With all the bashing of Sears Holdings (SHLD) Eddie Lampert recently, I was reminded by a reader of an article from Barron’s in 1999 about the demise of Berkshire Hathaway’s (BRK.A) Warren Buffett.
The whole article can be found here:
The lead sentence goes “After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.”
It then continues,
“Shares in Buffett’s Berkshire Hathaway are set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor’s 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.
At around $54,000 a share, Berkshire’s Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company’s famed investment portfolio, which includes such stocks as Coca-Cola, Gillette and American Express .
Warren Buffett’s distaste for technology has soured performance.
But there’s more to Berkshire’s weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.”
Now, hindsight always being 20/20, in retrospect this article is just foolish and Buffett was indeed proven correct as shares have almost tripled since then. Great long term investors do not “lose it” overnight, they just have a bad year. Now, here is the important part. The bad year is not necessarily because they made bad investments, it is because the market during that year went against those investment. The two are not directly related.
In fact, for investors like Buffett and Lampert, the two must be at times indirectly related. Unless they are, there can be no “value investing” as all securities at all times are accurately valued.
Let’s not forget that even with Sears’ recent slide, it is still up over 100% since Lampert combined the companies 2 1/2 years ago. Sears as a retailer is not “dead” as folks like to say. The retail environment has deteriorated dramatically the last year with virtually all retailers save Target (TGT) and Wal-Mart (WMT) suffering dramatic declines.
Since Sears is the nations #1 appliance seller (over 25% market share and 40% of revenues), the housing situation has hurt it more so that the other retailers (seen Home Depot’s (HD) or Lowes (LOW) results lately?). These are high price, high margin items and this is the principle reason for the earnings situation. When housing turns around in 2008, Sears EPS will jump dramatically as at the rate Lampert is buying shares, there ought to be almost 20% less of them on the market by then.
Sears is not “dead”. How can the #1 appliance seller be a dead retailer? Can it get much better? Sure. Is putting Lands End “store in a store” concept a winner? Yes. But let’s not forget, there are 2600 locations and currently just over 200 have the concept. That is not going to turn a $53 billion operation around in a quarter. It takes time to retrofit locations and order merchandise to stock them. On this scale that process takes a year, not months. The expansion of the concept was announced in March and already the number of locations has already more than doubled.
Is Lampert on the right track? Yes he is. Lands End results have been setting record year after year. People love the stuff.
Sears is being hit on both ends with appliance sales suffering and retail clothing suffering to. Both segments of retail are being hit and with Sears largely into both, their hit is worse. Now, the same can be said of the turnaround in both, when the resume, Sears gets a double boost.
Lampert is thinking like an owner of a company, not a short term investor. That is a god thing for those of us who like to think the same way,
3 replies on “Has Lampert "Lost It"? Did Buffett?”
Todd – good post. However, I quibble with a couple of points:
1. 5 years ago, before the merger, Sears controlled 34% of the appliance market. You state they control 25% today. That’s not a good trend.
2. Appliances are NOT high margin products. In fact, they are poor by comparison with apparel (generally around 20% vs. 50%+ for apparel) and also require much higher supply chain costs.
3. The margin for appliances lays in delivery, services, and maintenance agreements. Same for electronics – why do you think Best Buy and Circuit City push their services brands?
4. Sears is not dead – far from it. But the trends are troubling. The inventory run-up for me is most problematic. They built inventories in some areas without reducing it in others. Now, to clear it out, they are committed to get rid of it – read, crappy margins to clear it out. I seem to remember another department retailer going through similar palpitations a couple of years ago – May Company. How did that end?
5. Finally, if you were smart enough to buy into the company in 2004, you’ve done well. If you purchased the stock on Jan. 7, 2005, you’ve made 20% on your investment over the past 3 YEAR, a 9% CAGR. No offense, but that’s really crappy performance – even worse than the Nasdaq and S&P during the same time span.
http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1196888400000&chddm=286114&cmpto=INDEXNASDAQ:.IXIC;INDEXSP:.INX&q=NASDAQ:SHLD
Listen, I want to see Sears succeed. There’s too much at stake. But until Eddie gets real, professional retail management in place, I’m afraid it will be more of the same.
Now, to refute the above, JCP’s performance, which went through a massive enterprise transformation lead by a retail merchant named Allen Questrom during the early 2000s, is up a comparable 8% over the same time period.
Heres what I see in Sears:
1) Eddie is doing exactly what every one wants him to do. He’s increasing store traffic. How you ask? a) Appealing to upper-middle class families by buying high end retailers like Rest. Hardware and offering their products in Shld stores. Have you been to the rest hardware site? The have some pretty nice furniture. Expensive, but nice. b) Appealing to lower income families through also offering more “high end” brands at his discounted “walmart like” stores.
Now you are wondering how will he make more margins on the goods. He cant make a table for 100$ and sell it for 90$ and expect to make very much off of it. Well, I think that he is taking a page from walmarts book and Multi-channeling his products. Thus, reducing his shipping and carrying costs while giving customers more value for their purchases.
By buying Rest. Hardware he now reduces costs associated with “Double markups,” one by the furniture makers and an additional markup by the seller.
If Eddie can reduce his shipping and handling costs by streamlining the products he can pass a bit of the savings off to the customers who will say “Woah, sears has some quality stuff”
Edit from above….
If people come in a see value in products sears own, that is if they see that the furniture/appliances they have are of good quality while remaining at decent prices they will come in.
In order to get these prices he needs to make some cuts.
1) Own the furniture/appliances cutting out the middle man and 2)reduce his shipping and handling costs
If he can make a table for 80 bucks and sell it a 90$ then Sears will be back in business and customers will recognize the value.