Rule #1 Finance Blog

With Investor Phil Town

HOW TO READ A QUARTERLY CONFERENCE CALL (PART FOUR)

More analysis on WFMI’s Quarterly Conference Call… Picking up from where we left off yesterday…

We currently operate eight stores within the 60,000 to 80,000 square-foot range, with an additional 21 stores of that size in development, five of which are relocations. We are confident about the potential future returns of these larger stores, as we believe they appeal to a broader customer base, take longer to reach maximum capacity, and are less vulnerable to competition as they create a higher barrier to entry.

John is saying that WFMI is digging a wider MOAT. The brand is becoming harder to compete with.

For the fiscal year, we produced $411 million in cash from operations which allowed us to self fund $324 million in capital expenditures of which $208 million was for new stores. In addition, we paid $55 million to shareholders in cash dividends. For the fiscal year, we increased cash and cash equivalents, including restricted cash, by $124 million to $345 million, and reduced total long-term debt by $152 million to $19 million due primarily to voluntary conversions on the part of our bond holders.

They don’t have to borrow to grow and they are paying down the loans from when they started. Oh, and the people they owe like the biz so much they are switching from being lenders to being owners by swapping their loans for stock. That’s a good sign for the future when conservative bond holders are becoming owners.

Since accelerating the vesting of outstanding options at the end of September, we have already received over $80 million in proceeds from stock option exercises, as compared to the $86 million in proceeds from stock option exercises that we received in all of fiscal year 2005.

They are getting rid of the option overhand. With options still outstanding that have not been expensed, the owners are getting whacked for a piece of the biz out of nowhere. Lots of startups do the option thing, but it’s a hidden expense that gets you later. From now on WFMI is expensing the option awards, which John likes to use to incentivize the troops. Okay by me.

We are very confident in our future performance and believe we will continue to produce strong cash flow from operations and stock option exercises in excess of our capital expenditure needs. As an EVA company that believes in maximizing returns on invested capital to our shareholders, we are very pleased to announce today a 20% increase in our quarterly dividend to $0.30 per share, a special dividend of $4.00 per share, and a $200 million four-year stock buyback program, along with a two-for-one stock split.

So the stock’s going to split soon, which makes it more psychologically attractive to the Big Boys, so they keep it in play. And John now has a pool of cash to buy stock with. This is probably a very good thing in his hands, but often isn’t so great in the hands of the CEOs who are traitors to the owners. A typical traitor CEO will use MY money to buy back stock from the public just to prop the stock price up. That’s not what is supposed to happen.

What’s supposed to happen is he’s supposed to buy stock when the market mis-prices it too low. When he buys it when it’s very low, in effect, he’s being a Rule #1 investor with my money. I LOVE that! It’s fantastic when the CEO does that correctly because he’s accelerating my rate of return by giving me a bigger piece of the pie without my having to buy it! And he’s bought that piece at a very good price. That’s the theory. We’ll see how he does with it!

Oh and he’s popping a big piece of cash out to us. $4 a share in one shot. You might wonder why.

Because he is grading himself with EVA, too. The less capital the business has, the higher the EVA — so he wants to get rid of the excess that he can’t invest with a good EVA, to make his EVA better. We see the EVA as ROIC. GO JOHN!!!! (And probably when I get the $4 I’ll just buy more WFMI with it … as long as the price still has a nice MOS.)

WE’LL FINISH TOMORROW IN PART FIVE…