales was attributable to strong growth in all product categories.

A kiss on the hand
May be quite continental,
But diamonds are a girl's best friend.

The online diamond retailer delivered net income of $3.2 million, up 34.3% from the first quarter of 2006. Reported net income per diluted share was $0.19, representing EPS growth of 46 percent. Our EPS of $0.19 for the quarter was $0.04 above the top end of our guidance range.

Analysts expected $0.15 a share on $62.1 million in net sales.

Men grow cold
As girls grow old,
And we all lose our charms in the end.

CFO Diane Irvine said, “Few companies know their customers as well as we do, and this allows us to continually become more adept at tailoring our website and our products to answer our customers' needs. This is visible through the healthy increases in the volume of traffic to our website, as well as our conversion rates during Q1. Total orders increased over 29% as compared to a year ago. Our average selling price per order was $1,536 in the first quarter, representing an increase of 3.6% from the prior year.”

As if to lend legitimacy to their business model, CFO Irvine enthusiastically crowed about the performance of jewelry at price points above $25,000: “The number of orders at price points above $25,000 increased 69% from the prior year. In diamond jewelry, we had seven transactions above $100,000 during the first quarter.”

CEO Mark Vadon added that Blue Nile was rapidly evolving into a brand of class—an e-tailer Tiffanys, "Stature of the Blue Nile brand is such that so many people trust us with such exceptional purchases. Some of the most impressive sales this quarter included a 5-carat engagement ring for $140,000 and a 6.5-carat pair of diamond earrings for $130,000. Our most memorable order during the quarter was a $195 garnet pendant that was shipped to a customer in Texas in late March."

But square-cut or pear-shaped,
These rocks don't loose their shape.
Diamonds are a girl's best friend.

When asked by an analyst about the impact of price point activity on margins, Vadon did concede there was a trade-off, growth rate for downward pressure on margins—above $100,000 gross margin fell to the single digits.

Albeit unit volume and unit prices increased, gross profit as a percentage of net sales was 19.5% in the quarter ended April 1, down 90 basis points from the prior year. Management said the decrease in gross profit as a percentage of net sales was primarily due to retail price reductions in diamonds that were instituted midway through the quarter ended April 2, 2006 to optimize gross profit (euphemism for saying that price-cuts were initiated on some products to stimulate—otherwise—sluggish sales?) In our view, higher diamond prices from suppliers adversely impacted gross margin, too.

Operating income as a percentage of net sales increased 20 basis points in the quarter to 5.4%, due to higher volume sales and a 100 basis point reduction in SG&A (which management attributed to their ability to “leverage the cost structure”).

Blue Nile has historically spent about 4 percent of revenues on marketing and advertising, a level that management says will continue for the foreseeable future. This is slightly lower than the typical independent specialty jeweler who spends about 5 percent of sales on promotions and advertising. Tiffany & Co. spends about 6.2 percent of revenues on advertising. Contrary to management’s view, we believe SG&A will come under pressure in future quarters.

The Company is looking to expand internationally, which means a build-out its infrastructure—fulfillment operations and electronic commerce services.

On the conference call, CFO Irvine said, “all categories were very strong…. Wedding bands are tremendous, probably our number 2 product category. Then if you look at non-diamond jewelry, we had great growth there. Sterling silver performed incredibly well, great growth during the quarter.”

Yet, in its 10Q regulatory filing, Blue Nile commented that net sales and results of operations were still highly dependent on the demand for diamonds and diamond jewelry, particularly engagement rings. In fact, more than 90% of business is still in diamonds, 70 percent being in engagement rings. In order to increase net sales and expand its product offerings, the Company must attract new customers or expand returning customers’ product purchases in a cost-effective manner.

Blue Nile’s growth strategy is to communicate its ‘value proposition’ (offering certified diamonds at up to 40% off retail prices) to visitors of its online site. In the last two years, Blue Nile proved to have the highest online visibility of any jewelry retailer across paid and organic search listings. Management attributes this success to its continued web site innovations, including its interactive
diamond search.

In our view, the online jewelry market is not as fragmented as when Blue Nile was first-to-market five years ago. Brick & mortar jewelers are narrowing the gap, investing more to increase search engine visibility. In addition, by building their own interactive resources, competitors are making it as easy for their customers to browse their websites as it is to walk through their doors.

Black Starr!
Frost Gorham!
Talk to me Harry Winston.
Tell me all about it!

Tiffany & Co., home of the little blue box that sets womens’ hearts aflutter, does not offer diamond engagement rings for sale online, it now offers an interactive section that educates diamond buyers in the 4 C’s of diamond quality and the ability to schedule an in-store consultation. The 10Q Detective notes that products containing one or more diamonds of varying sizes accounted for only 46 percent of Tiffany & Co’s net sales in Fiscal 2006.

As Blue Nile looks to other drivers, such as silver jewelry and smaller ticket diamond jewelry in an effort to reach new customers, the Company will start bumping into formidable online competition from the likes of a Tiffany & Co or a
Kay Jewelers.

To avoid maturation of paid-search and stay competitive in diamond search functionality, Blue Nile will have to pony up more advertising and marketing dollars, which will probably increase the cost of a new customer. [The Company does not currently release what it costs to convert a browser to a buyer.]

In addition, we believe that the build-out of online sites by stores with a national footprint—brick and mortar or direct merchandisers—will adversely impact future growth of repeat and referral revenue at Blue Nile. The budget-conscious consumer, for example, can now find an engaging ‘Design Your Own’ diamond service at national retailer
Zales .com site.

There may come a time
When a lass needs a lawyer,
But diamonds are a girl's best friend.

