Sunday, April 13, 2008

Turnaround - Pier 1

On Oct. 29, 2007, a fellow shareholder News_to_use highlighted Pier 1 at a time when UT was booted out of the index.

Although it is in a totally different sector, Pier 1 has also sustained multi-year losses (11 straight quarters of losses). Towards the end of last year when shareholders were confronted with UTs continued losses (and massively increasing at that), the question had to switch to WHEN can it become profitable again? This question is critical because the market tends to severely discount underperforming companies that are burning cash. With Pier 1 getting back to profitability, the stock has rebounded from the $3-4 range to the mid $7s in just a few months. This is in the face of continued credit deterioration in the markets, weakness in consumer spending in the US, and the industry that they are in (home furnishings in this mortgage meltdown). Thats pretty impressive and it was due to signficant cost cutting and operational improvements, which has its limits.

With all the talk about getting back to profitability for UT, the expenses have not not gone down materially and core revenues have not moved up to compensate for PAS losses. UT stock continues to stay in the $3 level as the market waits for divestitures, operating improvements, and profitability. UT is about to hit 12 consecutive quarters of losses and the projections for breakeven/profitability are not until Q4 at the earliest. If they do not get there by Q4, it will probably be Q2 2009 since PAS/PCD are seasonally strong in Q4 and weaker in Q1. That will be 16 consecutive quarters in the red!

The fact that Pier 1 can move up to the $7.5 range shows the significant drop in its shareprice similar to UT but also its willingness to cut costs and get back in the black. However, analysts are becoming cautious with Pier 1 due to the headwinds they face (so I would not buy it now).

For most of 2007 and early 2008, UT has had to address management changes, stabilizing China (after Wu left), refocusing on the business, filings, selling Gemdale/infinera, and the convertible bond. Blackmore and the management are trying to buy time and improve operationally but obviously don't have the sense of urgency that shareholders have had for the last few years. As I have been saying the last 8-10 months, UT has had TOO MUCH resources that has afforded them to "dilly dally" with making tough decisions (or any decisions at all). Blackmore mentions the 9-week strategic study and identifying core/none-core units as being very quick. They have cut some expenses and guided to more cost cuts but it is simply too slow. Blackmore has talked about turning the operations into "world class" but it will take atleast till end of Q4 2008/early 2009. The accounting systems that they have been working on since 2004-2005 won't be done until mid 2008 at the earliest. Other industries such as the airline industry have already gone through bankruptcy and reorganization and now back ...The stock has reflected their lack of urgency (even when compared to Pier 1). The quarterly expenses of $115-120m even for Q1 simply shows that they have too much resources. It is unfortunate for current long-time shareholders that management can hide behind "long term" shareprice appreciation while shareholders are forced to wait it out or sell at the all-time lows. The management/board continue to get outsized compensation while they tinker around on how to improve shareholder value from their initial restructuring in 2005 to the 2006 strategic study to the failed 2007 earnings and then the new 2007 restructuring and turnaround plan.

With their enormous quarterly expenses, there is no doubt they can cut enough costs sooner or later to get to breakeven but can they EVER justify their poor execuses for hiding behind enhancing longterm shareholder value? Will they ever be as proactive in addressing shareholder value as they are in dealing with their own personal compensation? (They did not have a call option on the convertible bond but they have clauses in their retention bonuses for change of control).

I will end this post discussing Fran Barton because he has been the architect of this ship for the last few years and is being paid "All-Star" money to turn this around. Simply put, he has failed shareholders and I don't know if the street has any faith in him. However, for whatever reason, the board seems to think he is worth the money and he is the person to turn it around. With thousands of employees and tens/hundreds of senior executives, the board chose to heave a ton of money at Fran. I for one have not seen him shine or done anything creative or worthy of being worth close to what they are compensating him, let alone the respect of shareholders. A huge part of any executive's compensation has to be tied to the shareprice performance. The top people should get credit and the blame because of their positions and yet we have seen NO salary cuts or compensation being tied to shareprice appreciation. I could be yet proven wrong about Fran's performance but in the meantime, shaerholders are left holding the bag.

I can't end with too much negativity so I'll go back to the Pier 1 example (my original reason for posting) as News_to_use pointed out that things can get better and the stock can take off significantly. If UT does get to profitability (getting their cost base right), they have a good chance of sustaining it due to their position in iptv in certain markets and the larger moat it has compared to Pier 1 and the better prospects in growing overseas markets.

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