Balance Sheets and Viruses; A Long Overdue Addition to “What’s Jeff Reading.”

Howard Marks is one of the two founders of Oaktree Capital Management. Oaktree is “…a leader among global investment managers specializing in alternative investments.” If the name sounds familiar it’s because they owned Boardriders (Quiksilver, DC Shoes, Roxy, Billabong, RVCA, Element, Vonzipper) after buying Quik and Billabong after their travails started. Oaktree, as you know, sold Boardriders to Authentic Brands in September 2023.

I saw Quiksilver hoodies in Costco a couple of weeks ago. Not unexpected and not a criticism of Authentic- it’s what they do. Still, a little sad. I’m not sure Quiksilver ever had a chance after they went public. If you’ve never read it, you really, really ought to get your hands on the book Salts and Suits, by Phil Jarratt. It’s the story of Quiksilver and makes interesting reading to say the least. There are good business lessons in it. Here’s the link.

I’ve been a long-time proponent of strong balance sheets. Debt can be beneficial, but a strong balance sheet positions you to navigate nasty surprises and take advantage of unexpected opportunities.

But don’t listen to me. Howard Marks just published a short article called, “The Impact of Debt.” It’s short compared to many of his posts, free, and you can download a PDF if you want. You can also be notified of his occasional posts should you wish. Here’s the link.

I’m not going to summarize or explain the article. Let’s just say I agree with it and wish I were as smart as Howard.

Speaking of financial risks, two gentlemen at the Federal Reserve Bank of San Francisco (where obviously I get all my best insights on the action sports/active outdoor industry) authored a paper called, “Longer-Run Economic Consequences of Pandemics.” Here’s the link. You can download a PDF of the paper on the left of the page below the two smiling faces of the authors. Published June 30, 2020.

Below is a quote from the summary.

“Significant macroeconomic after-effects of pandemics persist for decades, with real rates of return substantially depressed, in stark contrast to what happens after wars. Our findings are consistent with the neoclassical growth model: capital is destroyed in wars, but not in pandemics; pandemics instead may induce relative labor scarcity and/or a shift to greater precautionary savings.”

This paper is not for sissies. I couldn’t get through the math in section 3- Empirical Design. Recommend pretending you never saw that section. The rest of the paper is worth reading and accessible. If all you ever read is the paragraph from the summary above, you can see why you ought to care. Anybody out there had any labor scarcity problems?

I suspect this is not what you normally read when you think about running your business. Which is precisely why I’m recommending it. Stretch your mind a little.

There’s also a book on the reading list of my web site that came out before covid that describes how societies react to pandemics. Bottom line: We didn’t react much differently than the victims of the black plague in 14th century.

Enjoy the light reading.

2 replies
  1. Charlie Ninegar
    Charlie Ninegar says:

    Always glad to see your reading recommendations. Thanks, Jeff. My professional career really only began picking up speed as the 2007/8 shock happened, I missed that pain as I was personally accelerating (from a low base) through it. Since that shock, the economy was “up and to the right” until the pandemic hit. Yet that whole time the Action Sport world generally felt to me like it was shrinking. We all had a great year or two when the pandemic money hit, but unless you are a really unique brand now, you are probably suffering for the backlash of that “sugar-high” over the last year or two and the pain hasn’t stopped yet.

    Have we just settled back into the previously existing trend line, declining business for most Action Sports brands? Or if there could be a little rebound looming…?

    Action Sports brands mostly feel challenged, and yet participation is largely up, I believe, especially since the pandemic. Skate parks are everywhere, wave pools are slowly making surfing a nation-wide reality (no longer coastal exclusively), and yet that doesn’t seem to be reflected in the business for most Action Sports brands.

    Is this just the way it is, or is there something we can fix, Jeff? Show us the light! Haha.

    I hope you are doing well. Charlie

    Reply
    • Jeff Harbaugh
      Jeff Harbaugh says:

      Hi Charlie,
      Just saw your note. Good to hear from you. Jamie Salter, in founding Authentic Brands, might be the only guy who really figured out the active outdoor business. He knew that we were over retailed, there was little to no long term product differentiation, and that brands had an inevitable life cycle. Jamie was fine with that and took advantage of it. The fact that so many of us were uncomfortable with what he did proves we weren’t always in touch with reality. Still aren’t. Now there’s an additional inconvenient reality. Our customers are running out of money. For many of our customers- those who spend a larger proportion of their income on food, energy and housing, things are tough. All the pandemic spending caused inflation- because that’s what printing money does. Now the inflation is still here but the money has run out.

      That is the reality we have to deal with. Effectively real wages (after inflation) haven’t increased in this country since like 1980. So honestly, my recommendations haven’t changed much. Focus on the bottom line- it’s okay to be small (and agile) if you’re profitably. Keep the balance sheet strong and debt low. Value your customers and improve the quality of your data to get as much as you can out of it. I know it’s not as simple as I make it sound but that’s all I’ve got for you until we’re talking specifics.

      Happy to talk with you sometime.
      J.

      Reply

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