Attendee notes from the recent Sears Holdings (SHLD) annual meeting.
I went to the Sears Holdings annual shareholders meeting on May 4th, and thought i’d share some of what i heard.
First, i will say that i was extremely impressed with Eddie Lampert and left the meeting 100% reinforced that he is one of the smartest people out there.
The meeting was about 3 hours, the first 20 minutes or so, Bruce Johnson gave a presentation on the operating businesses, talked about things like expense control and inventory reductions, and he also highlighted things i had not noticed before, such as the improving performance of comp sales relative to competitors, quarter by quarter. The number of competitors who had comp sales worse than Sears Holdings accelerated dramatically towards the end of last year and Eddie Lampert brought up the point of saying, Which is worse, negative 4% comps four quarters in a row, or flat comps for three quarters and then a single quarter of negative 25% comps, as in the case of Abercrombie.
K-Mart had 1.4 million new layaway customers last year. Bruce Johnson talked about the subsequent purchases that layaway brings as customers visit the stores every two weeks to make payments.
Bruce Johnson talked about market share, saying that Sears Holdings has 34.6% market share in appliances, which leads all competitors, up from 30% in Q3 2007. Said they are reversing years of declines in market share in the appliance category. Eddie Lampert said that while you could sell a heck of alot of $3,000 washer/dryers at $1,500… all you’d essentially be doing is “renting market share” and that they wanted to “own market share”.
Market share in other categories mentioned:
22.3% tools
14.2% home repair
21.0% power lawn and garden
The majority of the meeting though Eddie Lampert took questions from the audience. Some interesting points and comments he made were:
Lampert wants to encourage more experimentation, even though it could mean more failures.
He noted that Sears is determined not to make any “serious mistakes” that can put you out of business, he noted ethical mistakes and serious amounts of leverage as two “serious mistakes”
He noted that he wants Sears to “grow out of the difficult operating enviornment” rather than only being defensive.
One of my favorite comments was Lampert saying “We don’t package B.S”… making reference to other company managments that claim to have ideas they are sure will work, in which they spend large amounts of capital rolling the plan out only to see it fail… after which they make an excuse as to what went wrong and then never mention it again. He told the audience that he’s not going to stand there and tell everyone he knows exactly how to fix all of Sears Holdings problems, and that he wants to “get this thing right” and they were willing to continue to try ideas such as MyGopher until they find what will work before they spend significant shareholder capital on any ideas. He also said there is nothing wrong with making a five million dollar mistake but there is something wrong with making a five hundred million dollar mistake.
On the subject of naked short selling, Lampert said he doesn’t have a problem with short selling, but he does have a problem with “selling something you don’t own, and can’t deliver”…. adding that… “it’s not a sport to destroy companies or jobs, even if you are right.”
Lampert made the comment that layaway sales were up 106% last year, to $157 million dollars.
Lampert said that “the ultimate goal is the transformation of the business”, transforming two american icons.. and he also said that “if the economic envioronment were different, we’d know better if what we are doing is working”
On the subject of inflation, Lampert said that we are probably likely to have higher inflation in the next few years, and that they were “trying to be ready for it”… He said that in certain categories inflation will help the company and in certain categories it will hurt. Higher inflation forces larger investments in working capital.
Lampert said that Sears should have no problem getting a new revolving credit line before the current one expires, saying that Sears Holdings has substantial collateral (inventory) to support one, although he did say the current four billion dollar revolver was more than necessary, and the new one will be smaller.
When asked at what point will Sears have enough cash flow to consider investing in other companies, Lampert sort of dodged the question, saying that “just because the market is valuing a stock a two dollars per share, does not mean the company will agree to sell itself at that price”.. I say he sort of dodged the question because the person asking the question (a representative of Fairholme Capital Management) seemed to be asking why Lampert didn’t use the extreme low market prices in February and March to invest Sears cash in different stocks, and Lampert responded as if the question was instead, why didn’t Sears use the low market prices to acquire whole companies.
At one point in a discussion with a shareholder, Eddie Lampert referred to himself as “a professional investor”, which i found very interesting because he could have claimed to be a merchant, or a retail guy. He also said that “At some point ESL will sell shares of Sears Holdings”, although they have not sold any since taking K-Mart out of bankruptcy.
Much of the meeting focused on retail, and Lampert does seem genuinely interested in turning around Sears Holdings, There was very little discussion on capital allocation decisions, real estate values, etc.. and no discussion on liqidation values of the company. Whenever someone would ask capital allocation question, Lampert basically dodged the question, instead talking about the retail operation…
I absolutely get the feeling that Lampert will continue to try to make the retail value of the business worth more than the liquidation value, but i also think that he will not do anything in the process that destroys shareholder value. After all, he owns over 50% of the company. I still feel that Sears is a long term runoff situation, that a majority of the cash generated will go towards reductions of debt and repurchases of shares, atleast until the point that the public float is nearly non-existent…. and I think that this will play out over many years, perhaps over a decade…. In the meantime Lampert will try different ideas and see if anything seems to work, and why shouldn’t he? Why kill a business that is generating and will continue to generate free cash flow? In the end though, I am basically indifferent as to whether or not the company gets liquidated or is turned around. Either way the end value will be significantly higher than today’s prices, or any price that Lampert ever paid for share repurchases. It will be very excited indeed to watch it play out over time.
What is most exciting is the growing share in appliances. That will bring shoppers into the stores and reinforce the value/quality proposition for the company with shoppers.