0 Why 7-Eleven Struggled [Special] February 26, 2004

David and Tom Gardner recently interviewed7-Eleven(NYSE: SE)CEO Jim Keyes onThe Motley Fool Radio Showon NPR. 7-Eleven dominates the convenience-store industry, and counts companies as diverse as Starbucks(Nasdaq: SBUX), Kroger(NYSE: KR), Krispy Kreme(NYSE: KKD), McDonald's(NYSE: MCD), Wal-Mart(NYSE: WMT), and Walgreen(NYSE: WAG) as competitors. This is the fourth of five parts. All previous parts are linked right over there. --->

TMF: Jim, your company has occasionally struggled with debt over the years. I am talking to a finance guy here so I can ask, how much debt are you currently carrying? How big of a concern is that debt for you at 7-Eleven?

Keyes: Much of our debt history comes from 1987 when the company was taken private in a leveraged buyout. We had at the time some $4 billion worth of debt as part of our restructuring, at extremely high interest rates I might add. Over the years, we were able to very dramatically reduce those debt levels. Today we are at about $1.4 billion in debt. The unique situation we have is that our cost of capital is extremely low. We have got an average weighted cost of capital in the mid-5% range and have been fortunate to have been able to accomplish some extremely strong and low-cost financings via the use of debt.

So while the equity markets have been somewhat challenging for the last couple of years, we have had a good access to cash, continually improving cash flow, and our coverage ratios have continued to improve. So yes, while the debt-to-equity ratio still is somewhat higher than many companies, our coverage ratios are strong and our cost of debt is very low. We are continuing to show significant operating improvements that allow us to gradually continue to improve the capital structure of the company.

TMF: I am talking to somebody who has had a measure of success now as CEO of 7-Eleven. You have been with the company since 1985. Jim, I am wondering what went wrong with 7-Eleven way back when, and why has maybe having a finance guy be in charge here the last few years been the right thing?

Keyes: I am not sure I would call myself a finance guy anymore. I am more of an operator today. (Laughs.) Or I like to think of myself as such.

TMF: We like to look at roots on this show.

Keyes:(Laughing.) Exposing my roots. There are many theories about 7-Eleven. I have heard I think every theory out there from the leveraged buyout being a culprit to the competition from major oil companies to the changing consumer, etc., etc.

To me, the heart of our problem was that we lost sight of our core customer for a period of years and the need to continually change to meet the needs of a changing convenience customer. In some ways we were victims of our own success because in the early days of our growth, we could put a store on any corner of America and become extremely successful, and then began to replicate that success all over the world. But ultimately we weren't keeping pace with the changing of the customers and it was only until we really restructured the company in the early 1990s and discovered the huge power of technology to make us better retailers that we transformed this business.

Today, hopefully, we will never ever again lose sight of the importance of that consumer and the constant change that is necessary to keep up with convenience needs.

Tomorrow: Slurpees, Apu, and the Quickie Mart.

David and Tom Gardner team up to bring you great stock ideas each month.

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