Joshua Kennon » letterman jackets

Within 12 Hours, We Declare War on the Letterman Jacket Industry

Joshua Kennon — Fri, 19 Feb 2010 18:41:42 +0000

As one of the oldest and largest online retailers of letterman jackets and custom chenille awards, Mount Olympus Awards has reached a point where our purchasing power enables us to actually increase our shareholders' return on equity by lowering the price on stock letterman jackets from $239.95 MSRP to $129.95, saving our customers at least $110.00 on the jacket alone, plus what we save them on the awards. Following a five-hour meeting with a DuPont ROE analysis, we realized that there is a huge opportunity to increase our returns on capital even further, while saving our customers more than 45.84% off retail. Despite not being active in day-to-day management (I'm a passive investor in the firm and have total control over investment policies), I wanted to actually be the one to "flip the switch" given the huge change in the nature of the business. I had my office PowerMac tied into the network and changed the prices myself, setting them to go live within the next 12 hours. Here's a picture of my desk as I did it. We certainly have come a long way since Aaron and I hand coded HTML pages in Dreamweaver via FTP during college.

Last night, the shareholders of Mount Olympus Awards, LLC had a 4 or 5 hour scheduled meeting in a local office and solidified our plans for the business, which I discussed a few days ago (see Wholesale Chenille Letters, Patches, and Varsity Jacket Business Launching). The end decision was we are going much farther than we originally anticipated after doing a DuPont Return on Equity analysis. Far from being just ruthless on pricing, like I promised, we are about to drop a nuclear bomb on the letterman jacket industry by transforming our company into the same business model used by Rose Blumkin to build Nebraska Furniture Mart. We generate higher returns on equity for shareholders, our customers save money to a degree that wasn’t even possible only a few years ago, and we have the opportunity to compete for additional business that we previously chose not to pursue.

There are four components to this plan, which launches within 12 hours:

1. Drastic retail price reductions on letterman jackets, varsity jackets, and letter sweaters
We are dropping the price of our brand name, American-manufactured stock letterman jackets (companies such as Rock Creek, Holloway, and any remaining DeLong merchandise) to $129.95 from the MSRP of $239.95, giving customers $110.00 off, or 45.84%. We already dominate the industry, yet our market analysis shows that we have an opportunity to more than make up for the price drop in volume profits. Given that there is very little cost of capital due to our business model, there is no down side. In other words, individuals can now purchase their letterman jackets and varsity jackets from us for less than many wholesale companies can purchase them! The same brand names, the same quality, with no minimum orders. We will still earn attractive margins due to the sheer quantity of merchandise moving through our system. The same is true for our letter sweaters, which we are dropping from an MSRP of $180.00 per letter sweater to $69.95, a total discount of $110.05 or 61.14%.

2. Launching a direct-to-school and corporate division that offers wholesale prices
We are transforming MOA Team Supply into a direct-to-school and institutional business that will sell wholesale custom chenille letters, patches, and awards at prices below what most American manufacturers can manufacture the product for in their own facilities. These products, with only a few exceptions, are made here in the United States. Due to our volume, we will still make more than adequate compensation (in fact, our profit margins are comparable to those of one of the firms I admire, Bloomberg, LP). My team has identified 3-4 of the top players in this market and we are going to aggressively go after their business. We can beat their prices, and in many cases, offer faster delivery.

3. We will devote whatever capital is necessary to becoming the nation’s largest retailer and direct-to-school custom chenille and letterman jacket company
Mount Olympus Awards has indirectly served as one of the investment vehicles through which I had put capital to work. For instance, during the crash in March of 2010, I used the company’s cash flow to engage the capital markets heavily; e.g., when General Electric had fallen from $40 to below $6, I had the company buy a hell of a lot of common stock and even more LEAP (long-term call options) that have been obscenely profitable and will show up on our 2010 tax return (GE is back up above $16 per share). Hence, the old inside joke among the shareholders that we are basically a hedge fund in drag. In order to support these changes, I will halt all dividends, except tax distributions, and we will retain all of our capital to commit to whatever purchases are necessary with our letterman jacket vendors and suppliers. Capital markets investments will come second to our primary business.

