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0 7-Eleven: No Competition [Special] February 25, 2004

David and Tom Gardner recently interviewed7-Eleven(NYSE: SE)CEO Jim Keyes onThe Motley Fool Radio Showon NPR. This is the third of five parts. All previous parts are linked right over there. --->

TMF: Jim, let's talk about the competition. We want to spot you up with a few potential competitors and have you rank them. I would love you to rank these four in order of threat to your business. They are Starbucks(Nasdaq: SBUX), Kroger(NYSE: KR), Krispy Kreme(NYSE: KKD), and service stations.

Keyes: That is a very tough call.

TMF: You know, when we last talked to you, you said you didn't really have a primary competitor on a national basis. But I am wondering if that is still the case, and obviously, I am tossing out some national competitors there.

Keyes: It is still very much the case. In some ways, we compete with everyone from Wal-Mart(NYSE: WMT) to Walgreen(NYSE: WAG) to Krispy Kreme. But in other ways, we don't compete with any of them because none of the people in retail -- specifically Starbucks, Kroger, Krispy Kreme, and any of the major oil companies -- are really doing exactly the same things in terms of trying to respond so quickly to the changing needs of customers, and to leverage our strength to be able to offer daily delivery of very high quality, fresh foods, for example. So since none of them are actually doing the same things, we compete with all of them for a piece of our business. Certainly Starbucks is a competitor for coffee, and Krispy Kreme for our doughnuts. They are very good competitors for those specific products, but we have no one directly competing for the broad array of convenience that 7-Eleven offers.

TMF: An old investment thinker I respect once said, "If you can't point to a direct primary competitor, how do you know you are succeeding? How do you know you are winning?" Do you feel that at all?

Keyes: This is a challenge because if you are an employee of Coca-Cola(NYSE: KO), you wake up every day trying to find a way to beat PepsiCo(NYSE: PEP), and vice versa. At 7-Eleven, we do have a hard time rallying our people against competitor No. 1 or competitor No. 2. So instead, what we do is we rally them around constant improvement in our own benchmarks. So this year, for example, we have our entire team rallied around a dramatic improvement in our fresh-food business. That internal benchmark stands as our competitive force, if you will, so it doesn't matter if it is Krispy Kreme or McDonald's(NYSE: MCD) that we are competing against. We are rallying around our own internal measure to beat last year's performance in a dramatic way in our fresh-food sales. So it is a surrogate, if you will, for a national competitor.

TMF: Let's next turn to the financial situation. I am curious, from a stock market standpoint, one thing I was advocating a few years ago. In fact, I even mentioned it to then CEO Clark Matthews on the show... that maybe 7-Eleven should do a reverse stock split. At the time, the stock was down around a dollar a share and it just seemed to me that in order to be noticed by institutions, it might be smart to execute a reverse split. So for a 1-for-5 reverse split, folks who own five shares now have just one share -- but of course, you take the stock price and adjust it accordingly, up five times.

As things played out, 7-Eleven did make a 1-for-5 reverse stock split about three years ago. The market didn't like it -- or at least the split didn't help -- and the stock sold off dramatically. I am wondering what is the perspective now, three or four years' time looking back, on a stock that has done pretty well in the last three years. Was the reverse stock split the right thing?

Keyes: Well, you are asking the right guy. At the time, I was serving as chief financial officer and we dealt with this head on. The use of a reverse stock split is an extremely controversial tool that some companies have used successfully and probably just as many have not had very good luck with. As chief financial officer at the time, I was advised by others. I appreciate your recommendation, by the way. I was advised by others to take this step but would not have done it in isolation because the way I look at a reverse stock split is that it is purely cosmetic, solely for the purpose of artificially driving up the price of shares so that you can get coverage or institutional interest. It is going to be perceived as such, just purely cosmetic.

The reason that we did it is we combined it with several other steps that were leading to an equity offering. We changed the name of the company from the Southland Corporation to 7-Eleven, Inc. We moved from Nasdaq to the New York Stock Exchange. We provided our largest shareholder, 7-Eleven Japan, with an equity offering at a significant premium to help improve our capital structure, and at the same time we launched the reverse stock split. So, the sequence of these four events gave us a good platform to go to the equity markets with a much better story.

But, when we went to the market in 2000, the timing was such that the market was softening and our timing could have been better. The market did soften and frankly we could have proceeded with the deal but I wasn't prepared to sell stock at that time for something that I thought represented a lesser value than what the company was worth.

Tomorrow: Will heavy debt weigh down 7-Eleven?

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