Randomly Noted

Here’s a good one for you – It’s Carl Icahn’s fault that Blockbuster Inc. is in the sad state it is in today. At least that’s the view of disgruntled junior bondholder Lyme Regis Partners, who claim in a lawsuit that Icahn set the video retail chain to fail so that he could take over the company (as reported on Dow Jones Daily Bankruptcy Review).

The lawsuit goes on to allege that because of his insider status, Icahn had a much better view of how bad things were for Blockbuster and there that allowed allowed him to position himself ahead of the other investors because he knew before everyone else that the company was much closer to bankruptcy.

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If  you are thinking the proposed $3 billion acquisition of J. Crew by buyout firm TPG has a familiar ring to it, you are right. Back in 1997, TPG took J. Crew private in a $560 million buyout. TPG and others invested about $188 million in the acquisition. It took a while, but in 2006 J. Crew was brought public again. TPG didn’t sell any shares in the offering but, according to Dow Jones LBO Wire last year, TPG sold its shares piecemeal into the market and via a secondary offering.

It’s profit – a handsome 7 times over its initial investment. Some of the sales occurred as low as $14 (shortly after the Lehman bankruptcy). And some occurred around $44. Clearly, the buyout at $43.50 has TPG thinking there is more upside in the company. It profited nicely the first go-around.  The question is whether TPG can book the same kind of returns with this buyout.

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If you’ve ever walked into one of the 100 Fresh Market supermarkets, you’ll easily understand why the company’s initial public stock offering was a huge success on Day One.

The produce is super fresh, the cut of meats are incredible and for the stores that are allowed to sell wine, the selections are very good – and very affordable. Around the holidays, they have a wonderful selection of candies and cookies. And a hallmark at many of the stores – right when you walk in the door you walk past an area where they sell attractive baskets and flowers. The senses are put to work the moment you arrive.

And they have a very smart business strategy. I’ve spoken with employees at stores in Virginia Beach, Va., and Greensboro, North Carolina, over the years and they’ve told me the company doesn’t just open stores anywhere. It does a lot of demographic research to make sure it is located very close to areas of wealth. Another way of saying this is a high-end store. The one in Virginia Beach is only a couple of miles away from a Kroger, Farm Fresh and Food Lion. And it is always packed.

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Blockbuster, the video retail chain that has watched its business become decimated by online video and DVD rentals, has two big problems on its hands. One is its balance sheet. The other its business model. It made a move to fix one of them today.

Blockbuster filed for Chapter 11 bankruptcy protection and with that filing, will wipe out all of the existing debt on its books. Existing senior debt holders will get all of the equity in the new company. Subordinated debt holders, preferred shareholders and common stock holders get nothing – The sub debt holders may kick up a little fuss over that treatment. The senior debtors also agreed to led a new $125 million to the company.

While the Chapter 11 takes a lot of pressure off the balance sheet, it doesn’t do a thing for the company’s broken business model. It has tried to get into the online business, but it is a late comer to the game. NetFlix stole the mail DVD rental business from them. And companies like Apple and NeFlix have figured out the online rental model where movies and TV shows are delivered to your computer. The real question for Blockbuster is what part of the rental space is left for it?

Meet Winfred.

The odds are you already have if you’ve recently shopped at the Farm Fresh supermarket on Great Neck Road in Virginia Beach.

I did. Several times, in fact, as Winfred was wheeling up and down the aisles, asking customers if they needed help finding anything, while restocking shelves with products discarded at the last minute at the cash registers.

He told me he has been with the company for about 10 years and likes working there. “They don’t discriminate,” he said, referring to his being tied to his wheelchair. And what makes that even perhaps even more impressive, he hinted, was that Farm Fresh is part of a big company called SuperValu. “They are publicly traded,” he said with pride. And they are.