4. We will expand our product offerings into complimentary lines, such as embroidered patches worn by those in the service industry (sewn on or ironed on to a mechanic’s uniform, for instance).
We already have the relationships with the vendors necessary to immediately jump head first into this line of business, and we attract millions upon millions of page views at our various online sites each year. With a database of tens of thousands of customer names, we can hit the ground running.

The Ultimate Plan
Despite my general distaste for selling assets, I would consider selling the letterman jacket business within 3-5 years (not before then because the things we have in development are paying off heavily, meaning that every day that goes by, the underlying operating profits and cash flow continues to expand geometrically and that would mean a higher valuation for us, and a better, more powerful strategic asset for the firm that acquired us).

Wholesale Chenille Letters, Patches, and Varsity Jacket Business Launching

Joshua Kennon — Wed, 17 Feb 2010 16:10:06 +0000

Over the next month, we will be rolling out MOA Team Supply Version 2.0, which will switch to a wholesale pricing model on custom chenilles and varsity jackets. In many cases, we will be able to sell to schools, organizations, booster clubs, and other instiutions at prices below that what most American custom chenille factories can produce their merchandise! This is due to our extremely fine honed business model that allows us to operate with a fraction of the total capital investment and a cash conversion cycle that is self-funding.

A few months back, I told you that we were launching a new division of Mount Olympus Awards called MOA Team Supply. I explained that we were going after an entirely new market, specifically athletic directors and schools that want to purchase wholesale chenille letters, chenille patches, and even wholesale varsity jackets. We’ve finally got the business model in place and over the next month, we will be modifying the prices on the site to reflect the roll-out of our wholesale chenille structure, in some cases using our substantial purchasing power to sell varsity letters at a price lower than many factories can produce them here in the United States! It’s a huge accomplishment and, frankly, I can’t wait to get this off the ground.

As I said then, and I’m repeating now, I am going to be absolutely ruthless on pricing. We are a better business. We have figured out how to generate higher margins despite passing on substantial savings to our customers, meaning that we can turn a profit at prices lower than most wholesale chenille companies! We are going to structure some key school programs and get printed high gloss catalogs, along with informational videos and other materials in the hands of some of the nation’s biggest districts. I’m going to create a culture where schools can order what they need in under a few seconds, submit their purchase order and payment, and receive wholesale chenille patches, letters, and varsity jackets manufactured right here in the United States.

To put it in simple terms, we’re going to make wholesale chenille letters and patches more affordable for students throughout the country, pump money into American manufacturers of the products, and create an ordering process that makes athletic directors happy and their lives less stressful.

The new wholesale chenille catalog will feature varsity letters, embroidered patches, iron on patches, varsity jackets, and more.

MOA Team Supply Wholesale Chenille Catalog

The wholesale chenille catalog is currently in production and will be released when the updated site goes live in one month (the current site still reflects retail pricing so if you happen to visit it before March 2010, you will see prices that are far higher than they will be following the switch).

How We’re About to Launch a Wholesale Chenille and Wholesale Varsity Jacket Company In The Midst of the Recession

We are a completely debt-free company, meaning none of our capital goes to paying interest expense or fixed payments.
We generate a negative cash conversion cycle, meaning none of our shareholders’ capital is tied up in the company. We are able to collect cash for products sold long before we pay the bill to our vendors.
Utilizing special banking programs, we pre-pay all of our invoices, adding several percentage points to our profit margin without costing our customers anything.
We are one of the most successful custom letterman jacket businesses in the United States. Our products have appeared in magazines, on television, in movies, and much more. The quality is superb and we stand behind every product that goes out the door.
Instead, orders are placed and we can work with wholesale chenille factories and wholesale varsity jacket manufactures to get merchandise that lives up to our standards, at massive price discounts for our team dealers and school clients thanks to our huge volume purchases.
For small schools, we offer low minimums on the wholesale chenille letters and patches, making it easier for districts in even the tiniest farm town to reward their students and athletes without stretching their budget.

