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Eddie Lampert 2014 Shareholder Letter

March 03, 2014 | About:

“Messer Hubbard and Bell want to install one of their “telephone devices” in every city. The idea is idiotic on the face of it. Furthermore, why would any person want to use this ungainly and impractical device when he can send a messenger to the telegraph office and have a clear written message sent to any large city in the United States?”

This is an excerpt from a Western Union internal report in response to an offer from Alexander Graham Bell (inventor of the telephone) to sell his invention to Western Union for $100,000.

I have tremendous respect for Eddie Lampert as an investor — an incredible track record for sure (one of the best ever) — but also the way he handles his business in the face of significant criticism. I like following Sears Holdings (SHLD) — like many investors, the assets pique my interest.

Sears' Transformation

Lampert has been pounding the table on how he believes Sears is ahead of the curve when it comes to the tectonic shift taking place in the brick and mortar retail business model. Lampert's primary claim is that Sears is making headway in its “transformation” from a traditional retail store to an “integrated” retailer that interacts and serves customers through online channels, social media, and also in physical stores.

Late last week, Sears posted Lampert’s annual letter to shareholders, where he again cites data that he feels provides further evidence that Sears is making progress on this transformation front, despite the ever present operating losses.

I’m not sure about the efficacy of this type of business strategy, and like many value investors, I’m much more interested in the assets. But one thing I think too many people are doing is closing their minds to this story, and following the consensus view that Sears is dead. Now, I have an ironic opinion on general consensus views — the popular belief is that the consensus is usually wrong. That’s actually not true. It is my observation that more often than not, the majority is actually right. So it’s important to keep that in mind. I don’t necessarily disagree with the naysayers regarding the future of Sears’ retail operations. It looks bleak to me as well, and it has a significant mountain to climb to reach consistent profitability.

But I think many have closed their minds on the future prospects of Sears as a retailer. The assets have been discussed ad nauseam to be sure, but I think Lampert has some interesting viewpoints, and given the investor’s record, I think it doesn’t hurt to try to reverse engineer his logic.

As an aside, I read through the press release that contained Sears’ year end results, and noticed that Lands’ End (which is the next asset that Lampert plans to spin off later this year) increased its profitability from the previous year, earning $79 million in profits:

Lands End Results

For those who are interested in learning more about how Lampert thinks as an investor and a businessman, I would really recommend the shareholder letters. Lampert rarely makes public appearances, so there won’t be many other places to get his views on investing, but he does actually write a blog. He rarely posts, but he has a couple interesting comments there, and the quote at the top of this post came from an interesting piece he linked to.

For those interested in Sears, or just gaining more insight into how Lampert thinks as an investor, capital allocator and chief executive, here are some other links to check out:

About the author:

John Huber
I am the Portfolio Manager at Saber Capital Management, LLC. Saber manages an investment partnership as well as separately managed accounts for clients interested in a focused value investing strategy. My investment style has been most influenced by Ben Graham, Walter Schloss, Warren Buffett, and Joel Greenblatt. I am also the author of www.BaseHitInvesting.com, a value investing blog.

Visit John Huber's Website


Rating: 4.0/5 (2 votes)

Comments

vgm
Vgm - 6 months ago

Thanks John for sharing your thoughts. I'm with you in admiring Eddie Lampert and also agree his letters and blog are a worthy read.

I've been monitoring SHLD for years and recently took a significant position when it dipped under $35 after the recent pre-announcement. It's a badly misunderstood (read widely hated) company but there are several ways it can win I think. The real estate alone could be worth almost 2x the current stock price, according to independent estimates, and it's carried on the books at a fraction of its actual value. Lampert is unloading it at a good clip currently.

vgm
Vgm - 6 months ago

From Francis Chou (Trades, Portfolio)'s latest shareholder Letter:

"We substantially raised our position in the common stocks of Resolute Forest Product and Sears Holdings when their stock prices fell to a level where we felt they were compelling bargains. As a result, investors should be advised that due to our portfolio’s high exposure to these two stocks, the net asset value of the Fund can be volatile. However, we are not bothered by this volatility because our focus has always been, and continues to be, on how inexpensive we believe the stocks are, relative to their intrinsic value. Based on year-end prices, in our view, these two stocks are trading at significant discounts to their intrinsic value.

We believe that Sears Holdings is a misunderstood story. There are many moving parts but we believe Sears Holdings’ intrinsic value lies in its real estate assets. It also has other valuable assets such as Lands’ End, Kenmore, Craftsman and Diehard. Being a traditional department store has become a tough business during the last decade but, according to management, Sears is transitioning its historic focus on running a brick and mortar department store into a business that provides and delivers value by serving its members in the manner most convenient for them: whether in store, at home or through digital devices. The value of its real estate allows Eddie Lampert, the controlling shareholder and CEO, the time and money to effect the changes. If the transformation does not work out as expected, we believe the real estate values are high enough that we would not lose money in our investment at current prices after netting out all liabilities."

http://ify.valuewalk.com/wp-content/uploads/2014/03/123113-Chou-Annual-Report-FINAL-Dated.pdf

vgm
Vgm - 5 months ago

"An Owner Driven Transformation"

http://blog.searsholdings.com/leadership-viewpoint/an-owner-driven-transformation/

March 24, 2014 by Rob Schriesheim

Schriesheim is CFO of Sears Holdings

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