Wednesday, April 12, 2006

"We don't get credit for being shareholder friendly" - Eddie Lampert

I just came out of the annual meeting of Sears.
There were about 150 people in the room.
I am in the airport and will be brief.
Here are some quick notes.

First some insights and observations.

Eddie mentioned the word "focus" several times. In fact,
he recommended a book, "Crazy Busy" at the end of the meeting.
It is a book by a psychiatrist who dealt with ADD patients. The
psychiatrist's thesis is that at the end of the day, being focused
on one task is superior to multi-tasking. Eddie says he agrees with
that thesis.

Eddie struck me as somebody who is extremly balanced in his thinking.
He always offers 2 sides of the coin when explaining. For example, he
would say we are doing this not because X, but because of Y. He always offers
the is, and the what is not. This to me is a sign of wisdom -- a very self-aware, very wise person. I liken this to Lao Tzu's quote. "Knowing what you know, and knowing what you do not know. That is the way to know."

Anyway, this is my third time hearing Eddie talk. I came out very impressed with his answers and articulateness. I asked him a question about the online commerce of Sears versus Walmart.com, his answers showed he thinks about all these things a lot all the time.

Eddie said that aside from buybacks, dividends, capex spending and
acquisitions, their main focus is to invest in people. Not trying to
be soft, but he repeatedly said that the culture is extremely important
to him and the Sears team. He mentions GE, Dell, Starbucks as examples of the culture.

Eddie said no retailer should aspire for a situation where the real estate is more valuable than the business. It is a shame that they had to sell real estate to other retailers whose business model can develop a better business than themselves.

Eddie said he rarely uses EBITDA. But for Sears, since there is M&A accounting, fresh start accounting (for post bankruptcy situations) and foreseeing that in the near term, capex would be less than D&A, he uses EBITDA for Sears.

I talked to some of the associates at Sears. There was a shareholder of Sears and an employee of Sears since 1970. He said he has seen a lot of great improvement since Eddie came on board. In the past, people viewed Sears and Kmart as sinking ships, he said that the new captain is righting the course. He cited quick decisions being made. He used the example of Sears Essentials. In the past, all the bureacracy would not make a quick decision about ending a mistake.

This leads me to one of the topics Eddie frequently discussed in the meeting.
He cited that aside from buybacks, dividends, acquisitions, and capex, the best
investment for Sears now is in its people and culture. He envisions a culture
where people are comfortable with ambiguity, where people are comfortable with admitting mistakes and failures. He wants to build a company that outlives him.
He mentioned GE, Dell, Goldman Sachs as examples of this kind of culture. He specifically said GE has done a great job of transitioning from Jack Welch.

He tries not be doctrinare about anything. He says a lot of companies forcefeed to their customers. If they make a goal to remodel 100 stores and it is not working, they keep doing it. He says momentum in the right direction should be accelerated and momentum in the wrong direction should be stopped. They could increase their sales by giving away flat panel televisions for 1 dollar. But if their own employees have to use coupons to buy at Sears and would happily buy from Target at listed prices, Sears must learn from it. It's not even about disloyalty, it's about learning what Target's doing right.

Another example of not being doctrinaire was the use of debt. He said sometimes it's good to increase debt. For example, at Autozone, they increased the debt levels. He then said one can argue that Microsoft or Berkshire can benefit from some leverage. On the other hand, Google did not seem to need to raise cash with its present business model, but they raised cash probably because Microsoft has so much cash.

After the meeting, Vivian took us a tour of the new products that Sears has developed. I must say that a lot of thought went into the designs of these products.

I will write more when I get back to New York City.

2 Comments:

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At 2:24 AM, Blogger Vishal Mittal said...

Good one...

I have learnt my investment philosophy from these greats...

1) Invest in what you know (Circle of competence)

2) 3-4 Investment ideas a year is all it takes to wealth (Focus, 20 rule of Buffet)

3) Invest in stocks where the upside is minimum 50% (reverse calculation of 60% margin of safety)

4) Not investing is better than hurried investing

5) Growth, predictability, moat are important components of valuation

 

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