In support of our argument, we submit evidence from Alexa, which provides information on web traffic to online sites. The daily traffic rank (based on a combined measure of page views and users reach) of Blue Nile is trending lower, peaking at a 1,100 rank during the Christmas 2004 holiday (which means there were only 1,099 sites more frequently visited at that time). Its current 3-month average Alexa traffic rank is 10,150.

[Ed. note. We acknowledge the critics of Alexa, who contend that the representative Alexa's user base is atypical of actual Internet behavior.]

Bulls argue that Blue Nile is unstoppable. Future growth will be driven by further penetration in existing markets and new growth in other jewelry categories. Whereas the Company has had success in leveraging online commerce, our aforementioned presentation suggests that the Company’s formula for success in diamonds may not translate into similar success for other jewelry categories.

Looking ahead, Blue Nile sees full-year earnings of 86 cents to 91 cents a share, up from a prior guidance of 80 cents to 85 cents. Blue Nile projects sales of $295 million to $305 million, compared with its earlier forecast of $290 million to $300 million.

Wall Street predicts full-year earnings of 86 cents a share and sales of $300 million.

He's your guy
When stocks are high,
But beware when they start to descend.

On a risk-reward basis, the current valuation of Blue Nile is not compelling. The common stock is selling at 61.6 times fiscal 2007 consensus earnings’ estimate—or a premium of more than 3 times forward 12-month peer estimates. The stock price discounts any fundamental acceleration (even hitting the top-end of its share-net guidance).

Time rolls on,
And youth is gone,
And you can't straighten up when you bend.

While we believe that management is committed to improving its product strategy, it has not yet executed on attracting broader customer appeal for non-diamond products. Product newness will require (unacknowledged) additional marketing dollars.

I don't mean rhinestones!
But diamonds are a girl's best friend.
-- "Diamonds are a Girl's Best Friend" (GENTLEMEN PREFER BLONDES, 1953)

Perhaps this elevated execution risk is the unspoken rationale why insiders—who beneficially own 2.3 million shares of the common stock outstanding—have unloaded more than 16.3% of their holdings, for an estimated $20.0 million.

Marilyn Monroe may have sung,
Diamonds Are a Girl's Best Friend”, but like this (highlighted) Swing Cats version, it lacks the luster of the original. The same can be said for Blue Nile trying to remix its business strategy

Editor David J. Phillips owns put options in Blue Nile's common stock. The 10Q Detective has a Full Disclosure Policy.

Monday, May 21, 2007

Looks Alone Will Not Help What's Ailing Jones Apparel Group

Being properly attired is a must at clothing retailer Jones Apparel Group, Inc. (JNY-$28.57). Named Executive Officers and non-management directors alike receive 35% -to- 40% discounts on purchases made at any Barneys New York stores.

Jones Apparel Group is a marketer and wholesaler of branded apparel, footwear and accessories. The Company operates the Barneys New York chain of luxury stores and also markets directly to consumers through its chain of 411 specialty retail stores and 701 (value pricing) outlets. Its nationally recognized brands include Jones New York, Nine West, Anne Klein, Gloria Vanderbilt, Kasper, Evan-Picone, Norton McNaughton, Joan & David, and Mootsies Tootsies.

Corporate Governance

Directors Lowell W. Robinson and Allen I. Questrom, who made $242,008 and $268,266, respectively, in their service to the Company last year, were rebated $11,710 and $35,198, respectively, in their pursuit of the better-dressed look.

CEO Peter Boneparth and Chairman Sidney Kimmel earned compensation of $4.02 million and $1.36 million, respectively, in total compensation for fiscal 2006. Included in this remuneration were clothing discounts totaling $10,586 and $25,829, respectively.

Pride does not wish to owe and vanity does not wish to pay. ~ French noble and writer François de la Rochefoucauld (1613 – 1680)

Chairman Kimmel can relax in traffic, too, for the Company provided him with a car and driver, which cost shareholders $120,554 last year.

When in NYC, CFO Wesley R. Card is provided with a car service, company apartment, and a tax gross-up for his ‘crib’ in the city—$8,411, $79,171, and $77,448, respectively. Messer. Card earned more than $2.5 million—and the Company is headquartered in NYC—could he not afford to rent his own apartment?

Financial Outlook

On May 2, Jones Apparel Group posted a lower-than-expected quarterly profit and slashed its full-year outlook due to higher cost of goods and weak sales of shoes and moderately priced sportswear.

The company said it earned $47.8 million, or 44 cents per share, on $1.24 billion in sales in the quarter. Jones' retail same-store sales (open more than one-year) fell 5% for the period, driven by a 12.3% decline at its footwear outlet stores.

Analysts polled by Thomson Financial expected net income of 60 cents per share on revenue of $1.22 billion.

Due to the strategic decision to exit some moderately priced lines (with estimated aggregate operating margins in the single digits) and a cautious retail outlook for fiscal 2007, management cut its 2007 earnings outlook to a range of $1.95 to $2.05 per share from a prior implied forecast of $2.41 per share, or 10 percent year-over-year growth.

Of course, those businesses being targeted for sale, such as sportswear makers Norton McNaughton and l.e.i and/or Westies and Sam & Libby footwear brands, are non-performing—in terms of projected revenues and profitability—and would be sold at discounts (given recently recorded goodwill and trademark impairment charges), for there likely would be few buyers.

Investment Considerations

The share price of Jones Apparel Group has lost about 17 percent in value in the last year, as compared to a 52-week change of 20.18% in the S&P 500 Index.

