Compounding Machines

2008 Sears Holdings Annual Meeting

with 2 comments

I had the opportunity to attend the 2008 Sears Holdings annual meeting held in Hoffman Estates, Illinois.  It took place the Monday following the Berkshire Hathaway annual meeting (which I was also fortunate to attend) at Sears’ headquarters. There were approximately 150 people in attendance. Part of my reason for attending was to make sure that Eddie Lampert actually exists as he never does any print or television interviews.  You can find my notes from the meeting below:

2008 Sears Holdings – Annual Meeting Notes

Monday May 5, 2008 – Hoffman Estates, IL

Courtesy of CompoundingMachines.wordpress.com

1.) Bruce Johnson, interim CEO, opened the meeting with a brief presentation.

– Disappointed with 2007 performance caused in part by excess inventory, higher markdowns

2008 Priorities

         Improve margins

o   Selling and promotional prices

o   Purchasing

         Tightly control expenses

         Focus on cash generation

         Implement new operating model

o   Better sense of ownership, accountability for results

o   Improved speed of decision making

o   Attracting top talent

o   Improving productivity of brands and stores

         Expand online, multi-channel capabilities

         Invest in off-mall formats

o   Sears dealer stores / Hope Appliance Showroom

o   Sears Outlet

         Introduce new products/brands

o   Piper & Bule (Kmart clothing brand-doing well so far)

o   Wckd (Kmart clothing brand)

o   Snapper (Sears)

2.) Eddie then gave a 15-20 minute presentation beginning with a brief overview of 2007 results including net income, EPS, and adjusted EBITDA. He used slides throughout this presentation taken mostly from the annual letter to shareholders including competitor’s trends in debt, capex, etc. 

            – 8 straight quarters of negative comp store sales

– Retail competitors over the last 5 years have spent $140 billion on capex, opened 4,904       new stores and added 5 million square feet of new retail space. **Eddie really emphasized that there is nothing that SHLD can do when their competitors build new stores. He seems to think that 5 million added square feet was overdone and irrational.

– SHLD domestic debt is down 47% since 2004, compared to competitors like WMT and TGT that have piled on debt, partially to fund store expansion.

– Discussed long term performance of other retailers and how it relates to their capital spending over the last 5 years. Ex. WMT has spent X on capital spending over the last 5 years, stock price is basically flat.

– Eddie sees no evidence of an economic turn around

– Sears & Kmart together cover more US population than any other retailer, including WMT.  He makes this point to prove that SHLD does not need to expand and build new stores, rather to increase productivity of existing assets.

– Discussed a pitfall in same store sales figures in that there is a built in upward bias when new stores are built and the subsequent ramp up in sales in the first few years. For example a typical Target store may do $20 million in sales per year.  A new TGT may do $10 million in year 1 on its way to ramping up to the normal $20 million, the percentage increase in years 2-5 may distort what can be considered a normal same-store-sales increase.

– Further hints that there might have been some over expansion in retail square footage over the past five years that will cause some pain and dislocation among SHLD competitors.

– So far SHLD has not been able to big money behind big new ideas.  They test new ideas on a couple of stores at first before making large scale changes.

– Starting to see some retail behavior changes (uses chart showing store closings)

– Commented on the many changes in how people live and shop and how SHLD needs to be aware of and adapt to these changes.  He uses an example of Kmart’s photo development business and how quickly it faded.

            * Entertainment (Tivo, Netflix, Apple, YouTube)

            * Communications (Blackberry, Apple Iphone)

            * Shopping (Amazon, Ebay)

            * Information (Google)

            * Social Interaction (My Space, Facebook)

– Wall Street Journal, NY Times as a product, are the best they have been, but the performance is worse than ever.  The point here is that a great product does not necessarily mean great results.

-Talked about reduced debt. Eddie says that he feels comfortable with SHLD’s financial position.

