TUP and Zombies and rates

Tupperware is down 42% as of now. Earnings miss and a warning they might not be able to continue as a going concern. From what I can tell they are getting debt reset and at higher rates. I think this classifies as a Zombie company and I’m surprised that a company like this would be one.

Are they truly in trouble? Or is this a negotiation tactic with their creditors?

The Federal Reserve says that about 10% of listed companies are zombies.

The book, “The Lords of Easy Money,” describes how private equity firms used ultra-low interest loans to take over healthy companies, strip them of assets and load them with debts. The failure of “Toys ‘R’ Us” is an example. This “financialization” of business turns a manufacturing company with a focus on products and customers into a zombie whose profits exist for the purpose of financing an obscene overload of debt. This is the fault of the Federal Reserve’s suppression of interest rates which began after 2002.

This process makes me so angry! It’s why a good company like Tupperware is a zombie with a 55% chance of bankruptcy in the next year.

Total net sales were $302.8 million, a decrease of 20% (or 14% on a constant currency basis) compared to the prior year period. Gross profit was $196.6 million, or 64.9% of net sales. (Loss) income from continuing operations was $(3.8) million. Total debt was $704.0 million, compared to $684.8 million a year ago.

I don’t know what “debt reset” means but this zombie will need to refinance debts in a rising interest rate environment. I think they are really in trouble, a perfect example of what I have been warning about.

https://www.google.com/search?client=firefox-b-1-d&q=tupperware+stock+price+history

Wendy

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That is what I meant by a debt reset. Debt would need to be refinanced, and that means the interest rates and terms change, and thus the payments. It appears Tupperware does not think they can afford to do so, but they also cannot pay off their debts either.

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TUP is/was frequently mentioned on the Falling Knives board. Someone traded the idea successfully in the first half of 2022. Not so sure others will be quite so successful this round

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This is a basic financial analysis question that any fundamental investor should be able to answer in just a few minutes by looking at the company’s financial statements. So let’s take a look.

A quick internet search (on tupperware investor relations) turns up their latest quarterly report. The first thing to do is to get oriented. Here’s their investor relations page with their recent sec filings.

Their last 10-Q (the quarterly report) is for June. For future readers, I’m guessing their Sept report will be posted a day or two after I type this, so you will have more current information than I do while typing.

Clicking on the links, I’ve brought up the PDF. I prefer that over other formats - you might like a different format. Doesn’t really matter. Use whichever one is easier for you. The first page tells you what period we’re looking at. This one is for the 13 weeks ended June 25, 2022. Right away, we know that Tupperware is using a 52/53 week year rather than calendar months. Looking ahead to the financials, we see that the year to date numbers are for 26 weeks. So this is their second quarter and they have a year that ends near the end of December. Not unusual for retail companies. And it doesn’t really affect analysis in any notable way.

The income statements show 1.2 million of profits for the last quarter and 1.1 million for the last 6 months. That compares to 35.6 million and 80.9 million for the comparable periods from a year ago. Clearly, something is wrong.

Looking at the top line, sales are down significantly this year compared to the prior years. That would seem to be their issue.

With debt as a possible concern, looking at the line item for interest expense is the next stop. The quarter ended June shows 6 million of interest expense, compared to 9.7 million in the same period last year. The six month figures are 10.6 and 21.5 million, respectively. So interest expense is actually down. That’s strange.

They also have a statement of Comprehensive Income. Going into cynical mode, this is where weird stuff can be hidden away. And Tupperware has a weird item. In the two quarters ending June, they’ve got 118 million of foreign currency translation adjustments - as an additional income source. That compares to 7 million in the prior year.

Spidey senses are beyond tingling at this point. We’re into full on What The Heck is going on mode.

Let’s look at the balance sheet.