This Means That I’ll Be, In Some Capacity, Competing Against My Parents and Their Wholesale Chenille Company

The only downside of this is that I will be indirectly competing against my parents and the company they built throughout my childhood. Their firm, Chenille Appeal, is one of the nation’s leading wholesale chenille manufacturers. Their business model is based upon selling directly to sporting goods stores and team dealers, not schools or individuals. This is because my dad’s background was in the sporting goods industry and he wants to focus on delivering the best service possible on a business-to-business basis. He doesn’t want to deal with the public or with school districts. I understand this. It’s an important part of their customer service experience (even though most of their competitors utilize both distribution channels) and it’s his right.

I, on the other hand, have no interest in selling to sporting goods stores because my company focuses on retail customers (Mount Olympus Awards) and team dealers or school districts (MOA Team Supply). So, perhaps, we won’t end up competing because we are appealing to different segments of the wholesale chenille and wholesale varsity jacket industries. If Wal-Mart and Target can peacefully coexist, so too can Mount Olympus Awards and Chenille Appeal. Even though we’re in the same industry, we are going after completely different customer bases with different business models. I just can’t see one of our customers ever contacting them or one of their customers ever contacting us because it wouldn’t make sense.

What Is Kennon, Green & Company Ultimately Going to Look Like?

Joshua Kennon — Sat, 06 Feb 2010 08:55:09 +0000

For the first, I understand what Buffett and Munger mean when they say there is "no master plan". If you follow attractive values, and focus on opportunity cost, you end up in places you never expected. I have no idea what the firm will look like 10 years from now, only that we will focus on generating the highest risk-adjusted real return on capital.

I’ve been thinking a lot about the ultimate form the partnership or the holding company is going to take when I consolidate everything I own – all of my private businesses, stocks, bonds, real estate, and other assets, along with my parents, family, and friends, under a single investment vehicle (I explained this in We’ve Finally Settled on a Course of Action). This has been occupying and increasingly large percentage of my time, mostly because I think the best thing to do is to simply raise capital, take a percentage of the profits, and then invest the money in the best risk-adjusted opportunities. Which opportunities present themselves and which time is beyond our control, so there’s really no way to predict, ahead of time, what our holdings will be.

I do know, however, that there are a few areas that interest me. I’ve been breaking them up in an organizational matrix so I can think about how to put together the various “pieces” when the time comes. This is probably 5+ years in the future.

Here’s the plan …

The point is, we may or may not be involved in any of these industries. They are merely areas in which I have an interest and a competitive advantage in understanding. What the empire ends up looking like will depend almost entirely upon opportunity cost and the prices at which we can acquire control. The only thing I care about is earning the highest risk-adjusted real return on capital. If that means that I end up owning a media distribution business in Southern Asia and nothing else, then so be it. What I’m doing now is drawing “circles of competence” around which I look for opportunities. This concept was originally created by the legendary CEO of IBM, Watson, but made famous by Warren Buffett because he quotes it all the time.

Kennon Home Accessories is one of our new retail companies, selling everything from cashmere scarves to diamond-tipped fountain pens. Right now, it is in beta mode. After a few years, when I truly understand the industry, what sells, what doesn't, and how to improve inventory turns, I'm going to put a hell of a lot of capital into it and blow the doors off the place, even if it means selling stocks and bonds to fund it.

Retail: I would love to end up owning something like a Borsheim’s, Meirettos, or Hamilton Jewelers, generating substantial sales from a single location.

Right now, most of our online stores are consolidated as part of the Cherrywood Shops family. This includes retailers selling everything from baby gifts and wedding favors to letterman jackets and murano glass beads. We also have the prototype retail store, Kennon & Company, in a town just north of Kansas City, where we test our merchandise.

Over the next few years, we will be building the stores, redeploying cash from our other operating businesses into them. On a long-term basis, once we get the formula down, I’d be willing to invest heavily, perhaps getting into fine watches, diamonds, or other merchandise. It just comes down to the return earned on capital. If I can be satisfied that the money is there, I’d seriously consider selling off stocks, bonds, or other assets and expanding the store, and its product offerings, exponentially. It’s like anything else in my life … I spend years studying it on a small scale and then (what looks like overnight to people on the outside), it’s 10x larger than it appeared a few months earlier.

