I'm a big fan of shareholder letters. Reading just a few from any company can tell you a lot about the company's management and how well they treat their shareholders. Warren Buffett's letters to shareholders are the gold standard, and having re-read some of the letters done by KimcoRealty
I'm also impressed with the letter to shareholders that Sears Holdings
I've stated before that I think the focus on same-store sales is overblown. Abercrombie & Fitch
If we take a simple example of a single store, then a comparison of SSS from year to year is fairly straightforward. If a store does $1 million in sales at a 10% operating margin this year, generating $100,000 in operating profit, and does $1.1 million in sales next year at the same operating margin of 10% generating $110,000 in operating profit, it will report a 10% increase in SSS. Now, let's add another dimension. Imagine that this same store spent $500,000 to improve the store experience during that year. The 10% increase in SSS generated an additional $10,000 in profit. Whether the $500,000 investment makes sense or not in hindsight will depend on the future performance of the store. Obviously, if the store only improves by the $10,000 in profit, the $500,000 investment doesn't make sense. I believe that companies that pursue SSS growth at any cost often fall victim to these traps.
I'm not sure how the Sears Holdings story will unfold and whether the company will ultimately be able to become a force in retail again. It's honestly not a story I've followed all that closely. However, the letter offers plenty of lessons for investors -- including an interesting discussion on pensions, liabilities, and share repurchases -- on how to think about companies and how they operate. And investors should give it a read for that reason even if they have no interest in the company.
For more Foolishness on Sears:
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