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Eddie Lampert Releases Sears Holding’s 2011 Annual Letter

February 25, 2011 | About:
Eddie Lampert released Sears Holding’s Chairmen’s Letter on February 24. You can find the full text of it by following this link. As has been Lampert’s custom in recent years, it’s a rambling letter touching on a range of issues including the performance of Sears, personnel changes, and politics.

Lampert starts out welcoming the new Sears CEO, Lou D’Ambrosio. D’Ambrosio is an IBM vet and was most recently CEO of software company Avaya before leaving there in 2008 to address a health issue. According to Lampert, D’Ambrosio is now healthy and ready to apply his tech skills to a retailer. It’s an interesting CEO choice, to be sure.

Lampert doesn’t have much to say about Kmart other than plugging their new private label foods, and the MyGofer.com service. For Sears, in contrast, he is forthright and critical, calling Sears’ 2010 performance “completely unacceptable.” He seems specifically upset about the results from their appliance segment, saying that “While this business is clearly highly dependent upon the macroeconomic environment, our own missteps exacerbated the situation.”

Reading about Sears and Kmart can be a bit depressing, despite Lampert’s efforts to promote the products online. While Sears still owns a few formidable brands, the constant shuffling of managers and the expectations and disappointments each year begins to weigh on the reader (not to mention the investor), and I’m sure this fills Lampert up with some regrets. At the same time, a large amount of cash continues to be generated and $400 million of that was allocated to share repurchases in 2010.

The more interesting part of the letter is Lampert’s musing on public policy. Ironically, in this section he confidently defends his beliefs about how government regulation, taxes, and uncertainty are inhibiting job growth. It’s ironic because he displays a confidence that he lacks while talking about Sears.

“Increasing taxes and regulation creates uncertainty for private businesses and individuals, which is exactly what inhibits job creation in the first place and may even make it harder for employers to maintain current levels of employment. Taxes remove resources from productive enterprises and individuals. Regulations restrict freedom to compete on different business models and rules. Whether businesses or individuals can “afford” to pay these taxes or “live” with these rules is beside the point. Risk taking by individuals and businesses is the leading generator of job creation, and increasing regulation and taxation almost always reduces risk taking.”

The end of the letter is a bit disjointed. He compares Microsoft (MSFT) and Apple (AAPL) to make the point that share repurchases by Microsoft did not deliver shareholder gains while Apple made no share repurchases and, because of that, has a higher market cap than Microsoft. Essentially, he’s saying that market cap doesn’t matter as much as shareholder gains. It’s a bit of an odd comparison since Apple both has a higher market cap and faster growth. He could have chosen a different company to compare Microsoft to and made his point more clearly, considering the comparison to Apple actually undermines his point. In a way, he’s attempting to defend the Sears policy of share buybacks and performance. The media and many investors focus on market cap, but not on actual shareholder value. Again, Apple has created a tremendous amount of shareholder value, while Microsoft has not, or at least the market hasn’t recognized that value, so it’s an odd way to defend yourself. And, unfortunately for Lampert, Sears is no Apple or Microsoft.

Following his analogy, Lampert notes that shareholder gains since 2003 have been tremendous. While that may be true, shareholder value since 2005 has been incredibly poor. I used to be a big fan of Lampert, but the last few years have been disappointing. He clearly is struggling with this investment, and his letters just make you think that he should have closed down most of the stores, sold off the real estate in 2004, and then sold off specific Sears brands that were worth something. Some of the tech-related things like MyGofer.com are interesting, but the returns are tiny compared to the overall company. Things are not going well for Sears, and have not gone well for years. Reading this letter makes that clear and, quite simply, it’s sad.

Disclosure: No positions.

Read the complete letter by following this link.

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

Visit Steven Kiel's Website


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Bsamra
Bsamra - 3 years ago
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