This is an interesting article.
The question is: Are the profits GAAP or EBITDA? GAAP has a standard set of accounting rules for presenting profits. While GAAP is not perfect, it does put everyone on a similar playing field. There are differences even within GAAP and a good analyst can adjust for those differences. On the other hand, EBITDA has no rules what so ever. It's like a bunch of kids playing a game in the back yard and making up rules as they go.
The private equity firm Apax partners bought Cole Haan from Nike in 2013. Nike is a pretty well-run company, and they weren't able to make the type of profits they wanted to with Cole Haan, so they sold it. In 2012, sales were 535 million and sales were 687 in 2019. That is a compounded growth of 3.6% ( (687/535)^(1/7) ) over 7 years, That is not much sales growth in a robust economy.
From the linked article, 2017 and 2018's revenues were flat at around 600. Absent 2019’s numbers, revenue growth was a paltry 2% ((602/535)^(1/6)) over 6 years to 2018!
The jump in revenue growth in 2019 appears to be the result of intense marketing and digital campaigns. We saw this tactic with other IPO's such as Chewy, Uber and WeWork. Goose the revenues with marketing. Who cares if it hurts the bottom line? Nobody is looking at the bottom line. The IPO buyer is focused on the revenue growth. It is a slight of hand. Lots of people are focused on revenues…so beef up revenues.
Finally, their earnings are presented as "Adjusted" EBITDA. This isn't GAAP. It isn't even EBITDA. It is even worse. It is essentially whatever they want to present!
Private firms like to present on EBITDA. This is earnings before interest, taxes, depreciation and amortization. These firms like EBITDA because it is an indicator of how much cash they can squeeze out of a firm for their investors. The cash is used to pay very high levels of debt service which can multiply their private equity owner’s earnings at a very high rate. This same leverage can also decimate a firm if they can't meet their debt obligations. This excessive leverage is one of the items tha banks were guilty of in the 2009 downturn and why so many controls were placed upon these high leverage practices. It is also a major factor in the demise of Toys-R-US.
EBITDA is before "Depreciation and Amortization" (DA). Almost any good business has to be constantly reinvesting in their business to build a solid and growing organization. DA is a proxy for the minimum amount of reinvestment needed to keep a business solid and growing. Because of inflation, the DA is even less than what is needed for capital expenditures to support a strong company. If a company is growing, it will need even more than DA plus inflation. These capital expenditures are very important. Private equity owners often "starve" their businesses of capital expenditures to achieve short term profits. You can save money by not servicing your car, but do you want to buy a car from someone who never changed the oil in 4 years?
Look at it this way, starving a company of capital expenditures is like holding your breath to swim across a pool. Eventually, you are going to need air. With many of these situations, private equity firms are keeping the company underwater while they steal your clothes and wallet.