The point here is a good one. You often don’t expect large companies to allow such smart and correct decisions to made at ground level. But clearly that’s the case here. Practically speaking, there is no reason why every supermarket or similar business doesn’t have a Winfred tooling around, asking customers if they need help. It is a job that a person bound to a wheelchair can do if he or she would like. It is super customer service. And if you get someone like Winfred, it puts a smile on many customers’ faces.

We already heard from Amazon earlier this week the stunning statistic that it is now selling 180 ebooks for each 100 hardcover books in its inventory. Today, as the company reported disappointing earnings, we learned that over the past year, it has sold $1 billion of product via mobile devices, a testament once again to the role that phones, and smartphones in particular, will continue to play in our lives and those of corporate America.

Another interesting stat from the company – the cash equivalent line on its balance sheet declined $215 million in the quarter. That number would have been $33 million better if it didn’t get hit by the effect of foreign currencies. In other words, it looks like forex reduced its cash position by nearly 13%. Bad hedging?

(Amazon’s earnings were lower than expected because operating expenses increased to meet demands for increased capacity. The stock fell 15% in after-hours trading.)

The line snakes around the inside of the Apple Store today on 5th Ave. What are they waiting in line for? To see if their iPads have arrived.

A colleague joined me for a field trip to the 5th Avenue Apple Store in Manhattan today. Both of us were looking to buy some accessories for our iPads. We walked down the circular steps in the middle of the store and before us, was a mass of people the envy of every retailer – in a line that almost circled the interior of the store. I walked over to a salesman to see if I had to wait in that line to make my purchase (no, if using a credit card. Yes, if cash). I asked who all of these people were. He told us that almost everyone in line was there to see if their iPad’s had arrived. He said there have been production problems in Taiwan, so stores are experiencing serious shortages.

But then he mentioned another interesting point – he said he sells maybe two a day to people who live here in New York. “From other countries,” he said in response to my question of where did all of these people come from. He said he’s heard stories of how people would buy a couple iPads and take them back to their home country to sell them for $2,400. He even talked about”resellers,” people who bought iPads in the store and then sold them outside the buildinging to people who didn’t want to wait days or weeks to get their iPad.  Entrepreneurs everywhere.

The international sales element is interesting as likely many of the buyers are getting them here to take them home to play with.  Earlier this month, Apple delayed launcing the iPad internationally until sometime in May. If the New York store experience is like what other large cities are experiencing, you wonder what impact this will have on international sales when the product actually launches.

The latest example of tin ears in the so-called c-suites and in board rooms comes courtesy of reporter Elizabeth Holmes in today’s Wall Street Journal. The retailer Abercrombie & Fitch Co. agreed to pay its CEO $4 million to limit his personal use of the company’s jet.

That’s right, CEO Michael Jeffries gets a lump sum payment of $4 million to induce him to only fly in the corporate jet for personal trips up to $200,000 a year. 

Jeffries’ prior employment agreement gave him unlimited personal use of the corporate jet. It’s a perk he seems to have put to good use. His personal travel on the jet in 2008 tallied about $1.1 million, the Journal said.

It’s simply hard to imagine why a board of directors of a public company would find it necessary to put unlimited personal use of a corporate jet into a CEO’s employment agreement.

One more piece of context supplied by the Journal article. Jeffries’ pay package in 2008, the last year for which data are publicly available, totaled $15.9 million.

Think about how this news is going to go over with Abercrombie & Fitch employees, customers and shareholders. Not to mention the broader public, where the deep recession has stirred significant resentment against high CEO pay, especially in situations where the pay doesn’t seem tied to company financial performance.

Abercrombie’s financial performance isn’t even the issue here, in this blogger’s view. I’ve maintained many times that what upsets many people is not so much high pay at top jobs when companies are performing, but the perks granted alongside that high compensation, perks that are typically unavailable to others.

That’s the tax “gross ups,” the easy terms on a mortgage, the country club payments. The view of the resentful, understandably, is that if you are making a lot of money you can pay your own taxes like everyone else.

