Thursday, June 30, 2005
Wal-Mart 9, Sears Holdings Corp 2
Yogi Berra might have said “you can observe a lot just by looking,” or he might not. But it’s still a wise notion.
Which is why yesterday I found myself in a newly re-merchandised K-Mart store—sorry, a “Big K”—a few towns away from home, just looking.
Visiting stores is the fun part of investing in retail stocks. Unlike a lot of businesses that do things nobody can possibly get a handle on even by visiting the field operations—oil companies, for example, which I used to follow—when you study retailers, you can actually see with your own eyes whether the company is doing what the management says they’re doing.
The trick, however, is to see a lot of stores, at different times of the day and in different parts of the country, if possible.
Stores can be as empty as an Art Garfunkel concert or packed like they’re giving away shares of Google, just depending on the time of day and the day of the week and the season of the year.
Also, talking to employees is not always the best way to find out what’s really going on, because store clerks don’t think in terms of year-over-year-change-in-comparable-store-sales the way Wall Street types do.
When you ask the kid behind the counter, “How’s business?” and he says “Really slow,” he’s talking about the previous half hour. And, since employee turnover at that level averages probably 50% a year, it's likely he's only worked there a few months anyway.
So you go to stores and look at what people are actually buying, and try to talk to the store manager or someone who runs a department to find out what’s selling and what’s not, and see if anyone in a position to know can tell you how business has been for that store in recent weeks. And you do it as often as you can.
All that said, it’s usually pretty easy to see when a retail concept really works—and when it doesn’t—without a whole lot of effort.
For instance, I was having dinner in Chicago last week, taking my sister-in-law and her husband to check out a restaurant spin-off from the Cheesecake Factory called the Grand Lux Café.
(If you’ve never been to a Cheesecake Factory, you ought to try it, if only to see a restaurant concept so successful the menus carry advertisements. In fact, I know some former National Hockey League players who looked forward to playing in certain cities where they could follow up a hockey game—probably the most physically demanding sport on earth—by heading to the local Cheesecake Factory for a few million carbs.)
This particular Grand Lux Café is three years old, and just off Michigan Avenue. While we ate, my brother-in-law asked me what I looked for in a restaurant. I told him I look at what people order, how quickly the tables turn, the cleanliness and the ambiance and service and yadda yadda yadda. “But actually,” I told him, “before we got here I knew all I needed to know when I saw the line out on the sidewalk.”
Grand Lux Café is a retail concept that works.
As for one that doesn’t, check out your local K-Mart.
After watching from the sidelines while Eddie Lampert built his own version of Berkshire-Hathaway buying up the remnants of two once-great retail chains and combining them into a single once-great retail chain, I was interested in seeing how the nearest "Big K" was faring.
This particular “Big K” is off Route One, in a C+ location next to an Ocean State Job Lot, a Dollar Tree and a Fashion Bug, and it looks a lot better than it looked during the the K-Mart Chapter 11 when the vendors weren’t shipping: the shelves are full, the signs are cheery, the lighting is good and the floors are clean.
And that’s about it.
“Big K” had that curiously soul-less feel of a decent-looking place with no particular franchise, nothing driving people in and little to keep them there. One ancient clerk moved slowly around the racetrack, putting up signage from a shopping cart when he wasn’t stopping to chat with other clerks. A few customers lurked in the aisles, but the only crowd was at the service desk.
Registers open? Two.
I then drove a few miles down Route One to the nearest Wal-Mart, which is in an A+ location next to a supermarket and a Home Depot. It was a typical Wal-Mart, bustling even at 11:30 on a Wednesday morning. The demographics of the shoppers were probably thirty years younger than the “Big K,” with mothers dragging children through the apparel section, kids roaming the DVD aisles and men in the tool area. Overall, it had the energy of a store doing a lot of business.
Registers open? Nine.
Now, Eddie Lampert is smarter, and richer, than 99.9% of the money managers on the planet. He found value in AutoZone and Sears and K-Mart, and extracted billions. A couple of other big investments didn’t work out so well, but that’s still a remarkable batting average for anyone in any line of work—and right up there with his role model, Warren Buffett.
But people forget that the original Berkshire Hathaway—the New England textile company Buffett acquired and turned into the conglomerate we all know and admire—failed.
Even Warren Buffett couldn’t make a New England-based textile company successful in a world of cheap southern mills and, later, offshore producers; so he liquidated that business, put the money into insurance, and used the float from the insurance business to buy high-return businesses with “moats,” as he calls their competitive advantages.
I have no doubt Sears Holdings Corp will be an even more successful investment vehicle for Eddie Lampert than it already has been.
But in its base business, with Wal-Mart adding more sales every two years than the combined annual sales of Sears and K-Mart together, I also have no doubt that whatever Sears Holdings Corp is making money at twenty years from now, it will not be making money from its motley collection of stores without billions of dollars of newly invested capital.
Yes, I know the “story” of Sears Holdings—just shut down a few hundred more lousy locations, start selling Sears appliances in the K-Mart locations, and get store productivity up to the level of Target. Voila! The incremental EBITDA and earnings are mind-boggling.
But there are no moats around those Sears stores and K-Mart stores with their lousy merchandising and old clerks and the ratty fixtures and 1980’s-era technology—only streets leading to better-looking, better-run, lower-priced Wal-Marts and Targets and Costcos and Sam’s Clubs.
And to get the customers back will require more than bright signs and Kenmore dishwashers.
From what I saw, the score right now stands at Wal-Mart 9, Sears Holdings Corp 2.
If Yogi were watching, he might just say “it’s deja-vu all over again.”
I Am Not Making This Up
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 8:21 AM