I made a terrible mistake this morning, and I read this article on BoLS.

After shaking my head sadly, turning my attention back to work for a while, downing an entire large coffee, and diving deep into the morass of negotiating legal terms around trades, I came back to it. I shook my head again.

So, I wanted to post this on Warseer (my favorite grounds for this kind of thing, truth be told), and see if I can start a discussion that would actually clear up some of the misconceptions around GW and what is actually going on with them as a business, from a financial perspective.

As a little background, I work on Wall Street. Not literally; the only actual bank left on the physical street is DB and virtually none of the buy side firms are there. Most of the banks are now scattered throughout midtown ranging down into flatiron, and a few are downtown. The asset managers are shotgunned across NYC, Jersey, and the rest of the northeast (and are spreading into the west), and hedge funds... well, look, three dudes, one computer, and a broom closet can qualify as a hedge fund, so what the hell can I really say? Point is, I have an MBA from a top-tier school, I run a trading desk, and I've been doing this for a while. I would caveat that all of this is my personal opinion, I am in no way representing any firm, and that none of this is intended as investment advice (I own no GW stock). In fact, you probably shouldn't read it. Your eyes will likely start bleeding, you will wail and gnash your teeth, and then you will smash your forehead through your monitor / ipad / tinfoil hat. Consider yourselves warned. After that, I will take questions.

Why shareholders are not the problem, or at least not in the way people think they are

Public companies are beholden, first and foremost (though not always only) to their shareholders. Those are the people who, you know, literally own the thing. GW has them. There are those who claim that GW is run by some shadow conspiracy, or in the palm of Tom Kirby as a maniacal dictator, or that a small group of nefarious insiders are deliberately destroying the company. All of these things are untrue. Several of them are also illegal.

If you want to know who owns GW, all you need to do is have a Bloomberg terminal, grab the GAW ticker, and run the OWN and HDS reports, which helpfully gives you the owners of the firm. Roughly speaking, GW has a pretty atomized ownership structure. ~14.5% percent appears to be owned by insiders (Kirby, other directors, former c-level executives, etc.), ~81% of the owners are from the UK, ~80% are owned through investment advisors (retirement funds, asset managers, and the like), and the largest individual holding is around 7% (Kirby).

In a technical sense, to have a controlling interest in a public firm, you need > 50% of the voting shares of a company. Nobody is close to that with GW. What you should realize, however, is that 80% ownership of investment advisors in a very small company means that it is unlikely anyone is paying much attention to GW at all, as they care about the returns of their portfolios, and GW is a tiny piece of your portfolio. GW is a tiny, tiny fish in the global stock market. To put this in concrete terms: Apple is worth 2,758.92 times as much as GW at the time of this writing. Worrying about GW for most portfolio managers would be like worrying exactly how much change is in your couch while your ferrari is on fire in the driveway. It's literally not worth their time.

In a literal sense, firms like this often tend to be inefficient. This is why activist shareholders and hedge fund managers can make money (think of them as adults who show up and rudely force the children to behave), why managers can do things that are destructive to the long-term interets of the shareholders for long periods of time before anyone notices, and why companies often take forever to die even if they are terrible (because nobody is paying enough attention to take their ball away). If GW's behavior looks mildly insane, as though no adult supervision is going on, or as though nobody who really knows how to run a business is paying attention, that's probably because all of those things are likely to be true.

With that said, there are generally two things that can make you a successful public company in the long run:

1 - You consistently grow your customer base while preserving your margins (eventually). Growth is the key driver of most (though not all) stock prices. Grow, grow, grow, grow, and figure the rest out later is a recipe several firms have used successfully. These firms tend not to pay dividends (they are re-investing the money to grow the firm), have increasing sales and customer bases, and are largely valued on the basis of future earnings.

2 - You have a stable customer base, a strong edge/moat, and return tons of capital to your shareholders while earning an above-market return on your capital. This is less common, because most companies are unable to accept they are out of growth. Even more so, most companies are bad at returning capital for all kinds of issues I won't get into here. However, when you find the companies that do this, they are often undervalued and hugely valuable.

I would suggest that GW is neither of those, which leads me to a core point: GW's problem is not being a public company. There are plenty of successful public companies. The shareholders are not demanding that GW sacrifice their future and destroy all of the capital they have been given to get some pissant 2% dividend today. The shareholders are not demanding that GW shrink their customer base, release books ridden with typos and unclear language, and open and close their stores at erratic hours with unsuitably low staffing levels. The shareholders want a stable, average to above-average long-term return on their capital.

