Excerpt from Eddie Lamperts Annual Letter to Sears Shareholder
I think this is a very valuable excerpt from Eddie Lampert's letter to Sears shareholders and provides you with great insight into his thought process
"I want to close with a broad observation. I am an avid reader of books, newspapers, and magazines, and in the course of my reading over the last year, I have noticed that there is a significant degree of interest in the press about Sears Holdings. This is not surprising: as a well-known, high-profile American company, Sears will always attract considerable attention. There is no shortage of commentators who are eager to make known their perspectives on our company and its prospects. Some of these do so “on the record”; others cloak themselves in anonymity or do not disclose the true motives that are driving their comments.
Although all the attention Sears Holdings is receiving is, in some fashion, flattering, I would caution you to approach much of what is written and said about us with an appropriate amount of healthy skepticism. This is particularly so with respect to the loudest views, the most widely held views, or the so-called “expert” views. For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their articles – not on the accuracy of their writing or of their predictions.
As a long-term value investor, I am constantly on the lookout for situations in which the conventional wisdom of the commentators and “experts” is incomplete. There are many such examples, and those are the situations that produce real opportunities. I will not dwell here on the many instances where the “conventional wisdom” – for example, the view that Kmart would neither emerge from bankruptcy nor survive its first Christmas as a new company in 2003 – has turned out to be only “conventional” and not at all “wisdom.” I will simply say that I am pleased with the progress we are making at Sears Holdings. We are hiring great people, creating a winning culture, and focusing relentlessly on profitability. We have accomplished much in eight months and have a long way to go. We will continue to get better, which also entails recognizing the mistakes we make and correcting them.
One subject where the conventional wisdom has been much on display recently is the issue of capital expenditures. As I made clear in my very first letter to shareholders, we do not subscribe to the view (seemingly widely held) that more is better, or that there is a certain amount that must be spent on cap ex every year. The question we ask at Sears (and I believe every business should ask) is: “What is the most productive way to allocate the capital that we have on hand and the cash flow the company generates?” In some cases, spending money on the construction of new stores or the updating of existing stores produces real bottom-line benefits. In those cases, increasing capital expenditures is an attractive option. But if the analysis shows that allocating capital in some other way – for example, on acquisitions or stock repurchases – will generate superior returns, then it would be a mistake to plow money into capital expenditures merely because that is the “accepted practice” or “expected.” (That approach – of uncritically following accepted or prevailing practice – is what led many telecom companies astray as they tried to “keep up” with WorldCom’s expenditure levels.)
A meaningful analysis of the retailing industry would show the following. Between Sears and Kmart stores, we have approximately 2,300 large-format domestic stores – which is considerably more than Target (around 1,400), JC Penney (a little over 1,000), and Kohl’s (fewer than 1,000). The issue for Sears Holdings is therefore not one of building more stores, but rather one of making our existing stores more productive and relevant to our customers. Part of the solution obviously includes capital investments in existing stores. But that is not the complete formula, and, in any event, spending on existing stores should be expected to improve the operating performance of these stores.
For a reader, the key is to read broadly, but to be appropriately skeptical of the so-called experts. For a business executive, the key is to think about and understand one’s business and its strategic and financial characteristics, make decisions based on that understanding, and have the confidence to stay with well-reasoned decisions even in the face of vocal doubters. Most observers and financial pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at JC Penney, missed the emergence of Google, and missed the resurrection of Kmart – until it was abundantly clear that those companies had succeeded. In all those cases and in many others, imposing the right disciplines; adjusting the cost structure; creating an atmosphere of teamwork and collaboration; and being willing to learn while having the confidence to stay the course in the face of skepticism – were the necessary preconditions of success. We are not yet even one year into the merger, and we have plenty of work ahead of us, but that is the culture that we are committed to building at Sears Holdings."
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I think this is a very valuable excerpt from Eddie Lampert's letter to Sears shareholders and provides you with great insight into his thought process
"I want to close with a broad observation. I am an avid reader of books, newspapers, and magazines, and in the course of my reading over the last year, I have noticed that there is a significant degree of interest in the press about Sears Holdings. This is not surprising: as a well-known, high-profile American company, Sears will always attract considerable attention. There is no shortage of commentators who are eager to make known their perspectives on our company and its prospects. Some of these do so “on the record”; others cloak themselves in anonymity or do not disclose the true motives that are driving their comments.
Although all the attention Sears Holdings is receiving is, in some fashion, flattering, I would caution you to approach much of what is written and said about us with an appropriate amount of healthy skepticism. This is particularly so with respect to the loudest views, the most widely held views, or the so-called “expert” views. For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their articles – not on the accuracy of their writing or of their predictions.
As a long-term value investor, I am constantly on the lookout for situations in which the conventional wisdom of the commentators and “experts” is incomplete. There are many such examples, and those are the situations that produce real opportunities. I will not dwell here on the many instances where the “conventional wisdom” – for example, the view that Kmart would neither emerge from bankruptcy nor survive its first Christmas as a new company in 2003 – has turned out to be only “conventional” and not at all “wisdom.” I will simply say that I am pleased with the progress we are making at Sears Holdings. We are hiring great people, creating a winning culture, and focusing relentlessly on profitability. We have accomplished much in eight months and have a long way to go. We will continue to get better, which also entails recognizing the mistakes we make and correcting them.
One subject where the conventional wisdom has been much on display recently is the issue of capital expenditures. As I made clear in my very first letter to shareholders, we do not subscribe to the view (seemingly widely held) that more is better, or that there is a certain amount that must be spent on cap ex every year. The question we ask at Sears (and I believe every business should ask) is: “What is the most productive way to allocate the capital that we have on hand and the cash flow the company generates?” In some cases, spending money on the construction of new stores or the updating of existing stores produces real bottom-line benefits. In those cases, increasing capital expenditures is an attractive option. But if the analysis shows that allocating capital in some other way – for example, on acquisitions or stock repurchases – will generate superior returns, then it would be a mistake to plow money into capital expenditures merely because that is the “accepted practice” or “expected.” (That approach – of uncritically following accepted or prevailing practice – is what led many telecom companies astray as they tried to “keep up” with WorldCom’s expenditure levels.)
A meaningful analysis of the retailing industry would show the following. Between Sears and Kmart stores, we have approximately 2,300 large-format domestic stores – which is considerably more than Target (around 1,400), JC Penney (a little over 1,000), and Kohl’s (fewer than 1,000). The issue for Sears Holdings is therefore not one of building more stores, but rather one of making our existing stores more productive and relevant to our customers. Part of the solution obviously includes capital investments in existing stores. But that is not the complete formula, and, in any event, spending on existing stores should be expected to improve the operating performance of these stores.
For a reader, the key is to read broadly, but to be appropriately skeptical of the so-called experts. For a business executive, the key is to think about and understand one’s business and its strategic and financial characteristics, make decisions based on that understanding, and have the confidence to stay with well-reasoned decisions even in the face of vocal doubters. Most observers and financial pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at JC Penney, missed the emergence of Google, and missed the resurrection of Kmart – until it was abundantly clear that those companies had succeeded. In all those cases and in many others, imposing the right disciplines; adjusting the cost structure; creating an atmosphere of teamwork and collaboration; and being willing to learn while having the confidence to stay the course in the face of skepticism – were the necessary preconditions of success. We are not yet even one year into the merger, and we have plenty of work ahead of us, but that is the culture that we are committed to building at Sears Holdings."
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posted by Little Blog Investor @ 3:20 PM
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