Thursday, February 28, 2008

Eddie Lampert's Letter to Shareholders

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I mention this not because I am a Giants fan (I am actually a lifelong fan of the New York Jets) but rather because the Giants’ story reminds me of what we went through a few years ago with Kmart. When I first became involved with Kmart in 2002, during its bankruptcy, the company had been given up for dead by most industry analysts and media commentators. Kmart was like an undrafted free agent who nobody thought had a chance to play in the big leagues. Its more than 150,000 employees and its investors had an uncertain future. Despite intense criticism of and skepticism about the company and its prospects, we were able to rally Kmart’s various constituents and turn an unprofitable, failing company into a profitable company with hope for the future. Like Eli Manning, we know what it’s like to be underestimated and questioned, but we intend to keep working on our game to achieve our full potential.
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Looking forward, I continue to be excited about the prospects for Sears Holdings. In 2008, we need to reverse much of the profit erosion we experienced in 2007. It won’t be easy, especially if the economy stays soft. The environment surrounding U.S. retail has been very difficult; we were not alone in experiencing disappointing performance this past year. Many retail companies lost significant market value. As illustrated in the table below, while the recent correction has brought Sears Holdings’ stock price down from an increase of nearly 20 times since Kmart emerged from bankruptcy to around ten times, it remains one of the top-performing retail stocks over the past five years. In addition, it is not clear that heavy expenditures of capital guarantee either short or long term success. Like any investment of capital, the return on that capital over time will determine its wisdom.
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Pressing this point even further, some might ask, if you can’t justify investing in your stores, then how are you going to grow your business? To be clear, we are not saying that we can’t justify investing in our stores. The issue is more about the size and type of investment as well as the timing and sequencing of an investment. There are many things that a retailer can do to improve its business without the significant amounts of capital that a major remodel would require. Improving the assortment of products and services, mix of inventory, visual presentation, recruitment and training of employees, and marketing and communications to customers are all ways to generate improved performance. They all require significant investments, but we already invest a significant amount of capital and expense in all of these areas. The key is to improve the productivity of these investments. Our marketing and labor spend is in the billions of dollars each and we need to work diligently to get the most from these significant investments. Fundamentally, our capital allocation decisions are influenced by the alignment of management and owners with the goal of creating value for the shareholders of the business.