Same thing applies here. With nearly $16 million in compensation in 2008, it doesn’t seem like too much to ask the CEO to limit his personal, not business use, of the corporate jet, and not have to pay big dollars for that adjustment.

Scrabble may be a simple game to learn to play, but it sure gets complicated as a business. For a start, Hasbro owns the rights in the USA and Canada and its arch-rival Mattel owns them for the rest of the world.

Now, adding further to the confusion are reports (for example here and here) that the rules are being changed to allow proper nouns. If you’re stuck with hard-to-play tiles you’ve now got Jay-Z and New Boyz to help you out.

The change, as many commentators have pointed out, is proof that the world is becoming a dumber place, where youngsters know the names of rappers instead of words such as adze (a woodworking tool)  or calx (the residue from burning a metal), which previous generations used to great effect to clear troublesome tiles out of the racks or get a high-scoring tile onto a triple-scoring space on the board.

Except that it’s not true. The rules of Scrabble aren’t being changed.

What’s happening instead is a smart piece of brand extension by Mattel. Scrabble may be a great and loved brand, but the core game hasn’t changed for decades so most people who want to play have a set.

So Mattel UK spokesman Philip Nelkon told Randomly Noted that Mattel in the UK is planning to launch Scrabble Trickster, a souped up version of Scrabble in which players in some circumstances will be able to play proper nouns, steal tiles from rivals and even spell words backwards.

Standard Scrabble will continue to be sold, Nelkon says. “The rules of that are sacrosanct,” he stated. Scrabble Trickster is aimed at a new audience.

It’s not a new idea. Over recent years the Scrabble brand has been stretched and applied to games that aren’t standard Scrabble or even anything like it. Going by amazon.com sales rankings, the best-selling Scrabble game in the U.S. at present is Scrabble Slam, a $5.99 card game with no plastic tiles, no double word scores and indeed no board. However the Scrabble brand name gives it instant shelf space in retailers and credibility with buyers. The original Scrabble board game doesn’t feature in amazon.com’s top 100 games. However neither Hasbro or Mattel will be pleased to see that Bananagram, a US-designed wordmaking game that uses tiles but no gameboard, is selling far faster than any Scrabble spin-off. It shows that word games may have been around a long time but Scrabble can’t rest just on its brand.

Based on this writer’s own recent visits to Toys R Us, to see brand extension turned into a fine art it’s necessary to find the shelves selling Hasboro’s Monopoly. Our local toy superstore on the last visit had seven varieties of Monopoly, including Simpsons and Star Wars themes, upmarket versions with lots of electronics, a version where property values have been adjusted for inflation so you’re trying to keep track of huge-denomination bills, and another one with different rules where you don’t need to own all of a color set to start building. Yet Hasbro still makes the traditional version available – although they’ve included an optional twist in the rules using an extra die that can make the game quicker to play.

Of course the real money in all these classic games is going electronic. The success of Scrabble-alike Lexulous online shows that Scrabble has a real edge over many other games in that it’s easy to dip in and out of playing, making it ideal for mobile phones or playing in a 10-minute coffee break in the office. One question yet to be answered is whether spin-offs and electronic versions can survive if the original is deemed to have lost relevance or be played only by the non-digital generation. Mattel is obviously not keen to find out.

Nike just reported some pretty strong financial results – net income up 104% to $496 million and revenues up 7%. But the breakdown of the numbers tell a different story, one of how certain markets have begun to recover, others haven’t and yet others are going gangbusters. Shoes are the biggest part of Nike’s business, so, it’s worth looking at those sales in different regions. In the U.S., footwear sales are actually down 1%. And even worse in Japan where they are down 6%. So, where are more kids today looking to become the next Air Jordan (and wear Michael’s brand of basketball shoes)? China (shoe sales up 12%) and in emerging markets (show sales up 53%).

Maybe this is also telling us about how different countries will fare in basketball in the next summer olympics…