There is another reason why the stock appears cheap, selling for a projected 0.6 times and 14.2 times 2007 sales and earnings, respectively. Operating margins and ROA (for the trailing five years) of 8.8% and 5.3%, respectively, are well below industry averages of 15.6% and 15.8%, respectively.

In addition, the retailing landscape is in flux, shrinking Jones’ national footprint. Ownership changes in the retail sector are a cause for uncertainty. Federated Department Stores (FD-$39.70), which operates more than 850 department stores in 45 states under the names of Macy's and Bloomingdale's—accounted for approximately 18% of Jones’ sales in fiscal 2006.

Federated is swallowing May Department Stores, and is expected to close about 80 duplicate stores in the coming year.

There is an increasing focus by Jones’ department store customers to concentrate an increasing portion of their product assortments within their own private label products. These private label lines compete directly with Jones’ own product lines. In fiscal 2006, ten customers (principally department stores) accounted for approximately 47% of gross revenues.

Until the directors and executives start spending less time gazing in front of the store mirrors—and more time looking at how to turnaround this troubled retailer—there are no catalysts in play (such as a sale or spin-off of Barneys) to push Jones’ share price back above the $30 level.

Narcissus does not fall in love with his reflection because it is beautiful, but because it is his. If it were his beauty that enthralled him, he would be set free in a few years by its fading.
~~ Anglo-American poet W. H. Auden (1907 – 1973)
Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this column. The 10Q Detective has a Full Disclosure Policy.

Friday, May 18, 2007

Hope Springs Eternal at Particle Drilling -- Forget About It!

On May 10, Particle Drilling (PDTI-$2.74), announced its second quarter results ended March 31, 2007. Reflecting its status as a development-stage oilfield services company, PDTI reported no revenue.

CEO Jim Terry backed away from previous comments that the Company would have ten sets of equipment available for rental by the end of 2007. As of the 2Q:07, PDTI had constructed only two PID units—neither of which was ready for commercialization.

Once again, he understated system failures, instead working to get investors to focus on sequential “performance improvements” of the Company’s
PID system in drilling through hard rock:

"This most recent quarter represents another big step forward in the development of our PID technology. Most notably, we demonstrated our best performance to date in a new formation, with a new customer using a newly designed bit—while integrating on a different drilling rig. Overall, the new PID unit performed very well."

A little learning is a dangerous thing. – British poet Alexander Pope (1688 – 1744)

Pulled from PDTI's second quarter 10Q filing: "After conducting four full-scale field trials, [management] finally believes that all components of the PID system are now functioning satisfactorily—with the exception of the frac pump driven injection system. While some minor modifications will be made to the PID bit in order to further improve performance, most of PDTI’s focus is now being directed towards implementation of a new particle injection system. The preferred alternative to the current system is an extruder-based system, which has been purchased and is currently undergoing testing and modification."

The Company expects to make another big leap in PDT when it deploys its new particle-injection system.

As the 10Q Detective
posted last month, management’s repeated promulgations of commercialization prospects have been only outmatched by the fact that the Company still has yet to earn a dollar in rig rentals.

The Company has never generated cash flow from operations, and until revenues commence, the Company continues to be highly dependent upon debt and equity funding.

Hope springs eternal in the human breast:
Man never is, but always
To be Blest.
– Alexander Pope

Editor David J. Phillips does not hold a financial interest in this company. The 10Q Detective has a Full Disclosure Policy.

Wednesday, May 16, 2007

Aduddell Industries -- Hurricane Season Stock Play

Commercial roofer Aduddell Industries (ADDL-$0.56) is implementing vertically integrated growth strategies that—if successful—should produce the catalysts necessary to drive organic and acquisition-based growth.

In the second half of 2006, Aduddell increased the scale and scope of
restoration services to include the total exterior envelope of a building through the asset purchase of Merit Construction and Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company.

The $1.08 million acquisition of Merit demonstrated the Company’s acuity to grow company assets by seeking out only accretive, complimentary business combinations. This purchase launched its restoration division, which eliminated Aduddell’s need to outsource restoration projects, while increasing restorations market opportunity and allowing the roofing segment to cross sell services to customers (and increase the aggregate restoration division sales).

The segment’s sales increased from $4 million in 2005, to over $6 million in 9 months of 2006, and continued to grow with a backlog in excess of $10 million at year-end.

The Company has signed definitive purchase agreements to acquire Hayden Building Maintenance, Inc. as well as Hudson Valley Roofing and Sheet Metal, Inc., privately held commercial roofing companies in New York.

Of concern, because of inadequate financing, management does not expect to close on the purchases by the previously announced May 18, 2007, closing date (known risk of a penny stock—inability to use equity as currency). Aduddell continues to seek acceptable financing and remains hopeful that it will proceed with the acquisition(s) at a future date. The 2007 combined revenues of these two companies would add over $4 million in revenues.

Hayden Building Maintenance has an office in New Orleans that is currently actively involved in commercial roofing related to disaster response.

Roofing Market Overview

In the roofing market, there are more than 50,000 companies with more than $25 billion in annual revenues. This is a highly fragmented industry, which presents multiple candidates for acquisition by Aduddell Industries in its goal to build a national footprint. No single company accounts for more than one percent of this market and most roofing companies are independent operators with limited access to capital for expansion.

Benefiting from Hurricane Season

In fiscal 2006, Aduddell entered the national emergency response market by creating AdudEnviro & Emergency Management Services, Inc. (E2MS), a subsidiary that is positioned for growth in pre-event preparation and recovery-response to weather-related and man-made disasters. Headquartered in Stuart, Florida, with an additional office in Boca Raton, E2MS is responsible for all disaster-driven Aduddell roofing projects, both public and private. E2MS is also cross-selling the parent Company’s complete roofing and restoration services, as well as marketing a number of environmental services that answer a myriad of urgent needs in the wake of natural and manmade disasters.

