Monday, July 27, 2009

"It'll Be Great, Just Wait!" Says CEO Rick Lepley of A.C. Moore

As a result of A.C. Moore’s (ACMR-$3.41) weak overall performance in fiscal 2008, competitive pressures, and the current economic recession, the specialty retailer of arts, crafts, and home floral merchandise has determined for fiscal 2009 to not increase base salaries or offer incentive bonuses for its executive officers, according to its 2009 proxy statement. As the specialty retailer has failed to meaningfully improve store profitability for four successive years running, this suspension in reward compensation is little more than a decorative attempt to mollify disenfranchised stockholders, and reflects the board of director’s feigned commitment to good corporate governance.

And I could be good, and I would - if I knew I was understood
And itll be great, just wait - or is it too little too late?

To his credit, Rick Lepley, anointed chief executive officer in June 2006, has taken steps to make the business more profitable, such as the shuttering of 11 stores in two years, installing up-to-date inventory software programs, and expanding merchandise (beyond traditional craft and art and scrapbooking categories) to attract kids – parents with child hobby activities, such as wood-model kits (boats, planes, drag racing cars) and the newest trends in paint crafts and pen sets.

How many times can a person water a houseful of plastic plants purchased at A.C. Moore’s before the owner realizes that she has no need for a gardener? Despite the endless rewind of initiatives, Lepley’s track record as executive steward has been abysmal: income from operations plummeted from $913,000 in 2006 to a loss of $(23.7) million in 2008 ended January 4, 2009; net sales declined 24.4% to $177 per square-foot by 2008 and average net sales per store fell 25.1% to $4,407 in the same period; and, the stock price during Lepley’s tenure has declined almost 81 percent!

One day, this embarrassment will fade behind me
And that day I could think of things that wont remind me
But these days its unbearable for both of us
We cant discuss it this way.

As for that hackneyed aphorism that the goals of Named Executive Officers’ compensation packages are to “motivate executives and align the interests of senior management with those of the shareholders,” the 10-Q Detective says rubbish!

On June 1, 2006, Mr. Lepley received a cash sign-on lump sum retention bonus of $280,000 and guaranteed cash bonus of $320,000, payable by March 31, 2007—in addition to the usual stock options, grants, and stock appreciation rights showered upon new chief executives. Adding further insult to injury, Lepley’s original
employment agreement articulated limits to his relocation benefits:

  1. For up to six months, Company shall pay for temporary housing for Executive and spouse in the vicinity of the Company's headquarters and for storage of household goods;
  2. Company shall reimburse Executive for standard out-of-pocket relocation and moving expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses; and,
  3. For house hunting and relocation investigation for up to six-months, Company shall pay for monthly round trip travel for each of Executive and his spouse.

In addition to being reimbursed $40,091 for relocation expenses in 2006 and 2007, a read of the 2009 proxy statement discloses the company paid its CEO $114,995 related to the sale of his house in Florida (per his “employment agreement”). Brushing aside the fact that Lepley continued to receive housing benefits beyond six-months, no where in the three filed regulatory amendments to Lepley’s employment agreement was any mention made of sale-related benefits owed to Lepley.

Oh—as for belt tightening—and “feeling the pain” of common stockholders, the compensation board rewarded Lepley with another $550,000 special retention bonus in April 2008, complementing a 4.5% base salary wage increase, too. [Ed. Note. Other senior exexcutives received pay hikes ranging from 8.6 percent to almost 10 percent and special retention awards equivalent to 100 percent of their base salaries!]

If I knew I was understood
And itll be great, just wait -Or is it too little too late?
~ Barenaked Ladies (“Too Little Too Late”)

Commenting on Moore’s dismal
first quarter 2009 results, Lepley said the specialty retailer “did nor expect any meaningful improvement before the second half of this year.”

It will be great, just wait—especially if you are an A.C. Moore executive collecting on guaranteed bonuses!

Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.

Wednesday, July 22, 2009

‘Chic’ Accounting Tricks Boost Sales at Swank Inc.

As retailing continues to face the weakest consumer-spending environment in decades, Swank Inc (SNKI-$2.49), a men’s accessories supplier of leather goods and jewelry collections, reaches deeper into its fashion bag of accounting tricks to boost annual sales.

