|Special Emphasis: Stress
Symptoms of Stress
A Conversation with "Doctor" Dick Meyer of Meyer & Associates
Anyone who has ever taken a stress test knows how unpleasant an experience it can be. Yet the pain and discomfort certainly are worthwhile if potential problems can be spotted early—or even if the only benefit is a better night’s sleep afforded by a clean bill of health.
But how often do we put our own companies through a “stress
test”? For those who aren’t sure how to make a self-diagnosis, Convenience Store
Decisions recently spoke with “Doctor” Dick Meyer, president of Meyer &
Associates, a Neenah, WI-based consulting firm that has studied c-store health
in detail. Here are some of his observations:
Q: What are the first signs that a publicly held convenience store company may be in trouble?
A: When their
press release announcing quarterly results reads like an economist’s analysis of
the stock market’s fluctuations, it’s usually a first clue that the company’s
fundamentals may be at risk. I then begin to monitor other common denominators
that signal potential financial demise.
I become very leery when the headline of the press release reads “Sales up 30%,” then about two paragraphs after the hype you find out that most of the revenue enhancement is artificial, caused by higher fuel and cigarette prices. Next, they say profits declined because of those same dynamics or some other supposedly unmanageable circumstance.
Q: Alternately, what credibility attributes do you look for in a company’s annual report to shareholders?
would include: a primary focus on real growth; a discussion of same-store sales
variances for like periods, in terms of inside sales and gallons; plus a
reasonable explanation for declines in pre-tax profit and other major changes in
their financial position.
There are times when good management teams sustain profit erosion, but it’s the strength and integrity of that CEO to speak to the issues in “accountable” terms, along with his/her explanation of how the company intends to improve future results. Hopefully, management’s analysis for the next quarter or year won’t echo the same sad song and/or surface a litany of new circumstances that previously frustrated a reasonable return for shareholders.
Q: Several years ago you apparently coined an acronym—“CACA”—and cautioned industry CFOs and CEOs against using this method of accounting vs GAAP. Can you explain for non-accountants what you’re talking about?
A: Many executives know that GAAP is a term from the American Institute of CPAs (AICPA) that means “generally accepted accounting principles,” presumed to be applied to the company’s financial statements on a consistent basis from period to period.
I suggest that some companies, consciously or otherwise, adopt CACA, which I call “convenient accounting consistently applied.”
In short, it becomes the whim of a CEO or CFO as to how they choose to record certain business transactions. They elect whichever method suits their objectives; i.e. throw as much expense against last year to make the current year look good, or vice versa. Their motivation is “playing with” normalized operating results, and this is a dangerous game.
Once bankers and/or potential lenders surface such accounting inconsistencies they become “insecure.” Further, when lenders and/or potential suitors feel that the “books are being cooked,” loans are called or acquisition interest halts.
Q: Can you provide a few examples of how convenience store companies use CACA?
A: Here are three that appear to be favorite targets:
• Contractual allowances. If you sign a 3- or 5-year agreement with, say a grocery wholesaler, and it involves substantial up-front cash per-store allowances, the right accounting treatment (presuming materiality) is to amortize this benefit into income over the term of the contract, not when the contract was executed or cash is received.
• Fuel rebates. Image funds representing equipment reimbursements should be amortized over the capital life of the related asset. Volume rebates should be accrued in the period when the gallons are sold, presuming a reasonable expectation that minimum volume requirements will be attained.
• Retail display allowances. As the premiums increase to “buy” counter and back-bar display space for an increasing multiple of products (it’s not just cigarettes any more), so does the significance of the related rebates. Unless companies assign this estimated revenue to the period when it was earned, they could easily lose focus on their true operating results by month or by quarter.
Q: You’ve addressed some of the “financial” barometers to monitor. Are there also some non-financial indications that suggest all may not be well with a company?
A: Definitely—they’re called departing executive talent and curious marketing decisions. I’ll explain.
First, I’m particularly concerned when a chief financial officer departs a company that is already on my “SOS” radar screen for other reasons. If the CFO was part of the problem, his or her departure may be a good sign. However, if they were competent and they move on, there’s often reason for unsecured creditors to make sure collections are timely.
Further, when you read about proven marketing or operations
veterans exiting, this may be evidence that water is seeping into the bow of the
company ship and they’re not inclined to be on board when it sinks!