It is not a question of if the next disaster will occur, but when. Largely due to the rapid dissipation of El Niño conditions, scientists affiliated with the Tropical Meteorological Project are calling for a very active hurricane season (officially June 1 – November 30). Their extended
Range Forecast of Atlantic Seasonal Hurricane Activity and U.S. Landfall Strike Probability for 2007 includes about 17 named storms, 9 hurricanes, and a 50 percent probability that at least one major (category 3,4, or 5) hurricane will slam into landfall (the U.S. East Coast, including Peninsula Florida) in 2007.

Calamity is virtue's opportunity. -- Roman philosopher, Seneca the Younger (4 BC - 65 AD), De Procidentia (IV) [Misfortune]

Albeit the probability is slight that 2007 will come close to matching the devastation of the 2005 Atlantic hurricane season—which included 26 named storms, 13 hurricanes (of which seven were major), and more than $200 billion in financial losses—we believe Adudell has positioned itself to maximize revenue from any disaster event—including other weather-related emergencies (tornados, fires, and flooding).


Revenues increased from $3,734,577 for the quarter ended March 31, 2006, to $9,952,242 for the quarter ended March 31, 2007. Revenues for 2007 included a 78.2% growth in roofing revenues as well as $3,185,471 of revenue in the new business line, restoration services.

The quarterly loss increased from $(114,513), or a net-loss of one cent per share, to $(2,615,893), or a share-net loss of five cents, primarily due to lower margins associated with certain project delays, cost overruns (which have been addressed), and infrastructure investments (higher selling, general and administrative expenses of $2.8 million). However, free cash flow improved to $(653,350) from $(14.62 million) in the prior year.

The Company's current backlog is approximately $27 million, up from $11 million at this time last year. In addition, the Company pointed out that its business is seasonal and first quarter revenues and profits are typically significantly lower than in subsequent quarters.

Management expects profitability to improve in the 2H:07, as cost reduction initiatives and function consolidations currently in place lead to quarterly reductions of more than $670,000 in administrative costs (coupled with higher sales volume and increased margin).

For an emerging growth company, Aduddell has a strong balance sheet, with only $582,681 in long-term debt (an earn-out provision), long-term debt-to-shareholder of 6.4 percent, and a book value of 17 cents per share.

One concern, as previously mentioned, with about 53.9 million shares outstanding and a share-price of 56 cents, the common stock will prove to be of little currency value in financing any future acquisitions.

Reading Between the Lines

We expect the Company to show a sequential improvement in fundamentals in coming quarters, due to its recurring revenue model (75% of all roofing expenditures are attributable to re-roofing, restoration, and repair) and cost initiatives. Nonetheless, we doubt upward price momentum in the underlying stock price will begin until management can demonstrate to investors that it can offer sustainable revenue and profit growth.

Still, for those investors looking to speculate on a low-priced “Hurricane Stock,” Aduddell Industries is our suggested idea.

Investment Risks and Considerations

Aduddell intends to supplement its organic growth primarily by acquiring commercial roofing companies in existing and new markets. The success of this acquisition strategy will depend on the extent to which management is able to identify, acquire, and successfully integrate and profitably manage additional businesses.

Commercial roofing is a seasonal industry and can fluctuate based on weather conditions. Aduddell’s operations and the demand for its roofing services can be expected to fluctuate from quarter to quarter due to a variety of factors, including but not limited to, adverse weather and the timing of acquisitions. For example, mild, dry weather results in reduced demand for the number of roofs in need of repair. Conversely, adverse weather increases the number of roofs in need of repair, but due to the increased demand and the inability to render services during such periods, severe weather can delay the time it takes to complete a roofing project. Accordingly, management expects its revenues and operating results generally will be lower in the first and fourth quarters of each year.

E2MS is new to the disaster-response market and faces tenured (‘politically-connected’) competitors. In fiscal 2006, Aduddell derived no revenues from pre-event planning, event management and post-event recovery services for disaster related activities.

The Company is making inroads in 2007, by leveraging relationships in the roofing and restoration markets. Management has negotiated a number of pre-event contracts as first responders in the event of an emergency. In one of these contracts, E2MS has been named the preferred vendor for emergency planning and response by
ASFONA - The Association of Starwood Franchisees & Owners of North America, and is the primary subcontractor to James Lee Witt Associates for emergency roofing and miscellaneous construction for their contracts with the State of Rhode Island and the State of Virginia.

Aduddell’s executive officers and directors owns approximately 76% of the outstanding common stock, with majority shareholder, Timothy Aduddell, beneficially owning about 67% of the Company float. Accordingly, such persons will have a material influence on board and company affairs, which might not always be consistent with the interests of other shareholders.

In our view, save for a lease with Aduddell Holdings, Inc., (a corporation wholly-owned by Tim Aduddell) for Aduddell Roofing’s office, warehouse and yard facilities, there are no conflicting corporate governance issues.
Editor David J Phillips holds a financial interest in Aduddell Industries. The 10Q Detective has a Full Disclosure Policy.

Friday, May 11, 2007

Jesse Jackson Takes His Tin Cup to Energy: Or, Another Day of Playing the Race Card for Personal Gain.

Did you get your race card?
Hell, no, I didn't get my race card!
Did you get your race card?
Everybody, show me your race card!
Did you get your race card?
Yo, what the hell is race card?
Did you get your race card?
Can anybody tell me what is a race card?