Distributing its namesake Swank, and well-known brands (like Claiborne, Kenneth Cole, Guess?, and Tommy Hilfiger) primarily to national retailers, such as Macy’s, Kohl’s, and TJX, the New-York marketer continues to demonstrate how to offset year-on-year declines in belt and jewelry sales and increases of in-store markdowns (associated with slow moving or discontinued merchandise) by manipulating period-end adjustments of customer returns.

Net sales in 2008, 2007, and 2006 were favorably affected by over-estimating the annual returns adjustment made during each prior year’s second quarter, according to
regulatory filings:

"Each spring upon the completion of processing returns from the preceding fall season, we record adjustments to net sales in the second quarter to reflect the difference between customer returns of prior year shipments actually received in the current year and the estimate used to establish the allowance for customer returns at the end of the preceding fiscal year."

As the actual returns experienced during the spring of 2008, 2007, and 2006 were less than the reserves established at the end of the preceding fiscal year, the subsequent adjustments increased net sales by $872,000 in fiscal 2008, $637,000 in fiscal 2007, and $1.25 million in fiscal 2006!

In 1995, the late Swank chairman Marshall Tulin (who died in 2005) passed the leadership reigns of president and chief executive officer to his son, John, stating his belief in the 1995 chairman's message that "it was time to let younger minds handle daily operations."

I wish I had it back again
The urge to sip from every mountain stream
Where every season promises
A host of golden, open-ended dreams
And every morning's joyful
With the prospect of days and nights to come
I love it most of all
The wisdom of the young
~ Saw Doctors (
“Wisdom of Youth” / youtube video)

Given John Tulin’s nimble use of the aforementioned accounting estimates – albeit within guidelines provided by generally accepted accounting principles – the 10Q Detective can only caution investors that youthful leadership might not profit Swank shareholders so much as what can be lost without the wisdom of age.

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

Monday, July 20, 2009

Has Noven Pharma's CEO Brandt Earned A $6.0 Million Payday?

Hisamitsu Pharmaceutical is acquiring U.S. drug delivery innovator Noven Pharmaceuticals (NOVN-$16.50), in an all-cash tender offer worth approximately $430 million, or $16.50 per share. Commenting on the merger agreement, Noven chief executive Peter Brandt said it was a great day for Noven, its shareholders, and employees—as the definitive deal “provides substantial value to Noven shareholders.” A read of Brandt’s employment agreement suggests that, in particular, it was an especially rewarding day for Brandt, too.

Hisamitsu, a Japanese manufacturer of transdermal patches for pain relief, is purchasing Noven to expand its business to the United States. Noven provides the company with the sufficient infrastructure—at a good price—necessary to build its presence and brand in the U.S. market.

Following the transaction, Noven’s Peter Brandt, will step down as chief executive—less than fifteen-months after being hired to clean up the unprofitable mess left behind by erstwhile chief executive Robert Strauss, whose contract (after a 10-year tenure) was not renewed due to a 60 percent vertical plunge in the share price of the drugmaker in 2007 [investor impatience with failed initiatives to grow shareholder value].

Brandt will receive $1.3 million in cash severance (equal to two times the sum of his “annual base salary" plus 2008 bonus) and equity options and stock appreciation rights with fair-valued gains of more than $5.0 million upon exercise. His employment agreement requires Novem to “gross-up” compensation for all federal, state, and local income and excise taxes due on the aggregate total, too!

Is Brandt worth the more than $6.3 million he will likely receive upon his planned departure? Contrary to what some critics contend (as articulated by
Jim Edwards over at BNET/CBS), Brandt cannot be blamed for the failed phase 3 clinical trial results of the developmental once-daily lithium carbonate drug, called Lithium QD, for bipolar disorder; the handling of manufacturing problems involving Daytrana, the only transdermal patch indicated for the treatment of the symptoms of Attention Deficit Hyperactivity Disorder (ADHD); and, the (August 2007) $130 million acquisition of JDS Pharmaceuticals, now known as Noven Therapeutics—all these disappointments rest on Strauss’ shoulders.

