October 13, 2022

Why Share The 10Q Statements?

There's a reason that the TV you want at Best Buy is never offered at 40% off (unless it is being liquidated). With a gross margin around 20%, you can't make money offering 40% off.

We review 10Q and 10K statements because the statements reveal the type of business we're evaluating. We see all of those Duluth Trading Company television commercials and we see all of their catalogs and we wonder how they can afford to do that while others don't execute old-school tactics like that? Well, their gross margins allow them to execute those tactics ... their gross margins pay for the tactics.

The danger for a high gross-margin business is that it becomes a "marketing" business. We see this happen all the time. In the early days of the brand the brand is highly profitable (think Lands' End in 1993). Then the brand wants to grow, so the brand spends more gross margin dollars executing more marketing programs ... the minute there is a merchandise productivity issue (like there was in 1995) the p&l doesn't work and people lose their jobs. This is the problem with so many businesses I analyze these days ... Leadership decides to spend ALL of the gross margin dollars on marketing instead of growing at a slower rate while being far more profitable. The minute merchandise productivity fails, the business fails.

You hear me harp on the importance of organic customer acquisition ... acquiring customers at low-cost or no-cost. You need to do this because if your business is like Best Buy, you don't have the gross margin dollars available to expand your marketing programs like you want to. You need to do this because if your business is like Duluth Trading Company, you are spending all of your gross margin dollars on physical stores, catalogs, and television and are not generating enough profit to pay for more new customers - you have to have an organic customer acquisition program to grow.

That's why we study 10Q and 10K statements. They help us understand the business model being employed, and they help us understand if there is any profit available to spend more money on marketing.

P.S.:  I didn't spend any time on a unique topic in this series ... but in these statements, take a look at interest paid on debt, especially among retail brands. It's not uncommon to see half of profit eaten way by interest payments.

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