Thursday, March 17, 2011

Syms Management: The Competitive DISadvantage

In his book (summarized here), Mohnish Pabrai describes the investment philosophy of value investors as follows: "Heads I win, Tails I don't lose much." Recognizing that it is very difficult to predict the future, value investors look for situations such that even if things don't go so well, the downside is protected. Pabrai's favourite example illustrating this technique is the motel owner/operator model. If a motel owner finds himself one day unable to generate profits, at least he can sell the land, since that has likely appreciated in value. On the surface, an investment in Syms (SYMS) appears to have similar benefits.

Syms is an off-price retailer throughout the United States. Throughout much of its 50+ year history, the company's strategy was to outright own the real estate on which it operated its stores. As a result, even though the company's operations have been rather poor of late, the company sits on a pile of valuable real estate that appears to far eclipse the company's market cap.

Syms trades at almost a 50% discount to its book value, which in turn understates the company's real estate by a significant amount, since land is carried at cost and buildings are depreciated on the balance sheet. With this in mind, some minority investors have actually asked the company to get its properties appraised and made public. (We discussed a recent example here where a company is actually doing just that.) To that end, there is a great rundown and estimation of Syms' properties over at Ragnar is a Pirate. Don't be fooled by the site's title; you are still privy to the investing gold available on that site even if your name isn't Hank Rearden.

But there are impediments that can prevent shareholders from ever seeing a gain. First, the company is majority owned and controlled by its CEO, Marcy Syms. Normally, this is not such a bad thing. Indeed, if management is financially motivated by its interest in the firm, this can actually be a really good thing. But when management sees the benefits of running the firm as more important than maximizing shareholder value, it can be trouble.

Syms is the daughter of the company's founder, and has so far rebuffed attempts by minority shareholders to realize value via the company's real estate holdings. In a rather sharp-tongued letter to the minority activists, she writes that "Syms Corp operates a chain of off-price retail stores. It is not a real estate development company, and will not become one, no matter how much you wish it were otherwise."

But frankly, the retail operations stink. While other off-price retailers continue to show positive comps, Syms blames the economy for double-digit same-store sales declines. The company's returns on capital weren't amazing even during the strong economic period a few years ago, and this is despite the advantage of having selling locations with understated values on the balance sheet.

Despite this, capital expenditures consistently out-pace depreciation, and that trend has continued so far this year; capex in the first nine months has been 40% higher than depreciation. This suggests that either depreciation expenses are underestimated, or management continues to allocate capital towards trying to grow the company, which is the exact opposite of what a poorly performing company should do. Neither scenario is good news for shareholders, as good money is being thrown after bad, causing the company's cash flow to be poor.

Syms has shown a willingness to shutter and sell the real estate of a couple of stores, but only when absolutely necessary. The cash generated from such sales has been used to finance the company's losses. If this mode of operation continues, investors looking to profit from the real estate values will continue to see value erosion. In the latest real estate sale, the company actually plans to lease the property back from the new owner! Therefore, the sale likely took place only to fund the company's cash outflows.

But perhaps this behaviour shouldn't be surprising. CEO Marcy Syms has written a book titled Mind Your Own Business and Keep It in the Family where she argues that the family's job is "to keep the business healthy for the generations to come." and that "the business of a family business is perpetuating itself."

Those don't sound like the words of someone interested in realizing shareholder value. Ironically, by doing whatever it takes to keep the business running as is, she appears to be putting the company's future at risk. At this point, it is unclear if she will cease growing the business into the ground before the company's valuable assets are completely eroded.

Disclosure: None


Taylor said...

I have looked at this company in the past. The New York property was of particular interest, as the company was purchasing air rights for the property.

It should also be noted that Michael Price and the Kahn Brothers are major owners of the company.

Paul said...

Hopefully, someone here can shine light on this. I've heard how great a manager Michael Price was when he managed the Mutual Shares. According to the information I found, he started as a full partner in 1982. If we run the numbers from 10/18/82 to 10/18/98 (the year he retired), he actually underperformed the S&P 500.

I'm making the assumptions that he made the actual decisions from 1982 on. I certainly could be incorrect about this, though!

Now, to be fair, the last little dip was after he announced that he would leave (or maybe he was gone at the time), but even if we start back a little before that, he barely beat the S&P. After taxes, he would've underperformed.

According to Morningstar, $10,000 invested 10/18/82 would've grown to $123,923.65 on 10/18/98.

Through the same time the index investment would've grown to $146,741.63.

If we back the data up until 10/18/97, MUTHX would be worth $137,527.23 vs $129,128.01 for the index.

Shouldn't a renowned value investor be able to beat the index by more than this over a 15 year period?

Taylor said...

"As manager of the Mutual Shares fund /quotes/comstock/10r!muthx (MUTHX 20.86, -0.29, -1.37%) , Price racked up an impressive long-term record. From 1975 to 1995, the fund returned an annualized 20.2 percent, compared with 15.6 percent for the S&P 500, according to Ibbotson Associates."

Paul said...

ahhh. thanks, Taylor. That make more sense.

jeff said...

Thanks for the mention of my write up!

One thing to remember is that there are a ton of cost savings that are getting ready to come from the Filene's acquisition (such as a virtual shut down of the Secaucus distribution center). This, and one other location closing alone should take out 1/2 of the losses in the past year.

While management doesn't seem to think of value in the terms that we do, there is no doubt that the company will be in business for many years to come; which is important for these low P/B stocks.

Anonymous said...

As a knowledgeable person on this issue, I can tell you the only job Marcy had before Syms was an assistant at a radio station of which she was let go.
In terms of keeping it in the family she has torn the Syms family apart, other than Marcy, Robert is the only other family member working there for a number of years, because that is what Marcy would allow.
during the last number of years of Sy's life he developed Alzheimer’s and dementia, Marcy and Lynn Syms (his second wife) took advantage of this, Lynn received a nice 15 million dollar payout + other perks while Marcy talked coerced her father into signing the company over to her effectively leaving nothing to the other siblings (with the exception of Robert getting 1-2 million if he played ball with Marcy). Marcy is a farce, her book is a joke, she never has cared about family, she never cared about Sy's excessive drinking habits (alcoholism), in fact she indulged him, for years she has had control effectively keeping nearly all of the family out of the business, she believes everything is for her, through her eerily close relationship with father through the years, Sy’s dementia and Alzheimer’s enabled her to do this. In earlier years there were more qualified members with better numbers working in the company.
Other family member are taking action, most of what I have said to you can be proved and is fact, although Marcy again is the controller of medical records, financial statements….etc…etc and with her team of top lawyers it’s difficult.
I wouldn’t be surprised if she was trying to buy back the company although other people think that she isn’t. In addition to being under qualified as a CEO, she has a medical condition that requires steroid treatment which has been known to cloud judgment ….. etc etc.
I write this comment to you in efforts to see Marcy’s dictatorship come to an end.