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Lampert Sheds Light on Sears

Chairman Promises Discipline and Responsiveness in Combined Company

Hoffman Estates, Ill. — As the combined Sears Holdings Corporation posted its first quarterly results last week, Chairman Edward Lampert promised that the company will be highly disciplined about expenses and capital allocation, but more responsive to trends and opportunities.

In a letter to shareholders, Lampert also indicated how he will function in the role of chairman. Specifically, he intends to focus on managing the business and improving operations rather than romancing investors.

Lampert, who owns 40 percent of the combined entity — formerly Kmart and Sears — said the company will communicate with the market through its Securities and Exchange filings, annual reports, proxy statements and press releases.

“As a related operating principle, we believe that substantial amounts of time spent on investor relations activities such as roadshows and investor conferences distract and detract from accomplishing our fundamental objective of creating value for all our owners,” he wrote.

Sears Holdings will more closely scrutinize inventory levels, open-to-buy authorizations, company expenses and capital allocation, Lampert said. Employees are being encouraged “to do more with less and to treat the company’s money as they would their own.” He noted that during its first 13 weeks of business, the combined company reduced capital expenditures from $143 million for Kmart and Sears combined last year to $106 million over the same period this year.

Despite the tight controls, the company will move forward with capital investments in the core business — such as the conversion of several hundred Kmart stores to the new Sears Essentials format, Lampert said.

Sears Holdings also will pursue investments in, and acquisitions of, other companies, as well as joint ventures and strategic alliances. Lampert, who has acknowledged his admiration of Warren Buffet’s Berkshire Hathaway empire, did not outline what types of properties might be attractive for a Sears portfolio.

The corporation will focus on building value rather than chasing market share or top-line sales exclusively, Lampert told investors.

“At the same time, we will partner with our suppliers to help differentiate our company and to improve our profitability and return on investment,” he wrote. “In the past, too often our predecessor companies pursued higher sales and accepted lower profits to meet objectives that, we believe, did not increase the value of the companies.”

Lampert intends to build “a learning culture” in which the traditional hierarchy of reporting relationships is flattened out so ideas can be acted upon quickly. The company will encourage experimentation and fast decision-making so that it become an easier place for suppliers to do business. In this more “responsive and nimble organization” Sears will work to generate cash more consistently across the year, he said.

“Historically, a disproportionate amount of our company’s earnings and cash flow have come in the fourth quarter of the year, a period that includes the Thanksgiving and year-end holidays,” he said.

In order to focus executives on the fundamentals, executive compensation will be tied to operating performance rather than the company’s stock price. Non-management directors will not receive stock options or other stock awards, Lampert said. An immediate priority is to convince rating agencies to upgrade Sears’ credit rating based on the company’s financial strength, asset value and operating performance. Sears’ debt is currently rated as non-investment grade.

While Lampert dealt more with value creation than outlining how to reinvigorate the Sears and Kmart nameplates, he also made it clear that he is in for the long haul. In addition, Lampert indicated that he will be more attentive to building the long-term value of the company than fretting over the sorts of operating hiccups that prompt short-term reactions on Wall Street.

“We expect to make mistakes as a company going forward, but we will acknowledge these mistakes, correct them and learn from them,” he said.

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