bizzXceleration: Performance, Value and Profit

For example, in the stories below, you'll find that the Paper industry - long the bastion of complete vertical integration, is adopting it's business model and strategy to extraordinary energy cost increases by re-focusing on its' core business functions. Similarly, the Auto Industry (particularly F & GM but also Chrysler) has avoided necessary strategic changes for literally decades. As a friend of mine who was involved for several years as a senior exec at GM put, "they're finally doing the things that we fell on our swords to get them to do". Yet they've got a huge journey just to return to operational effectiveness and an even longer one to go for strategic change. Which they're beginning with a fundamental re-consideration of the width and depth of their model lines, having disproved the Iaccoca Theorem that you can build separate "models" on the same platform and make people think they're getting different and more valuable cars. NOT TRUE ! You can fool...never mind.

The real interesting stories below are the compare and contrast between retailers (prior retail posts are here and here and here). Speaking of the LBO community they're bargain-hunting in retail. THE fundamental business, as opposed to financial, engineering question should include using something like this model to sort the future prosperous from the broken while all are currently sufferring valuation down-pressures. An interesting dilemma, is it not ? The better contrast is from Sears on the very bad end of the scale to Home Depot in the middle to Zaras on the very good end. We'd argue that Lambert substituted financial engineering for a fundamental re-think of Sears strategy and operations and until he's willing to invest, seriously and for the long-term, a great franchise will continue to whither. Home Depot on the other hand is a great company which sufferred years of short-sighted cost control in place of strategic adaptation - which should have included changes in core operating functions but didn't. They have a golden opportunity here to finally re-think the business and position themselves for a likely upturn but have to survive the current unpleasantness.

Zara's has been one of our two or three most favorite retailers for years because of it's superb strategy of constant product innovation (which in the framework requires a combination of outstanding product management with replenishment logistics and store operations). It is now engaging, before it is forced, in a major strategic overhaul to build on that inheritance by expanding globally to offset increased competition from imitators.

Translated that means that Sears is a sell-short opportunity, Home Depot may be a buy, and when thens begin to bottom out Zara's is most likely a buy. Depending on the strategic effectiveness of their global expansion and continued competitive supremcy in Europe. ALL of which you can read off the model in combination with the news stories. An approach we feel can and should be applied to any firm in any industry. 

Re-translated back to the retail enterprise framework - to compete with Zara you have to meet or exceed their capabilities in each of the core functions as well as develop an alternative value proposition. Home Depot on the other hand HAD a great business model and operational capability which needed to be adopted to a new strategic context, saturation and competition, and which it failed to adopt during a window of opportunity. Sears, on the gripping hand, had a broken business model and under Lambert its' only strategy was restricting cost in each function while avoiding all investment. In other words the gap between capability and requirement for the existing framework has grown when what's required is a new framework ! OUCH !!

Industry Readings

Paper Firms Reshuffle a Deck The paper industry, once an old-fashioned spread of vast companies that owned everything from forests to mills, has become more specialized -- and more eager to sell off segments through IPOs and mergers. In recent months, investors have seen two former units of large paper conglomerates prepare to stand alone as public companies, and more segments are expected to break ties with their parent firms going forward. The Situation: The paper industry, once tightly integrated, is evolving and becoming more singularly focused on specific aspects of the business. What It Means: IPOs, sometimes. Paper conglomerates have been shedding businesses through spinoffs and mergers, and the end result often is making it way to public markets. The Latest: Boise Inc., a paper-and-packaging company purchased by a blank-check company, is set to debut on the NYSE today.