Upset over the lack of African-Americans on the Braves roster, members of Jesse Jackson's Rainbow-PUSH Coalition recently met with team officials of the Atlanta-based baseball team.

Joe Beasley, Southern Regional Director for the Rainbow/PUSH Coalition, said he and Dexter Clinkscale, the director of sports for the organization, met Monday morning for nearly two hours with Braves general manager John Schuerholz, assistant general manager Frank Wren and three other Braves officials.

Less than 10 percent of major league players are African-Americans. Might it have more to do with the fact that African-American youngsters are drawn more to basketball and football—and less about purported racism?

A Major League team fields 25 players on their active roster. To be politically correct, does that mean the Braves should sign at least two and ½ black players --is the one-half of mixed descent—to the team?

In a recent interview on the subject, Schuerholz said: "You go to where the talent leads you. Finding major league-caliber baseball players is far too difficult if you try to narrow your criteria down to demographics."

Please don't believe the hype
Everything in the world ain't black and white
Everybody ain't a stereotype
Just because I look wrong, I'm about to do right
Please don't believe the hype
Everything in the world ain't black and white
Everybody ain't a stereotype
Just because I look wrong, I'm about to do right
-- ICE CUBE, Get Your Race Card

If history is any guide, Jackson’s latest excoriation has less to do with advancing the ‘civil rights’ of Black Americans and more about shaking down the Atlanta Braves owners for the usual ‘donation’ to his organization.

Given that Jesse Louis Jackson does not have a ‘real job,’ the IRS is more closely watching what he is paid annually by the Rainbow/PUSH coalition, and the fact that he has another mouth to feed in his family
(fathered a child out of wedlock), this spiritual advisor to audulterers (e.g. Bill Clinton) could use the money!

When we're unemployed, we're called lazy; when the whites are unemployed it's called a depression. ~ Jesse Jackson

In January 2001, The New York Post
reported that Jackson began paying his mistress, Karin Stanford, the child’s mother, $10,000 a month for child support after DNA tests proved that he was the father of her baby girl born in May 1999. The tests were necessary because Dr. Stanford was involved with another man when the child was conceived.

The Rainbow/PUSH Coalition was also reported to have shelled out $40,000 to cover her moving expenses to California, where she bought a home for $365,000.

The men the American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth. – American humorist Henry L. Mencken (1880 – 1956)

In October 2001, a prominent black businessman, Harold Doley, Jr., principal and chairman of the New Orleans-based Doley Securities, Inc. (and the first African American to purchase a seat on the New York Stock Exchange in 1973), accused Jesse Jackson of intimidation, saying the tactics used by the (self-appointed) civil rights leader amounted to "racketeering."

According to Mr. Doley, his troubles began when he started his own Black Broadcasting Alliance (BBA), a competitor to what he called the Jackson-friendly National Association of Black Owned Broadcasters (NABOB). Allegedly, Jackson petitioned the FCC to halt Edwards proposed $1.5 billion sale of 19 television stations to Sinclair Broadcasting.

In anther revelation, Doley contended that Jackson’s extortions of American companies—victims have included telecoms SBC Ameritech, Verizon, AT&T and GTE, brokerages such as Merrill Lynch, Lehman Brothers and Solomon Smith Barney and banks such as Citicorp and Bank of America—were paying and putting money in Jesse Jackson's coffers to the tune of $170 million in commissions a year, 10 percent of which went to Jackson.

The demagogue is one who preaches doctrines he knows to be untrue to men he knows to be idiots. – H. L. Mencken

Robert Huberty, Executive VP—Capital Research Center, which analyzes and tracks the activities of advocacy organizations, has done a great job in illuminating The Art of Jackson’s Shakedown: (i) Jackson looks for deep-pocketed companies whose core-competence is dependent on their public image; (ii) in the name of ‘civil rights,’ Jackson intimidates the companies into defending their hiring/ business practices; (iii) he threatens companies with boycotts and sanctions; (iv) ‘bad cop/good cop’—Jackson threatens to use his political leverage in D.C. to have his ‘friends’ impose government sanctions – or he offers to win them political and legal benefits; but, (v) then he also demands that they pay him for his trouble.

At other times Jackson seeks out a cut of the action for himself or his friends.

Jackson also leans on the individuals and minority-owned companies he claims to be helping and urges them to pay him for the assistance he’s provided—such as, paying a ‘membership fee’ to join his Rainbow alliance.

Author Kenneth Timmerman in his groundbreaking 2002 book, Skakedown: Exposing the Real Jesse Jackson, alleges, too, that Jesse Jackson never earned the titled, ‘The Reverend.’

Timmerman claims, “Jesse Jackson got himself ordained two months after Martin Luther King was shot. It was essentially a political ordination, a shotgun ordination. He did not go through the long procedure. He was not licensed to preach, as far as I could determine. I went to the church where he was ordained. He did not go through this two-year process. He never submitted himself to the authority of the church. He has never had a church himself, and he has been accountable to no one.”

Research done by Timmerman uncovered, too, that Jackson flunked out of the Chicago Theological Seminary after less than a year. But, he was finally awarded an honorary doctorate from that same theological seminary in 2000—more than 30 years later. Coincidentally, that same year, his son, Jessie Junior, the congressman, was appointed to the board of the Seminary.

[Ed. note. How much money do you think he had some Company ‘donate’ to the Seminary for that honor? What—do you think he contributed money out of his own pocket?]

Controversy is not a new adversary to Jackson. His critics charge that contrary to his claim, he never cradled THE Martin Luther King in his arms the day he was shot. In fact, witnesses claim that the pictures taken of Jackson with the [actual] Reverend King were publicity stills shot the day before James Earl Ray assassinated King on his balcony.

