Selling The Brick

The Brick has always been a relatively small holding in my portfolio because I could not get over two main concerns. One was my inability to find any real competitive advantages. Brick had several competitors which were also publicly traded companies. All of them were earning extraordinary returns on investment, yet this was the retail business and I could not see anything to stop them from eventually cannibalizing each other's business.

My second concern was that a credit crisis would have a very large impact on its business. A very large proportion of Brick's sales are made on credit with relatively easy terms. If credit were to tighten, sales would probably be hit hard. This would really hurt the business because of their warranty business. Essentially, Brick's warranty business generates large amounts of cash flow for the company because premiums are paid upfront but claims aren't made until much later. That is great; but the company has chosen to treat this as basically free cash flow and they have paid this money out in their dividends. This process is fine as long as warranty sales are stable or growing, but if they were to decline the process would reverse and the company's free cash flow would be less than its earnings. And if overall sales decline, it is very likely that warranty sales will as well.

Today, the possibility of a credit crisis appears to be much more certain. And I have still to discover any competitive advantages. As such, it appears logical to exit this position now.

The results of the Brick investment depend on your perspective. Over the 8 month holding period and counting dividends, it made 3% in Canadian dollar terms. In US dollar terms however, it made 19.7% (conservatively using a .86 exchange rate for all the dividends). As a US investor, I would prefer to look at the latter, but I think it is only fair to include both. Either way, at only 4% of my portfolio, the position was destined to be fairly inconsequential. It served as a placeholder instead of cash in my portfolio, and in that respect it was successful.

Brick Income Fund 3rd Quarter Report

This one almost slipped by me considering there was no news report on Yahoo. Thankfully it was a pretty good report.

We are very pleased with our third quarter and year to date results. Sales remain strong, reflected in our seventh straight consecutive quarter of same store sales growth, driven by a strong promotional calendar. As we had in the first half, we continued to make good progress on managing key revenue and expense line items. In its most simple terms, our strong quarter was driven by more effectively executing against strong written sales. We have improved our supply chain, reduced inventories, improved our cash position, and narrowed our focus to driving sales and maximizing customer satisfaction. Management remains excited not so much by what we have done, but more so by what we believe the future holds.

The strong Canadian dollar has been killer for SFK. But in the case of the Brick, the benefit has been twofold. One, because the Brick does its retailing business in Canada, the value of its profits and its business increases for me, a US investor. Two, because some of their purchasing costs are in US dollars, the Canadian rise has decreased their costs and so also helped to boost their profits. I'm reminded of something Pabrai said at his annual meeting, which was approximately- "We don't try to specifically hedge for events in our portfolio, it just ends up working out that way."