“I would rather throw a viper down my shirtfront than hire a compensation consultant” quipped Charlie Munger in 2004 - Ranmore

“I would rather throw a viper down my shirtfront than hire a compensation consultant” quipped Charlie Munger in 2004

I’m with you, Charlie

Because there are LOTS of BIG lessons companies seem to miss about consultants

Last week, US discount retailer, Big Lots, announced they are closing up to 315 stores

Which is over 20% of their store base and very unsettling for their 10,000 employees

But wasn’t this a good business?

Yes, that’s why we owned it pre-2018

They generated solid free cash flow of ~$200m a year and regularly generated double-digit ROEs

What went wrong?

Well for the years ended Jan 22, 23 & 24,

Same-store sales performance was

minus 2.5%,
minus 12.9%
minus 13.5%

meaning they reported

net income of $187m
a loss of $180m
a loss of $548m

But where do the consultants fit in?

Well, Big Lots use remuneration consultants

Whose complicated & benchmarked scheme somehow determined that the CEO should earn total compensation of

$9m
$8.5m
$7.8m

Surely these consultant-devised schemes are worthless if the CEO received a higher base salary ($1.22m) than last year ($1.2m) PLUS $6.6m in awards when the company lost $548m

after losing $180m the year before??

Well, thank goodness they have that cash from when sales were still growing…

If only!

They had net cash of $53m in 2020, but now have $2.3bn of debt

How?

Paying dividends and spending $632m buying back shares over this period didn’t help

What!

So let me get this right,

– Same-store sales have been collapsing,
– They’re losing buckets of money
– And with only $53m of net cash in 2020

This Board approved spending $632m buying back shares?

No, they approved $750m..

What’s the company’s market cap today?

$31m

Similar to the CEO’s compensation of recent years …

It gets better

They sold the company “silver” (distribution centres) by doing sale & leasebacks in 2021

Raising $588m

Which they then used to fund buybacks

But saddling the company with lease liabilities

Who thought THAT was a good idea?

Other consultants (who charged $4m)

And the Board agreed?

Well, if you give share awards to non-executive directors, chances are they’ll favour proposals that boost the share price..

People THINK share awards align their interests with shareholders

But only short-term shareholders

And to top it all

On Friday, Big Lots granted “one-time cash retention awards” to the

CEO – $3.2m
CFO – $1m
General Counsel – $0.6m
Chief Human Resources Officer – $0.6m

Quite why they want to retain the CEO and CFO who put them in this cash-strapped position

or pay them another “award” is a mystery

And “one-time CASH awards” not “one-time SHARE awards”

tells me what they think about the 10Q warning that their financial position “raises substantial doubt about the Company’s ability to continue as a going concern”

As investors, we need to look out for Boards and management teams who act like this

and keep an extra stock of vipers