Maybe I get this from my parents. When we were kids, they sat us down and explained they were starting a business, saving their money, and that we could really make something of it if we worked hard but it would mean sacrificing for many years. They asked what we thought, and if we were willing to do that. We talked about it and basically voted as a family. Everyone got behind the decision we continued to live in a rather pathetic 900 square foot house for many, many years as the capital built up silently in the background.

Finally, one day, my mom decided it was time to get a new house because the business was self-funding. Again, they sat us down and took a vote, asking if we wanted to build something in the town where we grew up (Savannah, Missouri), or move somewhere else. We voted for the latter and started house shopping. We found what we liked and they dropped a couple hundred grand on the new place. The business, however, always came first. (I didn’t realize, at this time, that most people spend everything they can on appearing well-off rather than investing. I mean, the house purchase was tiny in comparison to the machine purchases my parents were making to buy equipment for the company because the house, although it was nice, couldn’t generate cash whereas the company could. That is why most people never progress financially, for what it’s worth.)

Anyway, the point is that within a 30 day period, it looked like we went from a tiny house driving a 10-year-old van with no hubcaps to a huge new one, with new cars, and a bigger company. Apparently, this caused some of our family and friends shock and, in some cases, a bit of passive aggressive anger, which I never understood. Then again, I’m somewhat dense that way because I still don’t get it. Our balance sheets were more important than our pride.

There is something about inexpensive businesses that are simple that make me extremely happy. I think it probably goes back to my upbringing. Growing up in towns like Lee's Summit, Savannah, Warrensburg, and El Dorado Springs made me appreciate that a good business that serves people, without a lot of fuss, creates jobs and makes lives better. These are the sorts of things I want to own. I like the idea of my family and my shareholders driving by and saying, "We own that. Look at the customers in there."

Hospitality Group: I love the idea of owning mid-tier hotels (Comfort Inns, Hampton Inns, etc.) that generate steady streams of earnings over five to ten year periods when bought well. I also love the idea of “cheap” businesses, such as The Waffle House, or car washes, that have an easily determined return on capital. As our other businesses throw off cash, having a collection of assets that can use that cash almost instantly to fund expansion is going to be important. The hospitality group is going to have to have some sort of debt component, although I think my conservatism will shine through and we will have far more equity than the bankers and Wall Street say is “standard”. I love the idea of knowing that my family and my shareholders are making money from customers as they eat at our restaurants and sleep in our hotels, while we’re at home or the office, reading The Wall Street Journal over a cup of black coffee. This will come later, and most likely start because some hotel goes onto the market for less than I think it’s worth. It could be 3 years, it could be 25 years, but at some point, this division will be launched.

Sporting Goods: We already own several sporting goods companies, specifically on the manufacturing side. I grew up in this industry so I like the idea of holding on to these, although if it meant getting my hands on enough capital to launch my other projects, I would consider parting with them. The only complicating factor here is that some of my companies, and the company my parents own, compete against one another in some ways.

Insurance: Anyone who knows me understands that the first 25 years of my life consisted of me being obsessed with the insurance industry. One way I made quite a bit of money early on was preparing NAIC statutory accounting vs. GAAP reports to search for companies that were over estimating reserves so I could buy shares of stock when they appeared to be fairly valued (knowing that earnings were purposely being artificially depressed). Something about adjusting deferred acquisition costs still makes my heart stir. You don’t have to get it – no one seems to, anyway. It just makes me happy.

The property and casualty insurance group is going to be a huge part of the overall plan, giving us access to low-cost float and a business that I enjoy. Through it, we can also offer financial products and services, such as annuities and mutual funds. That’s why I spent so much time interning at a $5+ billion insurance company on the East Coast and learning from the controller and CEO so much more than the industry (the company’s culture was the secret to its success and that’s what is going to be the hardest part to structure, develop, and maintain in any firm I own). They also taught me a lot about internal audit. I had no idea how important that function was but it was definitely driven home.

Publishing: Our publishing business includes digital content, downloads, subscriptions, and other services that have 90% or greater operating margins, drowning us in cash that can be redeployed to other divisions. The model is to build a network of sites that have content contributed from readers, thus building themselves.