The 10Q Detective is not known for handing out accolades to chief executives—but, looking back over the past decade, the
stock chart of Noven resembles the Nitro coaster ride at Six Flags: blasting skyward when investors anticipated the company would find success for its patented Dot-Matrix technology in other blockbuster markets beyond its core product offering, the Vivelle-dot for hormonal therapy. However, failure to successfully diversify into other patch markets—such as stalled growth in ADHD due to quality-control issues (adhesion failures) of Daytrana—coupled with other investigational drug disappointments (Lithium QD) inevitably led to the share price hurtling back down to earth. From $9.10 a share—the day he signed on as chief executive—to $16.50 a share in cash being offering by Hisamitsu, the 10Q Detective says: “Dōmo arigatō.” Thank you, Mr. Brandt.

Let Hisamitsu deal with the soaring administrative costs hung on Noven from its JDS acquisition and the R&D capital needed to bring the developmental drugs in its pipeline to market.

“Dōmo arigatō.”

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

Monday, July 13, 2009

Gloomy Christmas 2009 for Peabody Energy Stockholders?

Peabody Energy Corp. (BTU-$28.92), the world's largest private-sector coal company, appears reasonably positioned to ride out the economic downturn, having locked in thermal coal contracts last year for 2009 delivery and beyond at close to 50 –to- 60 percent premiums to current Powder River Basin (PRB) spot prices of $9.00 per short ton. Reduced electric demand and rising inventory stockpiles, however, have utilities clamoring for deferral and relief from their coal-supply off-take agreements—shipments integral to this coal miner’s financial results.

Year to date,
coal-based electricity generation demand has declined nearly six percent from the prior year, or 15 million tons, according to the Energy Information Administration (EIA)—and could fall an aggregate 60 million to 70 million tons compared to 2008. Reduced steam generation combined with cheaper costs of competing power sources, such as natural gas, have contributed to an increase in utility inventory levels of coal, too. At March 31, current stockpiles represented a 21.5 million short ton oversupply, or approximately two-percent on annual consumption of 1.12 billion tons, according to the EIA.

During 2008, more than 80 percent of Peabody’s total sales (by volume), or almost 210 million tons of coal, went to U.S. electric utilities. Looking to address the current oversupply situation, chief executive officer Greg Boyce told analysts on the
first-quarter 2009 earnings call to expect total production cuts of about 15 million tons this year, with most of the announced production cuts anticipated to come from its biggest mining operation in the U.S., the low-sulfur producing PRB coal region in Wyoming. Boyce guided listeners on the call to expect full-year 2009 U.S. production of 185 million and 190 million tons.

Entering the second quarter, Peabody was fully contracted for 2009 shipments and roughly 90 percent committed for 2010. Should generation burn continue to fall through the second-half of the year, there is a growing concern that that more customers would pressure the coal miner to renegotiate volume and price breakpoints or defer shipment schedules. Peabody president Rick Navarre stressed on the quarterly conference call, however, that the company was “not in active renegotiations of contracts,” although he admitted the company would welcome talks to customers having “issues”—depressed end-user demand accompanied by growing coal stockpiles.

When asked to quantify how much of the revised 2009 production target was currently under renegotiation, CEO Boyce was evasive, only repeating that the five million tons taken out of Peabody’s forecast accurately represented the “number of customers” whose burn rates were down and needed shipments curtailed.

Huh? As forecasted power demand is unlikely to rebound before first-half of 2010, odds favor additional utility customers petitioning the company for deferral or cancellation of contracted shipments. Boyce commented on the call that the company was open to amending off-take agreements only where “the value of those contracts” could be retained. In my opinion, his comments smacked of a rhapsody of extended delivery schedules designed to smooth out the current glut of coal clogging the distribution pipeline. The success of this value-trap, however, is premised on contango market theory, where coal in succeeding delivery months is contracted at progressively higher prices, due, in part, to an expected rebound in economic activity. In other words, the entire scheme is nothing more than an attempt to protect production output by back loading coal shipments (at higher price points).

Strong contractual commitments do not guarantee financial success in the current environment. Financially strapped utilities are walking away from their contractual obligations. In fiscal 2008, Peabody lost $56.9 million on failed cash buyout offers from such coal supply agreements. Coal-based utility customers are still trying to find a floor for generation demand, which signals more production cuts and broken supply contracts in the second-half of 2009 for Peabody—and more coal in shareholder stockings come Christmas.

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

Thursday, July 09, 2009

Raser Tech Performs Its Best -- At Raising More Money!