Q&A

1.)    David Silger (NARS – Retired Sears Workers….NARS.org)

·         More of a comment than question that with thousands of retired Sears workers, why not use them more because they want to see Sears reclaim its position as an important retailer…..Eddie gives a stock response that he appreciates it and they will try to use them, etc.

2.)   Republican vs. Democrat economic policy and its effect on the retail environment

·         Not a great macro prognosticator

3.)   A few years ago you said you didn’t have a 5-year master plan…do you now with discretion of cash flow how do you think about cash spend on equities versus capex?

·         Acknowledged opportunity with capital – balance sheet strength

·         Want to make sure they secure Sears’ future first

·         You want to be able to zig while everyone else is sagging

·         Circumstantial whether to lever up to acquire whole businesses or equities

·         First priority is to stabilize the core business

4.)   Thoughts on providing additional shareholder interaction

·         Press releases, 10-qs are enough to attract the long-term shareholders they want

·         Earnings guidance is not possible to predict accurately, distracting to management and can lead to poor decisions just to meet quarterly earnings

·         Annual meeting is a better forum than quarterly calls

5.)   What can you do to reach the hourly worker to act/perform better? What can be done to stop poor worker attitude. Commented that he has witnessed cat fights between workers in the middle of the store.  Recommended tracking sites like fatwallet.com to watch for abuse of gift card bonus policies that could cost SHLD millions of dollars.

·         Eddie hopes the questioner didn’t cause the cat fight, he has never seen anything like that during his store visits.

·         You like to think you can trust the goodwill of your customers and employees, but bad things will happen when you have 300,000 employees.  In a town of 300k, not everyone will be behaving properly.

6.)   Ken Shubin Stein (Spencer Capital) – Real Estate value over time?

·         Several factors involved with commercial real estate values

·         As inflation increases, replacement value is higher

·         Can cost $20-$30 million to build a big box store

·         Recent store closing phenomenon is a factor

·         Lack of financing is a factor

·         Goal is to make the operating business worth more than the real estate

·         A mix right now whether the real estate is worth more than the operating business

·         The environment has changed recently

7.)   Question basically asking about ESL investing in AutoNation while Sears is buying back stock…trying to get to why SHLD doesn’t invest in AutoNation.

·         Eddie won’t comment on specific investments

8.)   Branding and Inventory question…why the inability to market and capture audience?

·         Test advertising before running a campaign

·         A lot of money lost last year in apparel inventory

·         Tough to get inventory planning correct because you make buying decisions 6-9 months in advance…long lead times make it difficult to react quickly to changes in the macro environment.

·         Questioner comments further on inventory problems….like seeing coats in a Phoenix store in the summer

o   Eddie acknowledges they have analytic problems

9.)   Bill Ackman –Pershing Square – How to pay/incentivize the new category heads, possible conflicts of interest…for example the real estate person deciding to sell a store that may negatively affect the profitability of the lawn and garden person.

·         Want a framework in place so that decision makers to act independently

·         Some stores are 4-wall EBITDA negative

·         Ackman gives an example of what happens when the head of Craftsmen decides to sell tools in Target…how does this affect Sears’ business?

o   There will be conflicts

o   Craftsmen could decide they want to sell tools in Target which might make the lawn, home and garden division upset

o   Productivity of store space may be worth more to someone else

o   Trying to get to a free market system for square foot usage (I am not sure of this, but I think the home and garden, apparel, etc divisions will pay rent to the real estate division…again I could be misunderstanding this)

10.) Thoughts on time/energy spent with ESL vs. SHLD

·         ESL is doing something different than Sears

·         The private equity business has a much bigger problem with this than SHLD…meaning portfolio company investment vs. pe firm investment

11.)  Question about share repurchase program getting close to complete…will they extend it?  Also a comment that Eddie should disclose how much of ESL he owns so the market can realize just how much he personally has invested in SHLD to which Eddie replied, why so everyone can see how much I lost last year? (Laughter)

·         No direct answer on whether or when they will authorize another share repurchase program

·         They have received several offers from large mall companies to buy some stores….they basically have not responded because Eddie didn’t take the offers/price seriously

12.) Student from Wisconsin-Oshkosh – How can you reassure shareholders that the reorganization is good for shareholders?

