As we were watching the share price of Capital Senior Living drop for several days in a row before announcing their fourth quarter earnings results, we were wondering whether something had leaked out, or whether it was the usual sell off because the company had underperformed relative to expectations for too many quarters in a row. We may never know which it was, and maybe a bit of both, but underperformance was there again.
Now, we can’t shoot the messenger because Kim Lody took over as CEO at the beginning of this year and was just a Board member before that, but the results were probably worse than anyone expected. Sequential occupancy declined by a whopping 110 basis points from the third quarter, while year-over-year occupancy plunged by 270 basis points. They fired their COO, Brett lee, who had only been with the company for less than two years, with obvious mixed results, and they announced they will be reducing their “field” labor by 250 positions. We are not sure who these people are and if they are expendable, what have they been doing these past few years. In addition, the sales management function will be reorganized, something that perhaps should have been done a few years ago.
On the positive side, it appears they will be going from a top-down management approach to a more localized approach. It is not clear if they will be going as far as The Ensign Group has in that regard, with obvious success, but it is a start as the people on the ground need to have bottom line responsibility and need to be appropriately incentivized. To that end, Ms. Lody has brought in a former colleague of hers from GN Hearing, Michael Fryar, who will have the new title and role of Chief Revenue Officer, and revenues and census are certainly what the company needs at this point in time. It was disappointing that they will no longer be providing near-term or longer-term guidance on earnings and cash flow, but perhaps they need to start behaving like a private company with regard to promises and just focus on operations.
The market’s response was swift and strong, sending the company’s shares down by 17.7% to $4.56 per share within hours of the release. It regained a bit of that in the afternoon, but shareholders are obviously frustrated. Ms. Lody will also be taking over the COO function, which is never a great idea when you are the new CEO, but she may have had little choice. The search has begun for Brett Lee’s replacement, but we believe Brookdale Senior Living has also been looking for a COO with little success as far as we can tell, so that would seem to be problematic. Perhaps it is time for both companies to look outside the industry, as the talent just doesn’t seem to be available within (and little desire for people to take on that risk). We would like to say that at current levels the shares should be a buy, but we have to wait to see how the historically bad first quarter pans out for them and the industry. Tough times for the public companies.
