Tuesday, December 11, 2012

Applying Short Framework to J. Bildner & Sons and Jiffy Lube

J. Bildner was an upscale yuppie grocery store chain that went public in the fall of 1986. It claims to serve time-conscious consumers with high levels of disposable income. In other words, a big 7-eleven with great service and home delivery for i-bankers and the like. The store featured imported tile, marble, European refrigerated cases, antique fixtures, and mahogany paneling and offered everything from video rentals to Brie to Pampers.

I. Short Sale Categories and Characteristics 
1.IPO stock with a franchise mania.
2.Young and inexperienced managers.
3.Flawed business plan: Atlanta and Birmingham did not suit the business plan. People in the South behave differently from the North. No one is going to drive to a mall after work and fight crowded parking lots for pricey carryout, and return home in rush hour traffic to eat in. 

II Research the Short Candidates:
1. The quality of earnings was poor. Other expense went down from 280,339 to 34,781. It turned out that the company used a one-time gain of one of the company's store to offset operating expenses. 
2. Construction delays hurt the expansion plans and the company required more financing than originally anticipated. 
3. Cash burn was quicker than anticipated. 
4. Prepaids and other assets were rising. Aggressive capitalizing pre-operating expenses.
5. The company is not meeting is strategic plan by a large margin. It only opened 23 stores compared to the originally planned 50.
6. Closing of the New York stores with sales price lower than cost.

Jiffy Lube, a quick oil change franchise company, was a growth stock and a short sale candidate with plenty of Wall Street assistance in blowing up the balloon. It was great franchise training, with a classic set of franchise financial statements for short sellers who fought the restaurant rage in the 1990s.

I. Short Sale Categories and Characteristics 
1.Poorly devised business plan: The company bet that a spectacular growth rate of franchises would swamp all competition and leave it in control of the field. 
2. New concept with no barrier to entry. (oil change, how hard is that). 
3. Jiffy Lube took debt for franchisee start-up expenses and they delivered inventories of oil and parts for credit. It is not normal for franchisor to assume all of the risk of many of the franchisees. 

II Research the Short Candidates and Key Development:

1986: Prospectus
1. The Company requires substantial amount of capital to provide for the acquisition and development of centers. 
2. Competition was mounting. 
3. The stock was selling at 40 times next year's earnings. 
4. Operating income was full of nonrecurring items such as gains on the sale of real estate and Company Operated Centers. 
5. Management has routinely facilitated the Company's funding of various projects by either loaning money directly to the Company or personally guaranteeing loans from others. 
6. Conflicts of interest: Certain members of management are investors in area developments and franchises. 

1. Related party transaction. CEO and chairman of the Company through a partnership which he started with 4 other partners, increased Jiffy Lube's revenue and cash. 
2. Non recurring earnings were greater than GAAP earnings. 
3. High AR, average store sales dropping, too much credit to franchises (no moeny down for owners/operators). 
4. Burning cash, but still announced a stock repurchase plan. 
5. Debt is up. 

6. The company also held 31 centers for resale.
7. SEC disagreed with the recognition of area-development fees.
8. The company purchase a new headquarter for $10,500,000.

1. Acquisition rumor, stock spiked but the rumor failed to materialize.
2. Centers for resale were up to 70.
3. Debt kept going up.
4. Credit loss provision increased.
5 Franchisee backed assets escalated from approximately 45% to 79% of total assets.
6. If a company quits adding new franchisees, earnings and revenue growth halt. If a parent subsidizes all the growth of new stores, slow payments can kill already tenuous cash flow.

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