Rent is not a debt. Rent is an accounting expense last time I checked. You guys may need to check your accounting rules. I'll give the benefit of the doubt to some of you though. Okay I can see your point that rent will eventually have to be paid, but ask yourselft this. ****** If Abercrombie, today, issued a press release that said it would be using its free cash flow to purchase (own) its currently rented stores, would the company then be more valuable????????
As for K-mart. You're pulling this
You said: Their credit rating is outstanding which allows them to be a buyer in this difficult, cash starved market. Buyer that is of assets and entire businesses, it is my understanding that Buffett isn't buying stocks.
My reply: It is my understanding that Buffett isn't buying stocks because he perceives better price value in picking up private companies. Historically he did prefer otherwise. His rational has been that it was easier to find and buy 1 dollar of assets for less than 1 dollar in cash in the stock market, where as in the private companies it was difficult to find such mispricing (usually the companies sold at a premium). The tides have turned, he is telling us that from a price to value perspective that private companies are better.....
also: I don't know if this is true, but i heard rumors earlier this year that Mr. Buffett was shorting the S&P 500. It's infrequent for him to do something like this, but not unusual. If true, here are the implications. If Mr. Buffett is to add value to Bershire Hathaway he has to make investments going forward that provide a return on equity greater than the weighted average fo the last measure. For example: If you had a savings account paying 10%, all else equal, to add value to this investment you would have to find a savings account paying greater than 10%. Essentially making sure you get more than 1 dollar in value for every dollar invested.
Back to the S&P 500, if he shorted, then its an indicator of a least how much he felt it was overvalued. He's mentioned 15% as a goal, i think, so his investment (albiet on the short side) would indicate that for him to add value, he would have to perceive the S&P 500 falling at least 15%. Well, that was at the begining of the year. So if this is true, how do you think he did????????
Here's where you keep fooling yourself.
You said: and their insurance business is very sound.
My reply: In reference to Berkshire, you pass judgement on the soundness of its insurance business. As a Berkshire shareholder, I along with most Berkshire shareholders have enough sense to know that we do not have the abilities or understanding to pass judgement on the soundness of Berkshires Insurance business. Unlike most companies, insurance is complex and not something you can just pick up and understand. Your better leaving these kind of calls to people trained to make them. Berkshire for me is my worse investment. Why you ask? Because it is the company i own that i least understand. The good news is that I am fully aware of this and take comfort in the fact that I speculate in Warrens investment vehicle. This investment is solely based on trust, and one shouldn't kid themselves otherwise.
Rent is an expense when it's paid. The lease is a liabilty when it's signed. This is a simple concept that hardley requires 400 messages to communicate.
"****** If Abercrombie, today, issued a press release that said it would be using its free cash flow to purchase (own) its currently rented stores, would the company then be more valuable????????"
They're in malls not condo's. The point is, if they had their own building they wouldn't have to pay $75 a sq ft to be in a mall.
Lee, you have what psychologists refer to as unconscious incompetence in accounting. Not only don't you know it, but your unaware that you don't know it.
right. And if they own their own buildings how does that happen. They would have had to use cash. So the question remains. What actions constitute better use of cash. Opening more stores because you rent, thereby expanding a business that generates nice margins. Or owning property that slows you store growth, but allows you to own hard assets. My point is that you guys aren't looking at the cash flow and return on investment implications, but instead just randomly subscibing to an idea that hard assets equal a level of safety. Prove out that hard assets equal a more profitable return on investment and more cash in investors pockets and I'll shut-up.
Believe me, I am at the outer limits of my accounting expertise here, but I would say that unpaid past due rent is a debt.
Companies don't go bankrupt because they have lousy balance sheets. They go bankrupt because they can't pay their bills and rent is a big bill.
Just a thought. Would you prefer Abercrombie own its employees or rent them? Wages are an expense that has to be paid in the future. Should we view this as debt also??
And who said anything about unpaid and past due rent????? where is this statement of yours coming from? As for your understanding of bankrupcy... If a company with zero debt finds its self in a position where it cannot pay its immediate expenses then you are supporting my arguement. The fact of the matter is that this company will be able to get a loan to pay the bills while a company burdened (already) with debt will find it hard if impossible to continue borrowing. As for hard assets as colateral for more debt, well, i view cash as a harder asset than a building or some land.
You really need to go back and think about why companies go bankrupt... More specifically why good companies go bankrupt. We can all easily understand why a terrrible business would go belly up, but it should not be analized the same way when a good company does.
Usually I don't like to argue accounting rules because many times analyst need to rely on more practical measurements, but rent as an expense, not as a debt, is useful here. When you classify rent as an expense under accounting rules, it implies that the line item has short term and period specific implications. Essentially Rent is a temporary account that has its impact on the period in question (whether it be this fiscal year, last quarter.. etc....).
A debt has different implications. They signal a future expense that implies certainty. To be more specific a debt is a fixed cost, while on the other hand rent is a variable one if we view the problem on a yearly basis. Yes, rent is fixed for shorter periods, but after that this expense can be adjusted. My point is this. You imply that ANF is a few quarters away from disaster. Yet you havn't sited any examples of where ANF's stores have not been able to support there expenses. As far as I can see the stores still produce a profit and not a loss. Held to your standard every business is a quarter or two away from disaster. Also, as you have correctly cationed me on stating ANF has no debt, you need be careful in how you interpret rent, debt, and the capital structure of a company.