“Do you have a Macy’s credit card?” asked the woman behind the counter.  “No,” I replied shaking my head somewhat disdainfully side-to-side.  “Who needs another credit card?” I thought.   ‘Well, I ask because you can get another 20% off’ continued the woman.  “Oh,” I said quietly to myself.  “I’m getting 20% off because it’s on sale … and I can get still another 20% off?  And I’m buying $300 worth of clothes.”  I quickly filled out the short credit application.  I mean who wouldn’t want to save $120? I had just become part of what is clearly – possibly the real – Macy’s business model.  Sell upscale high-end product, discounted by frequent “sales” and create credit card balances by incenting their use.  I realized that the following month when I opened my new Macy’s monthly bill.  On unpaid balances going forward, the interest rate would be 24.5%!  Who wouldn’t want to lend money at 24.5%?

The idea that a business wasn’t necessarily what it was thought to be was first brought to my attention by Mark McCormack’s 1986 book, “WHAT THEY DON’T TEACH YOU AT HARVARD BUSINESS SCHOOL.”  In the book, McCormick tells the story of playing golf in a Monday Pro-Am golf event.   After teeing off with his foursome, two of the players marched ahead and McCormick found himself walking beside a man whom he had just met moments before.  A man whose name was familiar to him and that he thought was the president of Rolex watch.  In an attempt to make casual conversation he asked “So how’s the watch business?”  The man stopped, looked at him incredulously, and said “I wouldn’t know.”  McCormick flummoxed, quickly apologized.  “I’m sorry. I thought you were the president of Rolex.”  “I am” the man responded.  “But I am not in the watch business.  Timex is in the watch business.  I am in the luxury business!”  And so he was.  

Understanding what the real business is is very important in investing.   Retailer J.C. Penny is a dramatic example.  Hedge fund manager, Bill Ackman, bought an 18% interest in October 2010 only to sell it two years later for a 50% loss.  The loss was roughly five-hundred million dollars!   His mistake?  He brought the former C.E.O. of Apple Computer’s retail stores in to run an apparel retailer.  The two companies have totally different products and different customers.  One sells “hot” new technology products - made by the company - to tech savvy young men.  The other sells apparel - that other companies make - to young mothers looking for the shopping “experience” of finding a bargain.   Each has a different subtext to its retail business model.  Apple’s is crowd pleasing “coolness” to the social media millennial generation.   J.C. Penney’s model - predicated on heavy promotion and sales to middleclass moms - is undoubtedly broken.   With the social demographic growth of out-of-wedlock births, there is now too much competition for too few middleclass moms spending money on apparel.

Sometimes, companies don’t want you to know the “THE REAL BUSINESS.” I sent Macy’s an e-mail – on their investor relations web site - asking “What percentage of your net income comes from credit card operations?”  That was five weeks ago.  Haven’t heard back.  Don’t think I will.

-Francis Patrick Boland