Thursday, March 1, 2007

Eddie Lampert = Warren Buffett?

Sears Holdings filed an 8K on March 1 that detailed Chairman Eddie Lampert's annual shareholder letter. It was a fairly interesting read as Lampert tries to disprove the stereotype that all Hedge Fund managers are short term pigs who are only interested in jacking up the price of the stock that they are invested in. A copy of it is here on the SEC web site:

Lampert makes the case that he is a long term champion of Sears and retailing in general. He opines on everything from cash flow to spending cuts to earning management. Here are a few interesting excerpts:

"While we like to think of ourselves as a start-up, we are different from most start-ups in our cash flow generation. Since the merger closed in 2005, we have demonstrated a consistent ability to generate cash flow. This strong source of cash provides us the flexibility to deploy capital in the manner that we believe is best calculated to create long-term shareholder value."

"As we look ahead, I want there to be no doubt about one thing: It is certainly our intention to grow Sears Holdings. Some commentators have asserted that we want to shrink the Company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not. But before embarking on a growth plan, it is critical to provide a sound base from which to grow. To this end, we have set out to improve the profitability of our business model. Our objective is disciplined growth. We do not want to grow simply for the sake of becoming bigger. Rather, our aim is to become more profitable, and as such we need to ensure that any revenue growth occurs at an appropriate level of profitability."

"In charting a path toward disciplined growth, it is worth exploring the role of spending cuts. The expression “You can’t cut your way to success” often surfaces when someone suggests cutting spending for one resource or another. But this maxim, like so many others, can be more or less true depending on context. If the context is a company like IBM in the early 1990s—where cuts had previously never been a way of life and where far too many resources were dedicated to far too many projects producing far too little benefit—then it is hard to dispute that spending cuts were a prerequisite for success.
Healthy companies stay that way by constantly reevaluating their resources and their decisions and pruning spending that doesn’t make sense. Just as it is important to prune a tree or a garden or even a wardrobe, it is critically important to prune a company, not as a one-time event, but on an ongoing basis. Words carry meaning, and the idea of “cutting” carries a lot of baggage; but in reality the best companies in the world are ones that constantly reallocate resources in order to deploy them in other, more productive areas."

"I believe one of the causes of the many well-known accounting abuses was this myopic focus on moving share price by driving short-term earnings. As we have explained, we do not attempt to manage earnings or expectations, we generally do not meet with Wall Street analysts, and, except in a few select cases, we have not provided options to our associates. Stock options can play an important role in compensation arrangements if handled correctly, and many companies have used them to motivate and compensate their executives and employees appropriately. The requirement that companies account for stock options as an expense is helpful in highlighting to investors and directors the cost of these programs."

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