Auto Makers Reconsider Clones Long before scientists started cloning sheep and cows, Detroit was cloning cars. But now, it's not so clear that replication leads to addition when it comes to sales. The idea that car makers can make money selling consumers the same basic vehicle in different guises has been fundamental to the business since the days of Alfred P. Sloan, the architect of the modern General Motors Corp. Mr. Sloan perfected the idea of the brand ladder -- Chevy at the bottom, Cadillac at the top and Pontiac, Oldsmobile and Buick in between. Over the years, those middle brands were increasingly stocked with cars that were basically fancier versions of the Chevrolet design. More recently, just about every auto executive assigned to turnaround a car company has established building more vehicles from "common platforms" as a cornerstone of the strategy to regain profitability. Implicit in this strategy is a belief that most consumers don't know and don't care whether a car branded as a Ford Fusion is fundamentally the same under the skin as the car sold as the Mercury Milan or the Lincoln MKZ. Instead, consumers are assumed to care only about superficial stuff -- such as the exterior design, or whether a car has leather seats, or a specific branded audio system. Repackaging the same basic hardware to sell at different price points makes a lot of sense on paper. There are many examples of how it works just fine. Toyota, for instance, gets away with selling the basic guts of a V-6 Toyota Camry as both the Toyota Avalon and the Lexus ES 350. Ford seems to be having some success with the Fusion, Milan and MKZ -- referred to in Dearborn as the "triplets." But in a market with more than 300 different models -- depending on how you count -- fielding two or three or even four of the same basic car can lead to some very thin slices of pie, especially when increasingly well-informed shoppers can figure out in two or three mouse clicks that a Saturn Outlook and a Buick Enclave and a GMC Acadia are just three different styling takes on the same large crossover wagon. MODEL MATCH GAME, Nissan still interested in U.S. partner

Retailers in the bargain bin Turns out investors are starting to do the same with battered retail stocks, which have limped through one of the worst years in recent history and are now trading near historically low prices. Here's why the worst may be behind retailers: The combination of interest rate cuts and an economic stimulus package promises to jump-start the economy in the second half of this year. Even so, the sector may still have some rough patches ahead. Following a dismal holiday shopping season, fourth-quarter earnings are likely to fall short even of lowered expectations. So Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman, is not encouraging clients to load up yet. But he predicts that the group will turn at some point in 2008. "These are 'when' trades, not 'if' trades," he says. There's no doubt that the slump has pushed many retail stocks into bargain territory. On a price-to-sales basis, relative to the broader market, large retailers are trading at levels not seen since 1994. As for price/earnings, the only time the group had a lower valuation was during the double-dip recession of 1990—91. Kmart drags Sears profit down 47%

Zara Stores' Fast Fashion to Get Faster Zara stores have set the pace for retailers around the world in making and shipping trendy clothing. As rivals catch up, Mr. Isla is attempting one of the fastest global expansions the fashion world has ever seen, opening hundreds of new stores and entering new markets. To do that, as an economic downturn threatens sales, Inditex is changing the systems that have driven its success at Zara and its other store brands, to save time and money. Among the innovations, it's introducing new methods to enable store managers to order and display merchandise faster and adding cargo routes for shipping goods. The world's second largest clothing retailer by sales after Gap Inc., Inditex is responding to a predicament shared by other companies that come up with game-changing formulas: Eventually competitors catch up, forcing the pioneers to do even better to keep their edge. The first Zara store opened in 1975 in La Coruña, a port town near Arteixo in a remote corner of northern Spain. Its two key traits were an eye for customer tastes and a production process that started with the final price and worked backward to the most-efficient production. In the mid-'80s, local business-school professor José Maria Castellano, a technophile, joined Inditex as right-hand man to founder Amancio Ortega Gaona, and the company became a world-class logistical outfit, peddling "fast fashion."

Home Depot Profit Falls, Missing Analysts' Estimates, as Housing Declines Home Depot Inc., the world's largest home-improvement retailer, said fourth-quarter profit fell and forecast earnings below analysts' estimates after the deepest housing slump in a quarter century showed no sign of receding. Net income dropped 27 percent to $671 million, or 40 cents a share, the Atlanta-based company said today in a statement. Profit trailed analysts' projections by 3 cents. Sales, which dropped for the first time ever last year, will fall as much as 5 percent during a ``challenging'' 2008, Chief Executive Officer Frank Blake said in the statement. He took over 13 months ago, pledging to spend $2 billion to revamp retail stores and service. Home Depot has lost market share to Lowe's Cos. as both companies struggle with declining U.S. home values.

Sears Net Falls 47%, More Than Analysts Estimated, as Appliance Sales Drop Sears Holdings Corp., the retailer controlled by investor Edward Lampert, reported fourth-quarter profit that plunged more than analysts projected after appliance and clothing sales declined. Net income fell 47 percent to $426 million, or $3.17 a share, in the three months ended Feb. 2 from $811 million, or $5.27, the Hoffman Estates, Illinois-based company said today in a statement. Revenue declined 6.8 percent to $15.07 billion. Sears announced a reorganization last month to revive sales as consumers burdened by higher fuel, food and mortgage costs cut spending or shopped elsewhere. The retailer has posted sales declines in stores open at least a year in every quarter since Lampert combined the Sears Roebuck and Kmart chains three years ago.