Raser Technologies (RZ-$2.30), focused on the construction of geothermal power plants, demonstrated once again that it is better at raising money than actually delivering megawatts of geothermal power. CEO Brent Cook said the company received net proceeds of $23.8 million from its most recent offering of common stock and warrants. As constructions costs per megawatt of capacity can run upwards of $6.0 million, it is unlikely that this latest capital raising will be the company’s last.

The 10Q Detective has followed the alleged progress of the Company for
more than three years. As we said back in December 2005, Raser is a stock-promoter's dream--hyped PR with no content.

Since re-inventing itself as a builder of geothermal power plants almost five years ago, Raser has accumulated deficits of about $96.2 million—on cumulative revenues of approximately $1.0 million! In addition, at March 31, 2009, negative working capital totaling $58.7 million.

“There are some people so addicted to exaggeration that they can’t tell the truth without lying.” ~ American humorist Josh Billings (1818 – 1885)

Listening to the promulgations of chief executive Cook, one might think that Raser would single-handedly reduce the country’s dependence on OPEC crude. To date, the company has opened one facility, the Hatch Geothermal Power Plant, located in Beaver County, Utah, commonly referred to as the Thermo No. 1 project. In April 2009, Raser began
selling electricity generated by the Thermo No. 1 geothermal power plant to the City of Anaheim, pursuant to a power purchase agreement previously entered into with Anaheim. Management expects the Thermo No. 1 Plant to be fully operational in the third quarter of this year [doubtful]. At full capacity, the plant is expected to produce up to 12 megawatts of geothermal power (enough to light up about 9,000 homes in Anaheim).

Despite the new financing, existing shareholders have about as much chance of seeing a return on their common shares as a Paleolithic Era caveman had of stumbling onto a copper cooking pot! The balance sheet is a mindless mess. In addition to owing $9.3 million in long-term debt obligations due in November 2009, the balance sheet is riddled with millions in warrants (most with reset pricing features). The company has also guaranteed cost overruns in construction-in- progress agreements with a plethora of sub-contractors—from drillers to vendors of transmission and cooling tower equipment. No sense even asking what the contingent exposure is, as the company has historically settled outstanding invoices and overdue promissory note obligations through the issuance of additional stock and warrants.

In additions, rumors are surfacing that service providers, tiring of late payments—if received at all—are walking away from some of the
eight geothermal projects currently under development.

Raser’s business outlook is ambitious, including expectations to finish construction on additional geothermal power plants that will add an additional 50 megawatts, 40 megawatts, and 125 megawatts of electricity sold to utilities during 2010, 2011, and 2012. By 2013, Raser expects to have geothermal capacity totaling 377 megawatts of electricity for sale.

“An exaggeration is a truth that has lost its temper.” ~ Lebanese American poet Khalil Gibran (1883 – 1931)

Given its relentless struggle to improve its liquidity situation, a more likely scenario is that Raser curtails operations or liquidates assets. In any case, existing shareholders have a right to lose their tempers, for exaggeration is a bitter pill to swallow.

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

Thursday, July 02, 2009

Hidden Labor Costs at Kimberly-Clark?

Kimberly-Clark's (KMB-$53.79) plans to layoff three percent of its salaried employees, or 1,600 positions, will lead to an estimated savings of about $150 million annually. Chairman and chief executive Tom Falk said the move was necessary—and in step with other cost-reduction plans—if the personal care products company was to stay competitive against an increasing threat from private-label brands. If the company's latest recovery plan falters, however, union workers could be next up to fall by the roadside.

Huggies diapers, Kotex feminine products, Kleenex tissues, and Scott paper towels—sales volumes of these key products declined in the
first-quarter, losing customers to the lower-cost store brands sold by retailers, such as Wal-Mart, and other consumer products companies, like Procter & Gamble (Bounty paper towels, Charmin toilet paper, and Luvs diapers). Nonetheless, the company still achieved three percent sales growth in the quarter, driven by selective price hikes.

Given the weak economy and growing threat from competitors, there is little wiggle room for the company to raise prices in coming months. Ergo, sequential margin improvements must spring from improvements in manufacturing efficiencies (such as transportation cost-savings resulting from moving diaper-making facilities to high-growth regions) and inventory control (March-ending quarter saw a seven-day sequential decline in inventory levels compared to year-end 2008).

Improved working capital performance, however, is being partially offset by poor returns on its defined contribution pension plan assets. …Continue Reading….

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