Hayden Capital shareholder letter

[Liberty]

Q3: http://www.haydencapital.com/wp-content/uploads/Hayden-Capital-Quarterly-Letter-2017-Q3.pdf

 

I thought there were some interesting ideas in there.

 

Fred also links this presentation on calculating incremental ROIC:

 

http://www.haydencapital.com/wp-content/uploads/COBF_Incremental-ROIC.pdf

[LC]

This is going to be a bit of a ranty post! Warning  ;D

 

ROC ROIC ROE ROA yada yada yada

 

I kind of hate them because it's all backwards looking. And it promoted false accuracy.

 

Let's use Hayden Capital's example because its there (no hate on that dude, seems bright as hell).

 

Delivery has better margins than sit-in restaurants? A first year business student could tell you this. Does it really matter whether the margins are 76% or 80% higher?

 

The REAL questions are on slide 17:

1. How much can delivery grow to?

2. What are the most effective methods to promote delivery? New Customer

Discounts? Advertising?

3. How can you make delivery costs cheaper? Drones & their unit economics?

(ok maybe not the drone question)

 

But that first question is the most important question and it has everything to do with the whole reliance on measuring a bunch of historical "Return on XYZ" metrics.

 

I'll talk about Nike since I'm a shareholder. Retail sales are falling, online/direct-to-customer sales are increasing. The company is actively moving towards direct-to-customer sales.

 

Now any freaking genius can tell you online sales will have higher returns on XYZ. Because there's no footlocker or whatever retailer taking a cut. So as an investor, I'm not taking the time to calculate ROICs of the marginal sneaker sold in each channel, because it really doesn't matter.

 

The real question is, as traditional customers move from purchasing in-store vs. online, what are the implications for sales volume? (i.e. question 1) from hayden capital's deck)

 

Online, customers will see many many many more brands/varieties. You go into footlocker, there are 5 brands and Nike owns the prime viewing location. But when you go online and sit down and look at running sneakers, you have so many more options. How will that dynamic affect Nike brand value and sales volume? That is the question.

 

Is it going to be a simple replacement? 100% of customers going from Footlocker will go to Nike.com? 75%? 50%?

 

Will shifting attention online actually improve sales? Communication, information travels much more quickly online. Essentially, cool sh1t goes "viral" fast. And its also forgotten fast. And brands can communicate more directly with customers. Will kids in Tokyo see meme's of kids in New York running around in a pair of Nike's and want them? Or will it be some Adidas, or J.Crew, or whatever?

 

So I hate using ROIC and ROC because they don't even come close to answering those questions. They are more useful when the business environment is not changing. Great for monopoly-esque situations.