Cash is less than half of what it was at the beginning of the year. The immediate question that should raise is: where is the cash going? We’ll look at that in a bit. Receivables are down just a smidge but appear to be less than 1 month of sales, so that’s good. Inventories are up a smidge and are more than two months of sales. (Compare these to the gross sales and cost of goods sold, respectively). That’s a bit concerning, but not in a business-threatening kind of way. All the other assets seem pretty comparable to the beginning of the year numbers. Deferred tax assets are more than 10% of total assets. That could warrant further investigation - probably in the footnotes. Let’s move on to liabilities. Since we’re concerned about short term survival, that’s where the threats will be.

Accounts payable, current debt and lease (that’s debt payments due over the next 12 months) seem quite reasonable compared to the assets and sales. Accrued liabilities - that’s another item to check in the footnotes, but probably not survival-threatening. Liabilities held for sale - that’s a new one on me. Footnote time again. All of these are interesting, but none are large enough to be a problem. On to long term debt.

These are large at 688 million. More interesting, they are down just a bit while interest expense is down by 35% or so (math done in head here, so consider this highly rounded.) That seems odd.

But I’ve been looking at the minutia and missing the elephant in the room. Shareholders’ equity is negative - although somewhat improved over the beginning of the year. Disturbingly, it’s not from retained deficits. Retained earnings is over 1 billion dollars. It’s from treasury stock and the accumulated other comprehensive losses.

I’m also disturbed to see that the company has repurchased a lot of shares during this financially difficult half year. (Look at the description for Treasury stock where it lists the number of treasury shared held.) Why would they be doing that? That’s more footnote work.

So lets back up to the bigger picture again. What are the problems here? Clearly, there’s a sales problem. They’ve got a big drop in sales from the prior year. How about the debt? Well, in the prior year, their interest expense sure seemed to be manageable. It was 21.5 million for the half year at June 2021, which still left them with almost 81 million in profit. Interest expense being half of that in the current year while the liability remained more or less the same seems odd, especially in a rising interest rate environment.

But if you ask me, the big problem is stock buybacks. The company has used the vast majority of it’s retained earnings over the years to buy back it’s stock. And because there’s still a significant amount of debt on the balance sheet, those buybacks have been effectively debt-financed. That’s a typical corporate raider move.

A better analysis would involve looking at all of the footnotes where I’ve noted things. And it would involve a look at the last couple of full years. I’m not going to actually do that at this time, since I’m approaching this as more of a lesson rather than a proper financial analysis. Also, new quarterly statements are going to be available in just a few days, so it would be better to read those financial statements first and then look at the footnotes there. This quick look at the company is just intended to show the process rather than be a full analysis.

–Peter

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@ptheland outstanding analysis. Thanks!

Corporate raiders and stock buybacks with debt go hand in hand.
Wendy

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You’re quite welcome.

But I’m not sure I’d call it outstanding. I call it a slapped together quick look at a company, which likely has a number of holes and shortcomings.

Or perhaps I don’t have a good take on what kind of knowledge a somewhat above average investor might have. As a CPA, I’m well trained in financial statements. Doing this kind of analysis wouldn’t even come close to proper financial analysis in an audit of a set of financials. It barely scratches the surface.

I sort of assumed that any investor beyond the casual listener to the advice of their stylist’s cousin’s latest love interest would be able to do something similar. I’m barely touching on the most basic financial statement reading skills. Am I wrong in that assumption?

–Peter

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Depends on who you ask…and how much time they are willing to put into the analysis. :slight_smile:
Wendy

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This is pandemic related. Myself and most other successful artists saw sales skyrocket during the pandemic. Home decor was the rage.

I am wondering how my Christmas sales will be. The other artists I know are not doing well. The elephant in the room is November 8. This is true for all Christmas shopping. The airwaves are full of tension till November 9.

Tupperware may be buried here. It is probably too late for them.

I really have no idea yet how I will do this season. None of us are off to a running head start in my orbit of artists.

