Episode 86: The Reject Shop Glory, MinRes Doldrums, Warby Parker, Southwest Airlines, Koala's Ambitious IPO, WiseTech, Hotels Behaving Badly and Dan Andrews Shunned
The guys discuss the managerial magic at The Reject Shop, MinRes struggles, Warby Parker v Luxottica v Specsavers, Southwest Airlines Free Bonanza, Koala float, Adir's hotel issues, and Dan Andrews.
The Contrarians catchup
After a hotel tried to upsell Adir on a more expensive suite, he pulled the “I host a podcast with the founder of Luxury Escapes” card, inadvertently giving a version of “do you know who I am?” (Adir doesn’t have status at this property, so the answer was probably no).
Adir posed the question: “Do you think that is a common view at hotels when you book through a third party and they pay a commission, that they treat you less lovingly as a guest, irrespective of your history with the hotel?” (His co-host is the founder of Luxury Escapes, ICYMI, and gives a great answer).
Adir: “I'm gonna ask Mike a question, in part because he's actually awake for a recording. When you go to book a hotel, do you book directly or through an online travel agency?” Adam, after Mike answered: “I'll try not to be too offended by this.”
For the record, Luxury Escapes has grown significantly beyond the flash sale packages that most people know it for. Adam: “We've got 70,000 curated properties. We're as broad as booking.com with much better service, obviously.” (And a better looking marketing team).
Sage words from Adir to Mike: “You can't manage the process of offending Adam because what he gets offended by is so unpredictable that it's basically just a minefield and so you probably haven't stepped on a landmine, but you probably have at other times without even realising it and that's why he's got such a low opinion of you.”
When Adir discovered he was alone in knowing who British neurologist Oliver Sacks is, he said “it’s lucky this is called ‘The Contrarians’ and not ‘The Intellectuals’” then went on to recommend his post-humous book ‘Gratitude’ about his final days.
Dan Andrews goes lower down the shelf
Former Victorian Premier, Dan Andrews, has reportedly resigned to a “locked-down life” of sorts, all but disappearing from public view and only seeming to pop up in news stories where he’s refused service at country pubs because the locals haven’t quite forgiven his approach to COVID lockdowns.
Adir: “I hate what he did during COVID and who he became, but I do not hate Dan Andrews. I would happily go out for lunch with Dan Andrews. And the reason that I say that is because no one has been more outspoken and active behind the scenes in the Labor party, in the Labor machine, against this horrible rise of Antisemitism than Andrews has.”
Adam: “I'm happy that people haven't forgotten the pain that was inflicted. The poorest people, people who lived in housing commissions. Let's not forget the crimes of people because maybe they did something good three years later under different circumstances.”
Chinese grad students use left part of brain
Adam poses the question: What are the top 10 subjects studied by Chinese graduate students? The answer:
Engineering
Management
Medicine
Science
Education
Law
Economics
Agriculture
Literature
History
Adam: “This is a country out for my own heart. You've got engineering, management, medicine - all really useful subjects. And you’ve got the useless waste of time subjects, literature and history, effectively bringing up the rear, and close to zero, which is really what it should be.”
Adir: “I think you should think deeply about whether you want a society where 100% of our focus is on producing efficiency, efficiency, efficiency and output and none of it is on the softer things that maybe contribute more to happiness as well.”
The Reject shop enters its main character era
The Reject Shop received a $259M takeover offer from Canadian discount retailer Dollarama, priced at $6.68 per share. The all-cash deal represents a 117% premium to the six-month volume-weighted average price of $3.21.
Adir: “The universal view on The Reject Shop is it was somewhere between a hold and a sell and people didn't believe in it. And I felt like, just to blow our own trumpet, we did a very detailed analysis of The Reject Shop and came to the view that it's a very undervalued business with a lot of potential.”
Adam: “This is in a super competitive space. They've done incredibly well to grow earnings in this business and it was on a low multiple. I think this is just an example of good management and what was a really difficult asset.”
Southwest Airlines says that’s not “our bag”
Southwest Airlines, the preferred airline for many because of its lenient bag check policy, reversed the decision that makes it so great. The airline will no longer offer free check-in for first and second bags, limiting this perk to Southwest's A-List loyalty program or those flying business class.
The company claimed at an investor day in September that if it started charging for bags, it would only make up to $1.5B a year, compared with an expected loss of $1.8B in market share.
Southwest has cut routes, ended summer internships, and laid off 1,750 workers in an attempt to slash $1B in spending over the next three years. The airline also said it will abandon its signature open seating plan starting next year to offer premium seating options.
Adir: “The thing about bag fees is that they’re like price rises - 100% of the money drops straight through to the profit line because there's no extra cost for carrying those bags. They're just charging for something they're doing already. And therefore, if you go from charging $0 in bag fees to $300M in bag fees, then you just made another $300M of profit.”
Adir: “This is less a story about bag fees and more a story about saying, can you take something that is a core brand association with your business, ‘bags fly free’, and go and eliminate it and still maintain the brand equity that you had previously? And I think the answer is no.”
Adam: “Is the amount they're saving in CPAs less or more than the amount of revenue they're making in bag fees? And I think the answer would be, financially, the decision was the right one.”
Koala dreams of big valuations
Koala, which has graduated from a mattress-in-a-box newbie to a well-stocked e-commerce furniture brand, is ready to put its IPO pitch to fund managers after flirting with a float for nearly three years.
Adir: “If you look at this business compared to Sleeping Duck, which I no longer have anything to do with, this is a vastly superior business to Sleeping Duck. And so there is no doubt in my mind that Koala has become the dominant business in Australia in this category with daylight between it and everything else.”
Adir: “But now I've got some problems with them too. Their EBITDA was $7.7M on $240M of revenue. So the question is, where is the $100M going between their gross margin and their contribution margin?”
MinRes digs itself a hole
Mining company MinRes has had a hectic few months with their share price dropping 40% a month ago, recovering through help from L1 Capital, but still remaining down 50% since October. What was once $96 share is now worth $24 and remains one of the most shorted stocks on the ASX.
Adir: “The biggest single driver of negative sentiment is stuff that has happened with respect to the founder. The risk of founder-led businesses where the founder is still so dominant is you run the risk that when they burn down their own reputation, it burns down the governance reputation of the company.”
Adam: “There's just so much stuff wrong with this business. It's like you go to the diving board - why are you trying to do a triple somersault with three twists? Why would you buy a business like this now when there are so many more obvious businesses to buy, or short?”
Five other stories worth following:
Elon Musk said he sold social media company X to xAI, his AI startup, for $45B. Musk said the combined company is worth $80B and that the new platform will “deliver smarter, more meaningful experiences.”
Charlie Javice, founder of FAFSA software startup Frank, was convicted of defrauding JPMorgan Chase out of $175M by exaggerating her customer base tenfold when selling her company to the bank.
Smartphone use was associated with positive mental health outcomes in kids, according to a new University of South Florida study. The study surveyed 1.5k+ kids ages 11-13 and found that those who have their own smartphones scored better than those who don’t on almost every wellbeing measure, including depression and anxiety.
Amazon Photos was updated to allow users to shop using their pictures. Panos Panay, senior VP of Amazon’s Devices and Services division, explained via X: “Spot something you loved at a friend’s house or a toy your kid was obsessed with? Just search your photos and we’ll surface relevant items for you.”
President Trump told NBC News "there are methods" by which he could serve a third term in the White House, a highly improbable idea some MAGA allies have endorsed. Many believe there's no chance the required two-thirds of Congress and three-quarters of the states would vote to abolish the 22nd Amendment.