Wednesday, August 5, 2009

Business Success in a Recession

I have a good college buddy up in Dallas who runs Entertainmart which is owned by his uncle. He sent me an article talking about the business. Thought the whole article was interesting enough to put on the blog. Several takeaways that are applicable. Few comments below.

From the Dallas Morning News

Mark Kane figures: If at first you do succeed, try, try again.

First, Kane turned a booth at a Garland flea market into CD Warehouse, netting him $7 million when he sold out in 1997.

Then he founded Movie Trading Co. He sold that seven-store chain to Blockbuster Inc. for $12 million in 2002.

Now the 55-year-old is rolling out Entertainmart – his latest, and perhaps greatest, adventure into the retail world of buying and selling used music, video and games.

He isn't trying to reinvent the wheel. He calls it a retread.

"Better, more expansive, nicer environment, obviously much larger sales volume," Kane says, surveying 32,000 square feet of merchandise at his newest store at Central Expressway and Parker Road. "I know this business. I've been doing it for 20-plus years. I'm just putting a little more lipstick on the pig."

From an investing standpoint, here is a man who sticks with his core competence. He knows what he knows and so far has stayed within it. So many people make a fortune in one area and then go lose it in a completely unrelated field. It also shows he loves what he does. This is the type of manager investors should be looking to invest in.

These days, Kane is taking advantage of desperate landlords.

His rent in Plano is half of what the landlord wanted 18 months ago.

The store sold $60,000 in merchandise its first week – about 20 percent of its first year's rent.

The lease has a key feature: a 90-day rolling kick-out. That means he can give notice anytime he wants and walk the lease three months later. It's a one-way opt-out, he says. His landlord can't give him the same 90-day heave-ho.

This is going on everywhere. In the world we live in of course the worst the news the more investors want it. REITs are up like 10% in the last three days. BRE Properties, an apartment REIT out west, expects rents to decline well into 2010. NYC office space rent is dropping like a stone. The desire for REIT stocks seem to have never been greater.

The big boogeyman is digital downloads of movies, Kane admits. "CDs used to be all of our business, and now they're 10 percent. If that happens to movies, it will obviously hurt."

But he has an escape route planned. Kane says he can mark down and liquidate his inventory in 60 days and still make money...."I'm all about mitigating the downside," Kane says. "I'm getting 1 percent on my CDs at the bank. I'm getting 60 percent on my CDs here. Low rent, a kick-out. How do I lose?"

Another key feature of his success. Worried primarily about his downside. Let the upside take care of itself.

Good luck to Russell and his Uncle.

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