·         Thinks it is good for shareholders

·         Example that GE and GM have finance businesses that may be more important, certainly more profitable in GM’s case, than the core business.  Though probably not intended these finance divisions are becoming ever more important.

·         Will the business perform better over the next 3-5 years is the question

13.) I can’t remember the question asked here, but here is Eddie’s answer…

·         Compared telco industry to today’s retail industry in terms of excess capacity

·         If 500 million sq. ft. of retail space are built over the next 5 years, everyone will struggle including SHLD

·         Can’t prevent competitors from building new stores

·         There are lots of ways to create value even with brick & mortar (Blue Nile, Amazon)

·         How Craftsmen creates value may be different than Sears/Kmart

·         Eddie seems worried about inflation, Wal-Mart and China may not be able to sustain keeping prices down

·         Would have gone to everyday low prices if he had to do it all over again

14.) Keith Trauner – Fairholme Capital – How do you protect operating cash flow…working capital management vs. keeping operating margins high?  (note: I love the way Fairholme thinks….it is all about the free cash flow yield)

·         Unfortunately I don’t have good notes or recall the answer for this question but I think Eddie dodged it quite well

·         Will look to have more productive ad spend, not reduced ad spend

·         Will consider spinning off business units but no plans for now

15.) Recommend two books

·         Jump Point

·         Currently half way through: From Third World to First

·         Also mentioned The Breakthrough Imperative earlier in the meeting. It is about a company’s options being determined by its competitive position

·         Eddie reads on an Amazon Kindle

16.) What were two probabilistic decisions you made last year that were mistakes?

·         Inventory decision was a mistake

·         People mistakes

17.) It is hard to find SHLD shares to sell short…possible to make up to $50 million lending shares out of treasury stock to shorts…..Why didn’t you raise the RSTO bid?

·         Eddie right away says…how much should we have bid for RSTO?

·         Ultimately it was a board decision at RSTO….sounds like they are done with RSTO

·         Didn’t speak directly to the lending shares question but he had a look on his face like he hadn’t thought about that before

18.) Bill Ackman – Pershing Square – Thinks that SHLD is undervalued because there is no breakdown of unit profitability. He gets the sense that some unites are very profitable and would like to see more detailed unit figures.  (Ackman was cordial in his questioning and mentioned that he thought SHLD was undervalued and that he was there and involved in the stock because of Eddie).

·         Eddie did not say yes or no, only that the board will consider the request

19.) Ken Shubin Stein – Spencer Capital – We have studied retail turnarounds in depth and have found that IT problems are the most significant roadblock in retail turnaround situations…are the IT projects described in the 2007 meeting complete?

·         IT manger spoke saying that all IT project goals are now complete

·         They are happy with the improvements made in IT…it was a mess at the time of merger

20.) Address the conflict between growing $ sales per sq. ft. growth vs. putting Craftsmen tools in Target

·         Captive distribution is not great for brands….i.e. Apple is spreading out of Apple Stores into other places like Best Buy, etc.

·         Able to drive awareness of products by putting them in Target, the increased awareness may actually increase sales at the Sears stores

·         Keeping things bottled up sometimes inhibits performance

·         Brands, brand distribution change over time

21.) How do you allocate your time between ESL and SHLD

·         SHLD is a very important investment for ESL

·         Trying to reengineer the culture of Sears by understanding how large organizations work

·         Sears is a large ship and will be slow to turn

·         Read Why Things Fail about how it is hard to see around corners

·         Trying to find executives that want to change the company

 

 

 

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Written by sdinvest

January 17, 2009 at 12:48 am

Posted in Sears Holdings

2 Responses

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  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

    Allen Taylor

    January 17, 2009 at 1:00 am

  2. […] write up of it at Compounding Machines. Be sure to read the whole thing. I’m a huge Eddie Lampert fan but have never invested in […]


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