Shareholder Letters & ReportsSuperinvestors

Eddie Lampert 2014 Shareholder Letter

“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?” 

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 to $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—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. Basically, Lampert claims that Sears is making headway in their “transformation” from a traditional retail store to an “integrated” retailer that interacts and serves customers through online channels, social media, and also in the 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 they have 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:

6 thoughts on “Eddie Lampert 2014 Shareholder Letter

  1. Personally, I think the Shop Your Way points is a great way for Eddie to create some “float” to invest later on while being able to pretty much sandbag his GAAP earnings every quarter. According to the last 10Q, they expense the points up front, but don’t actually give the discount until the customer uses it, if ever….

    If he manages to get a significant amount of members, could be a great way for building a “float” account down the line.

  2. Why do you think Eddie Lampert is a good investor? In theory one could check his returns and compare them against the appropriate passive benchmark, but I don’t see his returns on any verifiable or reputable website (a few sites like Wikipedia claim “29% annualized” but with no citation).

    This seems to be a pretty common theme in investing actually. Exceptions are early Buffett, early Greenblatt, and Ed Thorpe, which have been fairly well published and verified. And there are some edge cases like Jim Simons and Seth Klarman who are with high likelihood good investors — but how can you tell for sure without clear published records? (in the opaque crevices of the financial world, Ponzi schemes could always lurk).

    However maybe you know how to verify other investors claims better than I. I do feel the market is generally efficient, perhaps justifying my tendency to commit only type II errors and be skeptical — plus I’m a scientist so I like validating things. 🙂

    On the other hand I completely agree with the linked post by Ben Horowitz about focusing on what can’t be done vs focusing on what can be done. Actually that’s why I devote myself only to games that I believe to be positive sum in life. My philosophical outlook is like a maximum function — I assign meaning only to scenarios that are positive and null meaning to everything else (politics, large systems of people, setbacks, negativity, etc).

    1. Thanks for the comment Connelly. Lampert’s returns have been audited, and there is no question his returns have been outstanding over many years (multi-decades). Also, many well known long term investors (including Tisch, Rainwater and others) have shared estimates of their experiences while in his fund. His returns have been upward of 30% annually, and for a time even higher than that, as many investors have mentioned “high 20’s” after fees, which implies gross returns that might have been in excess of 30% annually.

        1. Hi Connelly, Some of the articles I’ve linked to in this Lampert and other Lampert posts contain his returns. Also of interest: There is a really nice piece from 1989 that features a number of young money managers including Klarman and Lampert among others that is very interesting (considering it was at the beginning of his career). All the large funds get their returns audited, so you can verify it if you feel inclined. Lampert’s returns are pretty well publicized, and as I mentioned, many big name investors have shed light on his returns over long periods of time, and of course we know about his numerous 10-baggers including AZO, GPS, AN, as well as other quality investments he made in the 1990’s like WFC and others. They make excellent case studies. I suppose if you want the audited returns, look up ESL’s ADV on the SEC site, and you can find out who the auditor is and call them to verify the record.

          1. Cool thanks! Great info to get me started. I just like validating investment information since there is a lot of promotional material floating around.

            I followed you on SeekingAlpha also. I previously had positions in Ebix and Coach which went well so I’ll be interested to read your articles on those companies more closely.

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