Collection: Warren Buffett - #254 '2 Reasons Why Fruit of the Loom Got Into Trouble'
[Transcript]
AUDIENCE MEMBER 00:00
Good morning. My name is Pamela Harrington and I live here in Omaha, Nebraska.
And my question concerns your investment in Fruit of the Loom.
Could you tell us about how that investment fits in with your philosophy about turnaround situations and your preference for businesses that have barriers to entrance? Thank you.
WARREN BUFFETT 00:20
Yeah. Well, Fruit of the Loom got in trouble for two reasons.
One is they borrowed too much money. They borrowed about a billion, 200-million, and actually it went something beyond that because they were engaged in some other transactions that were off balance sheet and so on.
So, it was a company that, in a financial sense, was out of control. Simultaneously with that, they had a lot of operating problems, too.
But we were not going to inherit the capital structure and we were not going to inherit the management that had caused the operating problems.
But, much to our pleasure, we were going to inherit a management that had done an incredible job in running the business for a long time prior to the sins of the recent period.
And, we made a condition — I don’t think there’d probably ever been a condition made to a bankruptcy court proposal — where we said our offer is not contingent on financing, it’s not contingent on, you know, if war breaks out, our offer is still good and everything else.
But John — but we did make it contingent on John Holland being available to run the business, because John had done a sensational job of running the business before the difficulties of the excess leverage and operating insanities. And he was willing to come back, which was very important to us.
And Fruit of the Loom has, I don’t know, between 40 and 45 percent of the men’s and boy’s market. It’s a product that has a deserved quality image.
It’s accepted in a big way by very important retailers who were disturbed by things that took place prior to, and early in, the bankruptcy, but who loved the idea of having a product like Fruit of the Loom in their stores.
And it’s a very low-cost producer of a very basic product.
So, it fits us very well. And now the management can simply worry about building the brand and running plants as efficiently as possible.
And there’s been some rearrangement of plants, as has happened throughout to many things connected with textiles.
But it’s an absolutely first-class business. And, you know, we’d like to get a little more share in the women’s market. We’d like to get a little more share in the men’s and boy’s market, too.
But it’s made to order for us. But it’s only made to order with the present management.
If we had to take on the management that was there for a few years, you know, we wouldn’t have bought it for a dollar. It would have been a disaster. And it was a disaster for a while.
But fortunately, it’s a little like GEICO in the mid ’70s. I mean, GEICO was a marvelous company that got mismanaged in a big way for a while.
But its fundamental advantages were there throughout the period, and what you had to do was get rid of the mismanagement and get back to the basics.
(Source: https://buffett.cnbc.com/2002-berkshire-hathaway-annual-meeting/)
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
[YAPSS Takeaway]
What an interesting case study on what can kill a business.
1. Excess Leverage.
2. Mismanagement of Operation – Poor Quality of Management –.
