Circle of Competence

Just wanted to drop a couple of quick notes on two portfolio companies, Steak N Shake and Sears Holdings.

Re: Steak N Shake, they filed the 8-k today regarding the election of Sardar Biglari to Chairman, a move we mentioned last week.

In the filing, there is a small, but noticeable governance issue that has been resolved, namely the extraordinary percentage of shareholders needed to call a special meeting. Prior to Biglari’s election, that number was a whopping 80%. There was, almost literally, no way for a shareholder group to have a meeting called without rallying the entire shareholder base of the company.

Per the filing, that percentage has been reduced to 25%, a much more manageable number.  While this is not a “gamebreaker” to the investment thesis, solving governance issues will help improve the company’s perception in the marketplace.

Regarding Sears, there was a short article on Fortune today regarding the turnaround effort and Eddie Lampert.  I enjoyed the fact that Eddie actually made a few meaningful comments to the reporter, Patricia Sellers, in a phone call.

The important pickup I got from this particular article is that Eddie is, unsurprisingly, running Sears much like his hedge fund, ESL Investments:  He’s going to spend their capital conservatively until the fat pitch arrives.  Here is the quote I am referencing:

“While they criticize him for under-investing in Sears and Kmart, he cites the value of pruning until he discovers the right strategy to spend money on. “Only when you find something that leads to better results,” he says, “do you get behind it with a significant amount of capital.”

I’m excited to see what this ’something’ might end up being.  But believe me, we’ll know when Eddie starts moving Sears’ capital with size for something other than share repurchasing, debt repayment, and pension funding.

A note at the end of the article also piqued my interest, something I hadn’t really contemplated as a strategy for Sears until I read it today:

“There, brand experts from India - including a renowned professor and a prominent industrialist - said that Indian investors are eager to expand into retailing globally and would likely be interested in owning, or at least carrying, brands like Craftsman and Kenmore.”

Can Sears take the brands global?  The possibilities are endless.

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Disclosure: Long Sears, Long Steak N Shake