While minority stockholders could take the hit, the real problems are with those who extend debt without using due diligence to see if their customers are debt-worthy. I expect some of this stems from sales quotas and incentives from the management of the lender companies

Jeff

An average investor with a basic knowledge of finance only needs to look at some headline numbers, revenue growth, net income growth, SG&A, margins, cash flow, debt to equity, stock dilution. Only if something is amiss does the average investor need to drill down into the causes.

For trading purposes look at average analysts guesstimates, a.k.a. consensus, and at price charts.

The real question is what kind of financial education the average investor might have. I suspect very limited. Humans are led by stories, not by numbers. When by numbers, by magic numbers like the Fed’s 2% inflation target. I owe a debt of gratitude to my boss at NCR, Señor Tulio Hansen, who had me take a course in accounting, not to be confused with book keeping which a brainless clerical job. I also learned some more advanced accounting from some of my customers, specially from Chu Chu Harrison, the assistant warehouse manager at Orinoco Mining, the Venezuelan subsidiary of US Steel. We called him Chu Chu (behind his back) because he was a model train fanatic to the point that he has the wheel flanges turned to the proper dimensions. Eventually he and some colleagues bought a real railway line as a hobby.

Advice to young Foolish investors, take a course in accounting. It will reward you many times over.

The Captain

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Always finding ways to demean people. You’re very reliable on that.

Accounting is impossible without good bookkeeping. Good bookkeepers need to be hard working and intelligent. As an accountant, I often spend more time fixing bad bookkeeping than doing actual accounting. And that’s because of managers and business owners who think bookkeeping is brainless, clerical work.

–Peter

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Without tidy recordkeeping financial planning is fraught with mistakes.

True. But…

Accounting was invented to help owners manage their businesses, then it was corrupted. Governments used private firms’ accounting to extract taxes. Anyone want to argue that this is not a huge conflict of interest? Next governments used private firms’ accounting to safeguard outside investors. Anyone want to argue that this is not another huge conflict of interest? All you need for proof is that firms supplement GAAP reporting with non-GAAP reporting. That is telling the world that GAAP no longer serves the firms’ best interests.

There is more. Discounted cash flow was invented to calculate the value of bonds where the inputs are known, expiration, interest rate, etc. The only unknowns are whether the issuer will have the cashflow to pay the dividends in a timely manner and return the capital. For that the investor must examine the state of the business. When finally stocks were accepted as worthy investments, investors wanted to use the same tools, DCF, to value the stocks. The only problem is that the data are not available, no known expiration, no know quarterly earnings or cashflow, no interest rate. Valuing stocks with DCF is a fools errand, no matter how precise the accounting is because the future is unknown and not prescribed by contracts as with bonds.

What is needed are new tools to value companies. Accounting remains an important but minor tool.

End of rant? Maybe… :slightly_smiling_face:

The Captain

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We are not talking major trading desks etc… We are talking local mom and pops that need accurate accounting. Their niche markets are not as big as the guys you are alluding to, their needs are solid management.

If you need a “new tool” get rid of the old tool putting in the number wrong.

I would, but it would be a wasted effort.

Could that be because insiders were cheating outside investors by lying about their finances? Who else is going to protect outside investors, particularly smaller ones?

I could go on, but you’ve slipped off the deep end here. Way off.

–Peter

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Just a quick update - As expected, Tupperware released their 3rd quarter 10-Q yesterday. The quarter wasn’t a whole lot different. A bit more income and the foreign exchange gains reversed a bit. Going from memory on the share counts, there were no significant repurchases in the 3rd quarter.

In short, they seem stable for the moment, but they’re still on the edge of a crumbling cliff. It’s not obvious they’ll end up in bankruptcy - it’s not obvious they won’t.

–Peter

Why your insistence on making it personal? Try talking about the subject, it’s not that difficult.

Maybe the moderators want to step in, supposedly no personal attacks are permitted.

The Captain

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Calling your opinion “off the deep end” is not a personal attack. It is a dismissal of your opinion as nonsense and not worth discussing.

–Peter

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Peter, how does one frowny face fools with this new interface?

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