When a suspect company deviates from its normal modus operandi in marketing to the consumer, and competitors and suppliers view the changes as short-term “cash-flow”- (versus long-term consumer-) driven, chances are, they are just that.
Not all of these deals are suspect however, so you should examine whether a “pattern” exists that, on the whole, doesn’t appear to make good business sense. Some signals I watch for include:
• a traditionally non-branded fuel operator that “brands up”
their fuel installations;
• a switch from co-existence tobacco RDA programs to an “exclusive” program;
• ransoming their fountain business exclusively to one supplier;
• or going through the wholesaler selection turnstile one more time to squeeze out new up-front allowances.
Q: I’ve seen many ways that companies mortgage their future and they’re just setting their company up for ultimate failure! Is the wave of new “securitized” debt flowing into the industry the last few years helping or hurting c-store companies?
A: I believe in this new type of debt because it can help match a company’s long-term assets (real estate and equipment) with long-term debt. Alternatively, companies are funding 10-20 year assets with traditional bank financing that probably has a 3- or 5-year balloon payment. That gets pretty scary during short-term economic hiccups.
I have a big caveat with my endorsement, however. Essentially, securitized lending makes sense only when it’s provided with appropriate due diligence by the lender and in connection with an overall financial plan by the retailer.
I would suggest that some lenders didn’t do so well in the due diligence category, and I believe we’ll see the fallout of some bad loans over the next 24 months.
Q: Can you define what you’d call “primary success attributes” of good operators?
A: Most of the points in this table are not rocket science. I find that companies subscribing to these minimum disciplines earn the highest returns on investment:
• controls—on store wages, overhead, claims control, other income sources, etc.;
• marketing prowess—at the pump, inside the store, sensitivity to traffic drivers, consumer sensitivity and responsiveness;
• fiscal responsibility—balance sheet orientation, ROI and leverage acumen, consistent and timely accounting, and ongoing cash flow awareness—including the company’s vulnerabilities;
• leadership—at the top, strength and shared vision at all levels;
• pride and passion—evident at stores and headquarters;
• growth plan—competitor prospects to acquire, including pecking order and reasonable price, understanding of consolidated savings from known synergies;
• projections—store-level historical data on the last two years and estimate for next three years, at minimum. Should encompass: G&A budget, including new/reduced personnel positions; technology strategies and impact; core business analysis including same stores, new stores, remodels and discontinued operations;
• sense of urgency—for current operations and development;
• accountability—to get this all done in a timely and efficient manner.
Dr. Meyer’s Top 10 List: Attributes of a Healthy Company
Still not sure of your diagnosis? Want to get a second opinion? Then benchmark your company’s performance against this list of 10 things a healthy company does to stay that way, prepared by the “c-store doctor,” Dick Meyer:
10. Weekly pay for store-level employees. If you pay them bi-weekly, they may pay themselves weekly. The difference in cash flow is usually minor.
9. Use a 4-week accounting period instead of a monthly one. You’ll have a consistent reporting interval, and you won’t waste a lot of time explaining a 28-day month vs. a 31-day month.
8. Monitoring of key trends on a weekly basis. Watch same-store sales, gross profit, cents per gallon, cartons per week, labor costs. “Taking your temperature” with these key barometers means less dependency on the income statement.
7. Mission, focus and plan. Establish the mission, stay the course, live the plan. As prescriptions go, it sounds a lot like chicken soup—but it works!
6. Store-specific marketing. Good companies know their neighborhood profiles, their customers and their competition—and they employ appropriate category management.
5. Maintain accountability at all levels, supported by timely information on trends, operating results and the company’s financial position.
4. Communication of job descriptions, effective human resources and training programs, feedback and follow-up.
3. Controls. Streamline systems for monitoring and measuring inventory performance, sales, margins and labor productivity.
2. Profit plan. Develop, by accounting period, a budget for per-store income, G&A costs, capital expenditures and debt service.
1. Execute the people that drop the ball on attributes one through nine. No, no, just kidding. But seriously, numbers one through nine on this list won’t make a bit of difference unless you also have timely and efficient implementation of both routine and special or one-time expectations.
Are there other characteristics of a solid company you would add to the list? Maybe some here that you take issue with? Dr. Meyer would love to hear your “second opinion.” Contact him at firstname.lastname@example.org or write CSD at email@example.com .