While photographs may not lie, liars may photograph. – Photographer Lewis Hines (1874 – 1940)

In a column written for WorldNet Daily back in 2003, political activist Mychal Massie (rhetorically) asked: How many of the jeering black faces Jackson uses as backdrop benefited from his 1997 shakedown of Viacom? Once Viacom agreed to pay $2 million with Jackson as the principle recipient, all opposition disappeared.

Exactly how has his intrusion into the NFL helped blacks? How many qualified blacks are in coaching positions today because of Jackson? Did Dennis Greene or Tony Dungy get hired and succeed because of Jackson?

How many blacks can truthfully say they tangibly benefited from Jackson's shakedown of Credit Suisse, Goldman Sachs, Morgan Stanley and Paine Weber?

Jackson’s has a side-business, too, a lobby, Wall Street Project, with a mission statement purportedly “designed to promote minority participation in corporate America."

In our view, its existence is just another front— promoting racial tension and extortion to the pinstripe crowd on Wall Street—and then extending the tin cup, ‘asking’ for donations.

Activist Massie alleges that Wall Street Project takes in more than $10 million yearly—with most of the dollars going to his narrow network of friends and business associates.

On May 1, 2007, Jesse Jackson said his organization, the Rainbow PUSH Coalition, will next target energy companies like Exxon Mobil Corp. and ConocoPhillips in “a push to create more jobs for women and minorities in the industry.”

To punish a man because we infer from the nature of some doctrine, which he holds, or from the conduct of other persons who hold the same doctrines with him, that he will commit a crime, is persecution, and is, in every case, foolish and wicked. – Thomas Babington Macaulay, English historian, essayist and politician (1800 – 1859)

In light of record profits being reported by oil companies—and little sympathy for energy companies among ordinary citizens, green activists, and DC politicians—Jackson smells another pay day. As already documented by others, Jackson has made a lucrative career out of keeping racial strife alive in America.

In an article published by the Chicago Sun Times (February 27, 2007), Jackson wrote, "America is said to be suffering from poverty fatigue. Reagan's "welfare queen" has been supplanted by the "illegal immigrant" supposedly living on the dole, avoiding taxes and consuming services."

The 10Q Detective can only hope that America—Black, White, Green, or Purple—is finally suffering from Jesse Jackson fatigue, too.

The one place where a man ought to get a square deal is in a courtroom, be he any color of the rainbow, but people have a way of carrying their resentments right into a jury box. As you grow older, you'll see white men cheat black men every day of your life, but let me tell you something and don't you forget it - whenever a white man does that to a black man, no matter who he is, how rich he is, or how fine a family he comes from, that white man is trash.

~Harper Lee, To Kill a Mockingbird

In our view, the same could be said of a black man, especially one who cheats men of any color.

Editor David J. Phillips does not hold a financial interest in any of the companies that Jessie Jackson has blackmailed to support his lavish lifestyle. The 10Q Detective has a FULL DISCLOSURE POLICY.

Wednesday, May 09, 2007

'Say on Pay' -- Bon-Ton Stores Shows the Way...Why NO!

Dozens of “say on pay” resolutions have been put forward this year by shareholders at annual meetings of U.S. corporations amid controversy over soaring executive pay compensation.

According to Institutional Shareholder Services, a corporate governance advisory service, a total of 240 pay-related proposals have been filed for annual meetings held in January through May 2007, up from 131 in the comparable period last year. “Say on pay” proposals form a high-profile subset of these resolutions, with more than 60 shareholder proposals submitted to date.

Management at those companies—of course—are advising shareholders to vote against this—and similar, non-binding advisory proposals—arguing that pay practices approved by compensation committees are in keeping with good corporate-governance principles.

Vote results for seven of the resolutions reported so far this year show average support of 41 percent. To date, the highest level of support came April 24 at Merck & Co. (MRK-$52.24), when 49.2% of the votes cast supported the resolution.

Verizon Communications Inc. (VZ-$40.62) may become the first publicly traded U.S. company where the shareholder “say or pay” resolution might be adopted by investors, depending on the outcome of a close vote at the Company’s annual meeting last week.

In a
press release, the No. 2 U.S. phone company, said “the preliminary results for the proposal on an advisory vote on senior executive compensation was too close to determine whether the proposal passed or was defeated, and a final result would be announced in the next few weeks.”

In our view, introducing a shareholder voice on pay will neither improve board accountability nor strengthen the pay-for-performance linkage. The 10Q Detective posits that U.S. Companies will just engage in Orwellian
newspeak: amending and restating performance metrics—‘lowering the bar,’ where bad performance is simply replaced by ‘ungood.’

There are some ideas so wrong that only a very intelligent person could believe in them. – British author George Orwell (1903 – 1950)

During the last four years, department store operator Bon-Ton Stores Inc. (BONT-$48.61) experienced dramatic growth in the size and scope of its operations, primarily through the acquisition of The Elder-Beerman Stores Corp. in October 2003 and the $1.1 billion acquisition of the Carson’s division of Saks Incorporated in March 2006. Sales increased from $713 million in 2002 to over $3.3 billion in 2006.

During the same period, the number of stores increased from 72 stores operating in nine states to 283 stores operating in 23 states.

Trading on these impressive trends, the Company’s common stock has performed well as the Company has grown, rising in value from $4.14 per share on the last trading day in 2002 to $37.32 on the last trading day in 2006.

