RE: Complex Trading Comps Analysis Treatment of gross profit
No we have not incorrectly stated TGT's Gross Profit. The traditional accounting definition of Gross Profit is Total Revenue less COGS. But forgetting about accounting definition for a second, intuitively, COGS is a raw material. The raw materials for Credit Card Revenues is Interest Expense; hence,... No we have not incorrectly stated TGT's Gross Profit. The traditional accounting definition of Gross Profit is Total Revenue less COGS. But forgetting about accounting definition for a second, intuitively, COGS is a raw material. The raw materials for Credit Card Revenues is Interest Expense; hence, according to GAAP (US and Int'l), the CC Revenues is already Interest Income less Interest Expense, thus, showing Net Revenue from CC. This is similar to a bank. The CC Expenses line is more like SG&A => advertising and salaries of the people administering the CC division, as opposed to true COGS. thus, we are not incorrectly stating TGT's Gross Profit at all. Read More

RE: Complex Trading Comps Analysis: Additional TGT adjustments
The $7MM expense for amounts to retired executives is a normal, ordinary and recurring expense and thus, not to be adjusted out. Even though we don't want execs to be retiring every year, you cannot simply adjust out everything => this is indeed a normal part of business and not non-recurring. It... The $7MM expense for amounts to retired executives is a normal, ordinary and recurring expense and thus, not to be adjusted out. Even though we don't want execs to be retiring every year, you cannot simply adjust out everything => this is indeed a normal part of business and not non-recurring. It is part of regular SG&A and compensation expense.

To illustrate - an old JCP 10K has a "senior mgmt transition charge" and this is specifically related to some sr mgmt getting forced out (as opposed to retirement) => in such a case, we would make an adjustment b/c you don't want mgmt to be forced out all the time. but if normal part of business (execs retiring) then you shouldn't adjust.

More importantly, the specific note you address is related to pensions. You will always have adjustments to pension related expenses that is definitely ongoing and recurring. We have an entire class related to pension adjustments => changes in actuarial assumptions can easily manipulate GAAP pension expenses, so we consider them to be recurring, unless it's an industry like car manufacturers and airlines where the magnitude is so large, it warrants a full-day discussion. Read More

RE: Complex Trading Comps Analysis: Fair Value of Debt
Yes, in theory, that is correct. However, as explained in our Finance 101 video in our WACC calculation, for non-distressed, going concerns, the difference between book value and market value of debt is not that large and thus, book value is used because people get lazy to get on bloomberg and look ... Yes, in theory, that is correct. However, as explained in our Finance 101 video in our WACC calculation, for non-distressed, going concerns, the difference between book value and market value of debt is not that large and thus, book value is used because people get lazy to get on bloomberg and look up the current market value of debt - why? B/c it is usually immaterial and insignificant of a difference and so the general accepted best practice is to allow book value -again, for run-rate companies with normalized debt figures, that is ok. Obviously for distressed debt, that's a whole other ballgame altogether. Read More

RE: Complex Trading Comps Analysis: Convertibles of COSTCO
No, upon conversion, the holder does NOT pay $22 per share. The $22 is simply used to determine the INITIAL value of the convertible bond/note when priced, so in short, the $22 is no longer required at this point. Don't confuse convertibles with options and warrants!

RE: Complex Trading Comps Analysis: Convertibles of COSTCO
1) Per the instruction in the video, it clearly stipulates that the key question in the costco converts rests on the timing - how long away is the maturity of the converts? if it matures tomorrow, the holder wouldn't convert b/c they can get more by simply holding to maturity and receiving par value... 1) Per the instruction in the video, it clearly stipulates that the key question in the costco converts rests on the timing - how long away is the maturity of the converts? if it matures tomorrow, the holder wouldn't convert b/c they can get more by simply holding to maturity and receiving par value. as financial analysts in the generic sense, one cannot introduce subjectivity as to say when is "far away enough" that a rationale investor would convert.

Again, to re-iterate our point, you mentioned PV of converts vs equivalent number of costco common shares - true statement, however, what costco shares suddenly dropped the next day? then it is suddenly out of the money and one wouldn't convert; thus, the timing of WHEN the PV is as of (in this case, years later) is critical - can one be absoultely sure that the price would go up in five years? ten years? most people would say yes, and we would disagree - case in point is WMT (wal-mart), the stock price has been stagnate and sideways for the past 5-7 years.

Thus, it is our opinion that it is NOT guaranteed that a rationale investor would necessarily convert given the specific information supplied for Costco at that given time.

Finally, pls note that the CFA is a great credential to have, but is still based on the textbook and not applied in real life.

2) Normally, per our instructions in the video, one would back out capital leases from the debt; however, because Costco's 10Q did not supply a full debt footnote in which we could have extracted such capital leases figures, we cannot just "make it up". One could argue to get it from Costco's 10K which might approximate the capital leases figure from 6 months prior (or 3 or 9 months prior depending on which 10Q), however, it is a worse sin to mix and match numbers from different time periods. Read More