This is where honesty gets you

Last week Roy Alstead, the CFO of Starbucks, did a wonderful job of explaining away the coffee giant’s tiny UK tax bill. It was because they grew too quickly in the past, leaving many of their stores unprofitable. Or because their royalty charge is comparable to other large multinationals. Or because of differences in accounting rules between the UK and US. He almost convinced me that it was entirely proper that Starbucks paid £8.6m in tax in its 14 years trading in the UK!

Imagine a corporate world where people spoke plainly. What would happen if a company was brutally honest about its poor performance?

Well, today I am going to tell you about a particularly courageous chairman who did just that.

In this Penny Sleuth I want to pay tribute to Nick Shepheard, chairman of AIM-listed Feedback Group (FDBK). With a stock market value of just £650,000 FDBK is just a tiddler. And judging by Mr Shepheard’s comments it is going to stay that way…

‘A year of horrors’

Asked to describe Feedback’s £1.8m pre-tax losses for the year to the end of May, Shepheard called it an “annus horribilis”.

Mr Shepheard pulled no punches. “Tough market conditions further exposed the group’s long-term weaknesses”, he began. “The structure and costs of Feedback were those of a larger group. Without sustained growth reversing the more than 40% decline in revenues over the past few years, the business was not sustainable.”

Every now and again you find a company boss who is not afraid to tell it like it is. It is no surprise to find that Feedback has no public relations adviser, who would no doubt have dressed up this disastrous performance to make it look like a success. Not so here.

I confess that I have not followed Feedback in the past – just as well, as its gruesome history has sunk the share price from a 150p high in 2000 to 0.5p today.

Hard times at the Ministry of Truth

Feedback describes itself thus:

Feedback “specialises in workforce management for companies operating in complex environments: hospitals, food manufacturing, high-end retail – just about any place where absolute certainty is paramount. Our systems sit behind thousands of workers capturing millions of actions using wired and wireless networks. We monitor time & attendance and we manage the most sophisticated access control needs with our Evolution system, the result of over 20 years in the field.”

Sounds a bit ‘Ministry of Truth’, doesn’t it?

And Feedback’s vision?

“Since the very start, our products have been designed with the principles of the feedback loop embedded in their DNA. Our primary aim has always been to make technically excellent products that work perfectly every time… The sweet spot we’re now striving for is to find and build products that work brilliantly, that look beautiful, and that bring a smile to the faces of everyone involved. Living up to that should keep us busy for another 50 years.”

If Mr Shepheard’s observations are anything to go by, Feedback is unlikely to still be around in 50 years’ time. Results for the year were “extremely disappointing”. Growth was “well below management’s expectations with export sales particularly disappointing”. Working capital presented a “financial challenge”.

Feedback Instruments “experienced several consecutive months of extremely weak order intake that fell well below management’s even short-term forecasts”. When export sales “dried to a trickle, predominantly due to the lack of product investment in prior years, the prospect of a sales-led recovery evaporated”.

In a desperate move to raise cash and “with a heavy heart given its position as the foundation stone of the group in 1958… Feedback sold its education business”. But even this was only achieved at the distressed price of £260,000.

Feedback’s scrap value

Mr Shepheard offered some perspective.

“Shareholders should be aware that the single factor most responsible for the decline in the Group’s long-term performance is the lack of priority given, over many years, to new product development. Feedback Instruments, generating approximately 90% of revenues from products developed more than ten years ago shows a clear picture of a company resting too long on past glories.

“The pace of product development has been, in the eyes of our customers and when compared with our competitors, extremely disappointing. Feedback’s development teams have been left behind by the quicker cycle times of larger and faster manufacturers who have bigger development budgets.’

The board has now put Feedback up for sale, to try to salvage something out of the wreckage.

Mr Shepheard’s assessment of the business is unlikely to enhance its value. So it’s unrealistic to expect other corporate leaders to follow his lead. But I can’t help but admire his candour. Feedback may be an extreme case, but its challenges are typical of those faced by other small companies. The big difference is that their leaders don’t have the neck to admit it!

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

One Response

  1. 23/11/2012, WJN-IMEX wrote

    Tom, read your comments on Feedback and the CEO’s analysis with great interest.
    Our Company represented their educational division for over 40 years.
    The products covered all areas of Electrical and Control Engineering and were quite outstanding. Much of the equipment supplied in the last 40 years is still operating and in daily use. I doubt if there is a 3rd level Education engineering department in the UK without Feedback equipment.
    Undoubtably Mr Shepheards analysis is excellent BUT it raises the question. ? Why no investment.

    I suggest that a large unfunded final salary pension liability in the early 2000′s was the cause. It bled off any funds available for new product design. If I remember correctly the pension scheme had a deficit of £6 -7 m in 2004/5.

    ? Is there a lesson in this for the UK .
    Unfunded liabilities can rapidly morph into a Ponsi scheme.

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