Video Games: The video game company will be close to headquarters, and both Aaron and I will be involved. In many cases, I will compose the soundtracks for the games (one of the reasons we both spent $140,000 each to attend one of the best music schools in the United States on a voice scholarship for my undergraduate degree, learning music theory, composition, etc.) We will focus on creating great games. It is that simple. I’ll make the money and resources available to create products that build franchises.

The Bottom Line

I can’t wait for my family and friends to spend their paychecks buying shares of the company so that when they drive by businesses, they know they own part of it. While the shareholder base is still small, we can have an annual dinner at our house, taking questions about operations and investing in general. The ultimate form we take – hedge fund, publicly traded stock, or privately held business by invitation only – is still a mystery. As I said before, it will be mostly opportunity cost and the availability of certain assets that determines the answer. The only strategic plan is to grow our capital. How that is done isn’t important.

DeLong Sportswear Files for Chapter 7 Bankruptcy

Joshua Kennon — Sat, 15 Aug 2009 02:47:21 +0000

DeLong was the nation's largest privately owned manufacturer of award jackets and team uniforms.

If you are involved in the sporting goods industry, you probably know that there are only a handful of companies that manufacture letterman jackets in the United States. Among the biggest was a company called DeLong Sportswear, headquartered in Grinnell, Iowa. A few months ago, rumors are that DeLong went into Chapter 7 bankruptcy and was scheduled for a liquidation of assets (although some sources say DeLong merely closed its doors and didn’t actually file). The town in which the firm operated for more than 150 years was given virtually no warning and employees were given a day to clean out their work stations at the factory, according to some things I’ve read.

We always maintain multiple vendors at our companies, and this is an example of how that policy has protected us. At Mount Olympus Awards, we sold thousands of DeLong jackets each year but we never allowed them to dominate our product offerings, instead spreading out our business among multiple vendors.

The truth is, my father, who has decades of experience in the sporting goods industry, called Aaron and I and warned us to virtually pull out of all DeLong products nearly six months before the company shut its doors. How did he know something was up with the firm? He and my mom founded and own a company called Chenille Appeal, which is one of the nation’s largest wholesale chenille manufacturers. They focus on selling only to a network of wholesale sporting goods stores (as opposed to my company, which sells to retail customers and team dealers). Anyway, during a call with customer service at the height of the busy winter selling season, the representative mentioned that they would be receiving a new shipment of a particular material in sometime during the week.

Knowing the letterman jacket and varsity jacket industry, my dad realized that a company the size of DeLong Sportswear should be drowning in cash during the winter and if they were unable to afford basic materials during the busy season, they couldn’t survive past another summer. After he told me this, I immediately, and quietly, shifted our sales to some other companies without missing a beat. The only exception were seven or eight orders that caused us a tremendous amount of grief (believe me – if I know about an specific order at the operating businesses, something went very, very wrong or very right.)

DeLong Sportswear had divisions that included letterman jackets, outerwear, embroidered caps, and team uniforms.

Last week, the founder of one of DeLong’s biggest competitors made a trip to our offices to introduce his company and the products. We were impressed because not only are the goods made right here in the United States (this was important to us – there are several major direct-sellers of letterman jackets that literally import their jackets from Pakistan and have them assembled by a few workers then have the audacity to say Assembled in the United States and hope no one knows the difference), but they provide a lifetime guarantee against defect, including dry cleaner error. That could be a huge advantage for us and allows us to provide an even better service to our customers at no additional cost to the firm.

Still, it’s tragic to see a company fail. I’ve been asking around the industry (sales reps, competitors, other retailers) and the rumors are that the owners of DeLong were taking too much money out of the business and making bad capital allocation decisions that caused the company to collapse when the economy fell off a cliff but I have absolutely no idea if that is true or if the people that told me that have ulterior motives. Whatever the cause, it doesn’t make it any easier for those who lost their job. It does remind me that Warren Buffett is absolutely correct when he talks about the importance of keeping enormous sums of cash available at headquarters to protect a business. Most people just drain the family company for cash to buy cars, houses, or expand into unprofitable divisions. I really hope that wasn’t the case here.