Given its impressive performance—financial and stock gains—it should surprise no one that CEO Byron L. Bergren earned total compensation of about $4.1 million in fiscal 2006, $1.5 million of which was in the form of a cash bonus (which was also the maximum bonus available to him under the Company’s current cash bonus plan).

[We would be remiss—as the 10Q Detective—if we did not mention, too, that included in the $4.1 million was $91,313 in “all other compensation”— $39,418 of which was for rental housing in Milwaukee, Wisconsin, for use during his trips to the Company’s merchandising operations there. We wonder if any of these trips coincided with spring fever in Milwaukee, which means only one thing to the locals—Coho salmon fishing on Lake Michigan!]

To some extent, apparel sales at Bon-Ton are dependent on (i) economic events in the automobile industry, which affect sales trend in the Company’s markets in Ohio, Michigan, and Indiana—states where Bon-Ton has more than one-third of its stores; (2) rising energy prices, which could adversely impact discretionary spending by consumers; and (iii) unseasonably warm weather that in the fall and/or wet weather in the spring would negatively affect traffic trends.

Merchandising decisions [buyers making judicious clothing style decisions] and integrating store acquisitions, impact same store sales at apparel retailers too.

On April 12, 2007, Bon-Ton reported a 3.8% drop in March sales at its stores open at least a year, citing unseasonably cold weather and weak performances from its home and furniture categories.

Analysts, on average, expected the same-store sales to rise 4.5 percent, according to a poll by Reuters.

Citing the aforementioned risks, share-net is expected to slow in fiscal 2008 (ending January), pegged at $3.48, up 18.8% from $2.93 in fiscal 2007. This estimate might be high, for analysts are looking for a traditional strong (seasonal) second half, postulated on a strong turnaround at its legacy stores and the successful integration of its recent acquisition.

how do future events at Bon-Ton link with “say for pay?”

Reflecting the aforementioned slowing of same store comps, the share price of Bon-Ton has plummeted 15.7% in the last two months, peaking at $57.66 per share on March 29, 2007.

In the Company’s recently filed proxy, the Board of Directors communicated to investors that it was the compensation committee’s
philosophy that the Company’s executive officers’ compensation should be directly linked to corporate performance and increases in shareholder value.

Curiously, the Board of Directors is now looking to amend and restate Bon-Ton’s ‘Cash Bonus’ plan:
  • The Cash Bonus Plan was adopted by the Board of Directors as a means to provide greater flexibility in the establishment of performance goals and setting of target bonuses….
  • The purpose of the amendment and restatement adopted by the Board is to increase the maximum individual bonus available under the Cash Bonus Plan from $1,500,000 to $5,000,000 and from two times base salary to three times base salary of an eligible participant.

In calendar 2006, 34% of CEO Bergren’s annual bonus ($1.5 million) and 34% of his Long-Term and equity compensation (restricted shares worth $1 million and performance-based RSUs worth $1 million) were tied to the financial performance and stock performance of the Company.

If the Company is successful in changing the dollar size of its executive Cash Bonus Plan, even if corporate performance and shareholder value drop in comparison to prior years, by raising the maximum payout—on a percentage basis—Bergren could still earn $1.5 million (or more) as a cash bonus.

The Board could defend their payout option, and an ‘ungood’ performance, falling short of stated metrics (bonus weighting: 75%-net income and 25%-net sales), becomes acceptable—as well as the compensation paid to Bergren—even though he made the same bonus for a better performance in the prior year!

During times of universal deceit, telling the truth becomes a revolutionary act. – George Orwell

Editor David J Phillips holds no financial interest in any of the stocks mentioned in this article. The 10Q Detective has a FULL DISCLOSURE policy

Monday, May 07, 2007

Reddy Ice -- In Need of Global Warming

Reddy Ice Holdings Inc. (FRZ-$30.07), the largest U.S. maker of packaged ice—distributing approximately 1.9 million tons of ice per annum—recently reaffirmed its full-year 2007 outlook. The company said it expects to earn $19.2 million to $23.4 million for the year, or 87 cents to $1.06 per share, with revenue of $360 million to $370 million.

Analysts surveyed by Thomson Financial are looking for earnings of 97 cents per share on revenue of $365.4 million.

The 10Q Detective believes that earnings expectations are still too high. Wall Street is expecting 43 percent share-net growth on the back of margin improvements and 6 percent growth in sales for fiscal 2007. Top line guidance is predicated on seasonal gains in the second and third quarters (warm weather); a growth by acquisition strategy; and, continuing efficiency improvements by switching to ten-pound bags of ice (with exponentially higher unit pricing).

In our view, hitting even the low end of guidance will be a challenge:

