Hogs vs. Bama: Retailer Lessons; Anti-Aging Ice Cream; Sara Lee, Flowers Foods and More!

Alabama/Arkansas Revisited – The Business Lesson

We don’t like to re-open the wound, but oftentimes sports teams and businesses employ one strategy to build a lead or market share, then once the lead has been achieved, they change the approach, which often backfires. For 56 minutes and 42 seconds, the Arkansas Razorbacks led #1 rated Alabama. While Alabama’s performance undoubtedly had a lot to do with the outcome, Arkansas changed its offensive approach late in the game, discarding balanced play-calling (running the ball once and passing ten times). Without balance to keep the Alabama defense off-guard, the Tide forced two Arkansas turnovers to pull ahead.

It seems like Wal-Mart’s U.S. merchandising changes over the past several years are similar to Arkansas’ change in strategy late in the game. For over 40 years, Wal-Mart built its lead by relentlessly driving out unnecessary costs and offering the lowest prices on the widest assortment of national brands. A focus on higher margins, reduced assortment, and moving up-market eroded their lead. Now, a return to the original game plan could re-invigorate comp-store sales and put “points on the board.”

Schoewe’s Retirement

Tom Schoewe, Wal-Mart’s CFO is retiring. He’s highly respected among professional investors for his job in overseeing Wal-Mart’s finances and allocating capital. Though he forfeits 132,269 performance shares, 15,011 options (approximately $48.00 per share) are accelerated and vesting of 69,131 shares of restricted stock is accelerated and he is to receive $1,654,848 in a transition payment. His non-compete agreement was extended to 2014. Here’s the detailed SEC filing.

Top 5 CPG CEO Letters to Shareholders

One of the first things that Warren Buffett reads when evaluating a company is the CEO’s letter to shareholders. Today, few shareholder letters are written by CEO’s, even fewer are written for the shareholders, and hardly any are ever read by investors. Most are written PR types and are little more than bizblab. Here’s a few examples that directly address financial performance and the most relevant business issues with unusual clarity.

1) James Craigie, CEO, Church & Dwight, Shareholder Letter

2) Bill Johnson, CEO, Heinz, Shareholder Letter

3) Kendall Powell, CEO, General Mills, Shareholder Letter

4) William McComb, CEO, Liz Claiborne, Shareholder Letter

5) George Deese, CEO, Flowers Foods, Shareholder Letter

SUPPLIER ROUNDUP

We weren’t the only ones that thought Sara Lee was undervalued

Buyout giant KKR, has approached the Board of Sara Lee intent on purchasing the company, according to a NY Post story. Back in June, we crunched some numbers on what Sara Lee might be worth (more than its current stock price). KKR, of course is the original Barbarian at the Gate, kicking off consolidation in the CPG space with its buyout of RJR Nabisco back in 1989.

Here’s a good presentation by Flowers Foods (21% of $2.6 billion in sales to Wal-Mart) demonstrating how a company with low natural sales growth can produce impressive EPS growth with effective cost control and using cash flow to repurchase shares cheaply.

And here’s Clorox, looking to do the same

Clorox (CLX-$66.69) is selling its automotive care business (Armor All) and plans to use the proceeds to buy back its stock. For sure, Clorox got a great price on business, with a private equity firm paying 2.6x sales for the $300 million business. For Clorox, trading at 13x expected earnings, reducing its share count should produce a very adequate return. Clorox has a mixed track record with buybacks, having bought back stock during a market downturn in 2003 and recently repurchasing a slug of stock in 2007 at an average price around $60.00. Source: Bloomberg, SEC filings

From the Venture Capital front – Chocolate Manufacturer Ritter has invested in German startup Chocri. Chocri enables consumers to design their own chocolate bars, with a variety of chocolates and fillings; the customized bar is then shipped to the customer. Sure, the Internet enables a consumer to cheaply design their own candy bar, but how can the model scale? Does the investment signal that Ritter is boxed in by the confectionary giants? Source: NY Times.

AND FOR YOUR PERSONAL PORTFOLIO…

Read 6 rules for your portfolio and your career from one of Wall Street’s gutsiest (and richest) traders. Shameless self promotion: we are the only investment firm in Northwest Arkansas that employs rule # 6. Source: Ritholtz.com

Legendary Hedge Fund Manager describes current market as a Hostess Twinkie. His comments in the article will make you think twice about how your investment portfolio and 401(k) plans are positioned. Source: Pragmatic Capitalist

HMMM…

Former Friend Allegedly Tries to Extort Campbell Soup Heiress. Read Article

Hershey loses case to take twizzler.com domain from registered owner. Read Article

Unilever working with Ben & Jerry’s on anti-aging ice cream. Read Article

Quote of the Day:

"Some people are born on third base, and go through life thinking they've hit a triple."

-Barry Switzer, former head coach at the University of Oklahoma

Have a thought or comment? Give us a call or email.

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com

Rogers (479) 657-6940

Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Wal-Mart Stores and Kimberly Clark at the time of this newsletter.