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FFH & BRK.UN


Zorrofan
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To the board members in Canada, what are your thoughts of The Brick from a retailing perspective? Do they have a competitive advantage? Personally, I do not like investing in retail as the consumer tends to be rather fickle and the competition is fierce. However, if The Brick has a competitive advantage, then perhaps it makes sense. If not, then I fear that this may be a case of good money chasing bad.

 

Thanks in advance.

 

-Crip

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The news release is not easy to understand so I was pleased to find an article "New CEO rebuilds The Brick" at http://www.thestar.com/business/article/678204 .  It seems that there was a major problem with shortage of inventory as many items were out of stock at the stores.  In addition the cuts to the sales staff had left the stores with a shortage of sales staff.  Only a third of the reduction in sales volume could be attributed to the recession.  The message is that the new financing has allowed measures to be taken to deal with these problems by increasing staff and dealing with nervous suppliers. 

 

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Crip

 

Brick is one of the dominant big box stores in the sector. Most folks will have bought at least 1 item (couch, appliance, furniture, etc) from them within their first 8 yrs or so of starting out. Lower quality middle of the road offerings at attractive value.

 

Within the triangle they have a zoo of aggressive, & good, niche competitors. Leons & Sears in furniture, Sleep Country in matresses, Goemans & Sears in appliances, Best Buy/Future Shop in electronics. Their advantage is economy of scale - if they have it in stock at the right time & place.

 

The sales force used to be very good, loyal, long standing, & well motivated. Many were privately rewarded with free stock when Brick went public, & there are many stories of above & beyond service - from that time. The stock out problem has gotten progressively worse, goodwill is close to empty, & many of their best salesman have voted with their feet. Especially troublesome - as the salesforce is disproportionally ethnic, & these individuals are likely to experience some discimination in their job search. Ticking bomb.

 

If they can get their act together they will do extremely well, but they need to show very real improvements - & soon. There's been some hubris, & panic execution in places (sales force), but they've also demonstrated that at one point they knew how to run this business.

 

Long call investment with an upward bias around binary events.

You should know by the end of January 

   

SD

 

 

 

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Thanks for the article.

Looks like the Brick has done lots of damage to itself in the previous few quarters because of liquidity issue.

Sure looks like some panic decisions has been made (firing too many people)...

 

But looks like they are turning the ship.

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The Brick was Canada's dominant furniture retailer for many, many years when Bill Comrie was at the helm.  The business went downhill after he retired from the company shortly after it went public.  There's a good biography of him below.  A great story about how he built the business.  Cheers!

 

http://www.retailcouncil.org/news/media/press/2008/pr20080516.asp

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There is something that is important to understand about BRK.UN.  The Brick is not primarily a furniture retailer.  Rather, they are primarily an originator of loans for low-to-medium income Canadians who happen to use those loans to buy crappy furniture and electronics.  The Brick then preys upon those low-to-medium income Canadians by using high pressure tactics to sell them extended warranties at grossly inflated prices.

 

If you look at their financials, you will see that even in the "good years" they basically made no money on the furniture and essentially all their income came from the financial services element.  Now they have had trouble with volume and the wheels have fallen off in Q1 2009.

 

So is this a sustainable business model?  Yes, I'd say that there will still be a good supply of clients who do not manage their finances well enough to purchase with cash and who are so financially illiterate that they cannot discern whether an extended warranty is a decent deal. However, it might take until 2011 or 2012 for those consumers to resume buying crappy furniture.

 

SJ

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As sad as it is to say, I agree with Stubblejumper (SJ) regarding the general sentiment from financially literate of what the Brick is to the financially illiterate/lower-income/poor credit history customer.  However, for the financially literate consumer, you can likely get some pretty good deals at the Brick but unfortunately for the Brick, it doesn't sound like they will make any margin from selling their goods if they do not finance or sell you an extended warranty.  I am adding these comments as a consumer living in southern Ontario, not as an investor who has analyzed their financial statements.  Perhaps Future Shop is similar?

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Having grown up in Edmonton and having watched  Bill Comrie when he was a centre for the junior Edmonton Oil Kings... ....there were some great games between the evil (not a metaphor) Flin Flon Bombers featuring Bobby Clark, Reggie Leetch et al....

 

The Brick is to rural Western Canada (and the prairie cities) what Wal Mart is to Alabama. It has been around forever with the same business model and has weathered recessions that are a lot tougher than this one. Their  major mistake was to try to take the business into Ontario and to try their  hand at speciality bedroom stores. They have however, extended their base in the last 10 boom years. Although there has been a contraction in the oil patch (which fuels the spending out there), the Brick will recover if the oil business remains viable. I think Prem is right with this one.

 

Cheers

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