Santayana’s philosophy or message is also applicable to investors. As a history enthusiast, I recognize that there are valuable lessons to be learned by observing companies that have succeeded and those that have failed. An example where we might seek some lessons from the past is in the failed company of Montgomery Ward.
Montgomery Ward originated in the 1860s by Chicago resident Aaron Montgomery Ward who created a niche in the retail industry by undercutting his rural competitors by means of mail order. This was a new concept, perhaps the forerunner of online ordering and further extended his “economic moat” by his creation and the first to use the slogan, “Satisfaction Guaranteed or Your Money Back.”
Ward was content to build his business around the farmers and shunned business from the larger cities considering it a nuisance. But, by the 1880s, the department store was taking hold and competitors, most notably Sears, begin to impact the business. By 1900, Sears passed Montgomery Ward in sales.
In 1915, Ward’s had a record year, making $3.4 million on just under $50 million in sales. They suffered during the financial panic of 1920, but with the economy running seemingly well, they had a great 1929, as the depression began to descend on America. With 531 stores and a depression beginning to hurt, Ward’s realized they had expanded too fast and soon became unprofitable and they appeared to lose all direction.
In 1931, with losses mounting, J.P. Morgan enlisted the help of Sewell Avery, a successful businessman, known for his stellar work at USG. Sewell went to work immediately and had moderate success, but found himself up against both government and union intervention with the shortages that the nation was facing with the entrance to World War II. Refusing to deal with the unions and the feds, Roosevelt ordered Sewell’s removal and took over Montgomery Ward. Sewell was out of touch and angry and continued to make apparent bad decisions, leading many executives to flee the company.
Things continued to go badly for the company and in 1954, they found themselves in a proxy fight with Louis E. Wolfson, an activist investor that wanted Sewell’s job and Montgomery Ward. Wolfson eventually failed, and this is great reading also. He is purported to be the first and original activist investor that led to much of the current SEC regulations regarding takeovers. Wolfson was no ordinary businessman, however. Worth approximately $250 million, Wolfson was a feared man. He eventually stood trial and was convicted for bribing Supreme Court Justice Abe Fortas and also convicted of insider trading.
With mediocre performance over the next several years, the company began to worry about a takeover. In 1968, a friendly merger took place with Container Corporation of America. Marcor was the holding company that was sold to Mobil Corporation in 1973. Margins were still poor for the company at approximately 2 cents on the dollar.
In 1980, Montgomery Ward lost $233 million on sales of just under $6 billion. They attempted to remake themselves through such devices or gimmicks as “Electric Avenue,” which appeared to work for a while with lots of new technology hitting the market. But soon, companies like Circuit City, Best Buy (BBY) and others were having their impact and taking away sales. GE Capital purchased the company in 1988, bringing capital with them, but to no avail. Soon the company was in default on loans.
In 1997, the company filed for Chapter 11 protection. Along the way, Swiss Colony bought what remained and under the name Colony Brands still has a familiar online catalog from Ward. See www.wards.com.
Some lessons or reminders:
Margins are important. This haunted Montgomery Ward and is a key metric when investing in retail. Watch the margins closely and compare them with their competitors.
Check the cash conversion cycle for the company and compare it with competitors.
Watch the business in general. The scene constantly changes. Stores that used to be in malls are now going to the smaller stand alone buildings and finding success and an increase in margins. What was in vogue today, in all probability, will not be in vogue tomorrow. Perhaps in retail, this lesson is the most important. Remember how Blockbuster did not keep up with the changing of the time? Watch how book sellers adjust to their industry decline. The change is constant, so be aware.
Watch for government interference. Not exclusive to retail, but to all businesses. Aside from the intervention in the tobacco industry, there are many examples where the government finds itself imposing regulations upon industry. Look at the healthcare industry or snack foods that may become subject to added taxation.
Be wary of companies expanding too fast.
As many will remember, R.H. Macy & Company filed for bankruptcy in 1992, but was a much different company than Ward, filing a few years later. Macy had a great name, structure and recognized by their great franchise but was struggling due to bad management decisions. These can often be fixed through an acquisition such as they experienced with Federated. Ward was in debt, out of touch and did not keep up with the industry. Good management is crucial. Watch and compare ROE, ROA, ROIC with competitors.
Be cautious of companies or industries with unions. Unions can cripple a company very quickly. One only needs to look at the airline and car manufacturers to discover how they may impact the entire industry and drag it down.
Not all ideas work. Electric Avenue was short-lived, as with any new concept that comes forward. The Edsel didn’t work either.
There are always things to learn in life and we must be cautious and remember that sometimes … we just don’t want to repeat history. This also applies to investing.