January 15, 2015 Comments

Markets continue to be anything but boring.

On Thursday, the S&P 500 was down 0.9% and Toronto was down 0.3%

I was shocked to hear that Target will close up.

I did point out way back (see Sept 19, 2011, August 1, 2012, February 27, 2013) when it was announced and multiple times after that that they had paid what seemed like an excessive amount for the Zellers leases ($1.8 billion, or about $10 million per store) and that they were spending a lot on renovations (about $15 million per store). For that reason I correctly predicted that they would not be a low cost operation. (And I saw no other analysts comment at the time about the huge costs they were sinking into each store and how that might prevent them offering low prices).

But I considered the lease costs to be basically fixed by contract and the renovation costs are already spent and I figured that SURELY they would make what is called an operating profit before considering these fixed costs. Normally you would not shut down a store that was generating an operating profit even it it was not covering some of the fixed costs. The reason for that is the fixed costs don’t go away when you shut down.

Well in this case maybe some will. Target Canada has filed for bankruptcy. I would not have guessed they would do that, not when the parent is financially healthy. It sounds like they are willing to stiff their landlords and creditors. Target USA has a new CEO from outside of the company (a warning sign in itself) and I suspect this new idiot is shutting down Target Canada even though it may not make sense to do so. By shutting it down he gets to take a “big bath” write-off and then suffer no further losses. Even if the one-time loss is WAY bigger than the expected losses over the next ten years he might prefer that as it puts the problem behind him. This is also why this was announced now before they close the books on 2014.

Overall I judge Target to have displayed colossal incompetence from start to finish on this Target Canada deal. The old CEO was rightly turfed as was the executive in charge of Canada. Next, every Board member who approved the original deal should immediately be ousted.

Hudsons Bay / Zellers who sold the leases to Target are to be heartily congratulated. It would be nice if they could come back in and grab the leases back for a song and say thank you Target for the free and spiffy renovations. They could use some stores for the Bay and reopen some as Zellers. These are now very good retail spaces and I do hope someone can fill them. (Watch for Dollarama to grab some of the smaller ones or least part thereof.)

This is a slap in the face to the many thousands of workers. Absolutely despicable. Frankly, the Canadian government should complain to Obama about his. It’s a black eye for the whole United States the way this played out especially the filing of bankruptcy.

Meanwhile Bombardier announced it will suspend work on a new model of its Lear Jet and take a $1.4 billion “charge”. That is a LOT considering its book equity value is $1.6 billion and its market cap (before today was just over $6 billion). The stock declined by 26% to $3.07. This is absolutely pathetic. It is stunning that Pierre Beaudoin son of the former long-time CEO and grandson of the founder is allowed to remain as CEO despite a dismal record. They recently fired their top sales executive. Not the first time they ousted a sales V.P. The real problem is in the CEO chair. The family controls the company with multiple voting shares. It’s real shame. I’d certainly like to see the company do well. It is a very tough industry. But still when the CEO can’t deliver for years and years on end, he has to go. I had thought this might be a good year for Bombardier as the C-series jet comes into service late this year. But what I have observed over the years is that winning companies tend to keep winning and losing companies usually manage to keep losing.

I have thought for years that it would be great if Berkshire Hathaway would buy them. Buffett would love the products and the storied history of the company. And his NetJets company buys a LOT of planes from them. But Buffett would hate the economics of the company and I suspect he would have no use at all for top management and he only buys with good management in place. If Berkshire owned it it would slash its debt and interest costs immediately.

I am not quite ready to write them off for dead as yet. One reason for that is the the Canadian government is unlikely to let it go under. So the shares might be okay as a speculative pick. The pref shares also took a big hit today. Again the may be okay as a speculative fixed income pick. But certainly there is substantial risk here. I may be biased to the upside here because I own both equity shares and pref. shares. I (stubbornly) added to my pref position today.

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