  • Selling ice is a commoditized business. Reddy Ice believes that they can offset related margin erosion by introducing new bag sizes at various price points. In 2006, sales of ten-pound bags of cubed ice accounted for approximately 42% of ice product revenues, up from approximately 24 percent and 5 percent of ice product revenues in 2005 and 2004, respectively. Management expects sales of ten-pound bags as a percentage of ice product revenues to continue to increase in 2007;
  • As the key supplier in the Southeast to many regional customers—including Albertson’s, Food Lion, Publix, and Winn-Dixie—Reddy Ice believes that it is well positioned to share in its customers’ growth. Management is looking to capture incremental volume as these customers continue to reduce their supplier base in order to achieve efficiencies across the supply chain. However, the price elasticity of demand for ice is elastic [(Ed > 1), the percentage change in quantity is greater than that in price]. Hence, when the price is raised, the demand, and the total revenue of ice producers falls, and vice versa. Ergo, the only way Reddy Ice is going to capture customers and incremental volume is—in the long run—to lower the price of its ice cubes;
  • Due to the seasonal nature of Reddy’s business, the Company records the majority of its revenues and profits during the months of May through September. Approximately 69 percent of annual revenues occur during the second and third calendar quarters. A wetter-than expected spring and forecasts for inclement weather patterns this summer could have an adverse impact on the level of demand for packaged ice and, as a result, Reddy Ice’s revenues and profitability;
  • Freezing, packaging, and delivering bags of cubed ice are dependent on energy prices, a variable cost. Plastic bags, fuel expenses, and electricity expenses represented approximately 8 percent, 4 percent, and 7 percent of revenues, respectively, in fiscal 2006. Rising energy prices will continue to eat into future financial results;
  • The packaged ice industry continues to be highly fragmented. Management intends to continue to pursue strategic acquisitions in existing or adjacent geographic markets that “enhance the density of its distribution routes and provide capacity rationalization opportunities.” We believe that this is nothing more than a roll-up strategy to boost organic growth: For example, in 2006, Reddy Ice acquired ten businesses, which contributed approximately $4.4 million, or 17 percent, to the $26.3 million increase in sales from 2005 to 2006.

The stock is currently trading near 52-week highs, buoyed by investors attracted to Reddy Ice’s 5.5% dividend yield. However, we believe investors ought not ignore that the dividend payout is governed by strict agreements governing Reddy Ice’s debt—and the Company is highly leveraged, too.

The indenture governing Reddy Ice’s senior discount notes restrict the amount of dividends and other distributions the Company may pay. Under the debt covenant, the Board is restricted from paying dividends on the common stock unless, at the time of such payment:

  1. The consolidated coverage ratio (pro forma EBITDA for the most recent four fiscal quarters to consolidated interest expense for such four-quarter period) set forth in the indenture governing the senior discount notes must exceed 2.0 to 1.0;
  2. Under Reddy Ice’s credit facilities, the Company’s total leverage ratio for the most recently ended fiscal quarter for which a covenant compliance certificate has been delivered must be less than or equal to 3.75 to 1.0.

As of March 31, 2007, Reddy Ice’s interest coverage ratio and total leverage ratio were 5.6 times and 2.7 times, respectively.

Irrespective of reconciling net income with non-cash expenses, Reddy Ice is using substantially all of its cash to pay dividend. A payout ratio of 268% will definitively limit the Company’s ability to pursue growth opportunities and operate its business generally.

There are significant amounts of goodwill and other intangible assets on Reddy Ice’s balance sheet, due to non-stop deal making—97 acquisitions (through March 9, 2007) in the last decade.

Goodwill and intangible assets total approximately $$301.9 million, representing approximately 51% of total assets.

And, as of April 24, 2007, Reddy Ice had approximately $10 million of cash on hand, but owed more than $429 million in long-term debt and other contractual obligations (operating leases and purchase contracts).

Total debt stood at more than 2.9 times stockholder equity and its interest coverage was a marginal 1.4 times available (trailing twelve-month) earnings.

In addition to liquidity problems, fuel costs, and the weather, we see other ice distributors as a threat to revenue growth. For example, Home City Ice Company, manufactures 4,400 tons of ice per day, retailing ice across all of Ohio, Indiana, Illinois, Kentucky, and West Virginia, as well as parts of Michigan, Pennsylvania, Tennessee, New York, and Maryland. An efficiently run operation of 28 state-of-the-art manufacturing plants, with 36 distribution centers, and a fleet of over 500 trucks, Home City Ice has frozen Reddy Ice from pursuing ‘growth through acquisition’ opportunities in the Midwest.

We believe that Reddy Ice has formidable competition from commercial ice equipment manufacturers, too. Technological innovations have made producing packaged ice on site less costly—in terms of energy consumption, untimely machine breakdowns and labor problems—for potential Reddy Ice customers. Working through a distribution chain, makers—like Manitowoc (MTW-$74.14), with a market share of 30 percent, Scotsman/Crystal Tips (25 percent), Hoshizaki (20 percent) and Mile High Equipment Co. (15 percent)—sell more than 300,000 ice machines each year to dealers or beverage and food distributors. Distributors and dealers then sell equipment directly to end-users.

Hospitals account for 39.4 percent of all commercial icemaker purchases, followed by hotels (22.3 percent), restaurants (13.8 percent), retail outlets (8.5 percent), schools (8.5 percent), offices (4.3 percent) and grocery stores (3.2 percent).

A typical commercial icemaker, which usually lasts about 7-10 years, consists of a case, insulation, refrigeration system and a water supply system. Each machine, on average, can harvest 500 lbs./day of crushed or ice cubes. Our readers can easily do the math. Each ice-machine a sales distributor successfully plants in certain end-users—think restaurants, retail outlets, and grocery stores—means 91.25 unit tons less in business for Reddy Ice!

[Ed. note. The Packaged Ice Association says that the
‘quality of packaged ice’—disease transmission from contaminated ice, presence of insect parts and foreign objects in frozen ice—reflects the quality of the source water and the sanitary conditions during manufacture. Ice retailers contend that many on-premise operations receive no oversight from local health inspection—ice is classified as a frozen food—and make ice of consistently poorer quality than ice made by major commercial producers.]

In our view, Reddy Ice is not a cheap stock, due to its valuation of 31 times forward earnings and its questionable ability to pay its dividend. Reddy Ice is showing all the signs of an aging company whose growth is too dependent on buying market size. Unstable cash flow and tougher comparisons in future quarters could soon dominate the story here more than the yield payment.

Editor David J Phillips holds no financial interest in any of the stocks mentioned in this article. The 10Q Detective has a FULL DISCLOSURE policy.