How to drive your business into the ground
January 7, 2017
From time to time, clients will ask me to check out investment opportunities. And for avoidance of doubt, I do so not to recommend an investment and certainly not to sell investments. I am not a financial advisor. But being in the finance professional industry, it's shop talk.
So let's talk about Richardson Electronics. RELL is its stock quote symbol. You can go online and check out what they do and what they sell. But I am intersted in sharing why this company is being driven into the ground.
Let's talk cash for a second. Cash is the lifeblood of any business. So Richardson announced earlinings. They are burning through cash. Lots of it. $1 million per month. Now, a detailed review of their financials reveals they are spending $275,000 per month in dividends. Oh and they lost $6 million in the most recent quarter. Now, if you're Apple (NASDAQ: AAPL) or if your American Airlines (NYSE: AMR), losing money could happen. No one would fret if AMR lost cash. But a business that has $60 million at the beginning of the year and has blown through 10% of it in just 6 months should give management pause for thought.
So the earnings call says they made $3 million of cuts. So the bleeding should drop by $250,000 per month. So, instead of burning through $1 million of cash per month, they'll only blow through $750,000.
This is a time to make aggressive moves. You can't be paying your management team and your owners (dividends) when you're losing $1 million per month. At this rate, the company will be out of cash in under five years. But that's hardly realistic. See, the first thing most businesses cut is marketing spend. So Richardson was happy to say that their T&E budgets are slashed and the customers didn't mind. How can this be true? If you are not in front of your customers, someone else will. The truth is that cutting marketing spend is a short time gamble, but a long time loss. Every time. It was a lesson I learnt in school - when it wouldn't hurt - back at Duke.
Surprisingly, the stock price upticked after the earnings call. How could this be? Well, it turns out the owner bought some shares. Hmm - taking dividends to bleed the company dry and then buying shares at a low price and then buy it up to drive the price to a reasonable level. Are you people paying attention. This is a dog and I give this business three years - tops - to disappear. Either they get bought or they just die.
This is a time when RELL needs to make some tough calls. Kicking this can down the road jeopardizes the livelihood of each of its employees. I hope their resume is up to date.