The problem with GW is their management, and the fact that nobody is paying attention from an ownership perspective (and probably won't be until GW is in much worse shape than they are now).

Stock prices are an excellent indicator of how bad humans are at stock pricing

You shouldn't read too much into GW's short term price movements. My favorite example of this sort of issue was Lehman Brothers. In early 2008, it was trading for roughly $20 per share (adjusted for splits, etc, as best I can from the historical data I have handy). At the end of 2008, it was trading for $0 because it was dead. What will GW's stock price be a year from now? Will it even have a stock price a year from now?

Note: I am not predicting anything here. I am merely pointing out that we love to imply meaning into things that may not have any discernable meaning when it comes to patterns, and stock prices bring out the worst in the human mind about this.

In aggregate, in the long run, I do believe stock prices tend to be correct-ish. However, correct on average does not mean correct at any given moment, and especially does not mean correct about what the future price will be. Just remember: all firms will eventually go bankrupt, shut down, or be acquired. Nothing lives forever.

Whenever anyone writes an article primarily focused on the changes in stock price without a clear explanation of why that price is changing (as the price, over the long run, should reflect the actual fundamental performance of the firm), you should ignore it, because they aren't communicating any information and probably have no clue what they are talking about (or have a clue but can't communicate it, which isn't any more helpful to you as a reader). If they can communicate it, you should still think long and hard about if you believe they are correct. There is far more bull---- about finance out there, due to a combination of lack of knowledge and people trying to take your money, than there is useful information. You should be reading even what I am writing here with a skeptical eye (though at least I'm not trying to sell you anything). I can assure you I am not always right.

WTF is actually going on with GW then, you stupid looking orange cat?

If I were to boil GW's problems down to a few key points, it would be the following:

1 - Uneven product quality
2 - Mismatch between production & design, pricing model, and customer/segment expectations
3 - Lack of business capability at all levels of the firm

These problems, to be clear, are not unusual. I've seen them in many, many situations over time. Most small to medium size firms are terribly managed, and GW is remarkably average in that regard. To that end, all of their problems can be traced back to poor management (and I'd be glad to expound of any of these points as I have in the past, if anyone is even more of a masochist than most people who have read this far).

This is the key: poor management is leading to products that don't match what the customers want, to pricing that is actively adversarial to the goal of selling to customers and retaining them, to confrontational/absent relationships with a customer base that wants to be engaged or independent sellers, and to opening up market spaces for competitors to consistently chew away at GW.

In terms of observables, there has been a single trend that has concerned me about GW for 5+ years now: losing customers. Even if you raise prices enough to cover the lost revenue, this cannot continue forever. Eventually your customers will go to zero (more realistically, the price increases stop working at some point, which is about where GW put themselves today, and now they aren't smart enough to figure out how to get back out of it).

Mr. Orange Cat, GW is profitable now and you are just some idiot blowhard on the internet. How dare you question them?

Hyperboli aside, this is another line of thought I often see (GW is still in business, so they are fine), to which I offer the long-running counter-example of companies like GM, Lehman, or any of the thousands of small and meidum sized companies that have gone bankrupt. Perhaps Sears is a good example of a downtrend right now. Companies are fine until they are not. Problems are usually observable before profits go completely to hell. This is why some companies in the red are not considered problems (they are in the red because they are either growing rapidly and funding that expansion, or because of temporary/fixable issues), and some companies in the black are considered problems.

Or, to put another way, would you argue that the train is still on the rails, so it's not a problem, even if it was about to ram straight into another train in 10 seconds?

Past performance is not an indicator of future performance. All firms that went bankrupt were operational at some point prior to that. I am not predicting the imminent demise of GW, either. I am predicting that they will either be gone (through bankruptcy or being eaten by someone bigger), or much smaller in the next decade-ish if they don't change their ways.

So what could change things and what is a "turn around"?

This one is simple: GW will have turned around when they being growing at the same rate as the segment again, retaining their current customers, and adding new customers.

Until this happens, the rest is all just hot air. If you want to argue things at GW have changed, you need to argue they are adding people instead of losing them. That is the bottom line. Anything else is just noise.

Okay, that's the majority of what I have to say for now, but if anyone was foolish enough to read all of that, I'm glad to discuss/debate/expound of any of it. Enjoy.