I hope that you had a wonderful Christmas.  Today Sears Holdings announced that they are closing 100-120 stores and that they will be selling the inventory and real estate to raise cash.  While the market has reacted unfavorably to this announcement, we see it as a huge positive from an investor’s point of view.  When Eddie Lampert (Chairman of Sears) took over the company about 8 years ago, many thought that Sears would basically be closed and liquidated to monetize the real estate assets and brands.  Lampert who was a self-professed Buffett admirer, actually faced the same problem that Buffett faced when he took over the Berkshire Hathaway textile operations.  These giant enterprises had thousands or in Sears case, tens of thousands of employees, and the social and moral costs of shutting down outweighed the short term financial gains that could be had.  Both Buffett and Lampert tried to turn the companies operations into profitable enterprise, but neither Berkshire’s textile business or Sears, were able to earn an adequate return on invested capital so basically they were delaying the inevitable.
As an investor we will benefit because Sears is now doing the things that they have to do to stay afloat and to maximize the value for shareholders.  Lampert owns 60% of the company so his interests are squarely aligned with our interests.  He is spinning off Orchard Supply which deserves a higher multiple than Sears of Kmart.  He is expanding the Kenmore, Craftsman, and Diehard, brands which will enhance the value and cash flows that can be derived from them.  Sears has become one of the most successful online retailers, and their growth in this market should continue to strengthen as housing improves due to their large presence in the appliances market.  Lastly and most importantly, he is shutting down underperforming stores and monetizing the real estate.  There are so many variables that the market will take some time to appreciate the news but I think this is really the starting point to much better things for a shareholder’s perspective, but I certainly appreciate that it is never fun to see more layoffs in an already cruddy economy.  Below is an excerpt from the 1985 Berkshire Hathaway Shareholder letter where he describes the shutdown of the textile operations, and I think you’ll see a lot of similarities with how the decision making has gone with Sears.  Thank you very much!
Shutdown of Textile Business
     In July we decided to close our textile operation, and by 

yearend this unpleasant job was largely completed.  The history 

of this business is instructive. 

     When Buffett Partnership, Ltd., an investment partnership of 

which I was general partner, bought control of Berkshire Hathaway 

21 years ago, it had an accounting net worth of $22 million, all 

devoted to the textile business.  The company’s intrinsic 

business value, however, was considerably less because the 

textile assets were unable to earn returns commensurate with 

their accounting value.  Indeed, during the previous nine years 

(the period in which Berkshire and Hathaway operated as a merged 

company) aggregate sales of $530 million had produced an 

aggregate loss of $10 million.  Profits had been reported from 

time to time but the net effect was always one step forward, two 

steps back. 

     At the time we made our purchase, southern textile plants – 

largely non-union – were believed to have an important 

competitive advantage.  Most northern textile operations had 

closed and many people thought we would liquidate our business as 


     We felt, however, that the business would be run much better 

by a long-time employee whom. we immediately selected to be 

president, Ken Chace.  In this respect we were 100% correct: Ken 

and his recent successor, Garry Morrison, have been excellent 

managers, every bit the equal of managers at our more profitable 


     In early 1967 cash generated by the textile operation was 

used to fund our entry into insurance via the purchase of 

National Indemnity Company.  Some of the money came from earnings 

and some from reduced investment in textile inventories, 

receivables, and fixed assets.  This pullback proved wise: 

although much improved by Ken’s management, the textile business 

never became a good earner, not even in cyclical upturns. 

     Further diversification for Berkshire followed, and 

gradually the textile operation’s depressing effect on our 

overall return diminished as the business became a progressively 

smaller portion of the corporation.  We remained in the business 

for reasons that I stated in the 1978 annual report (and 

summarized at other times also): “(1) our textile businesses are 

very important employers in their communities, (2) management has 

been straightforward in reporting on problems and energetic in 

attacking them, (3) labor has been cooperative and understanding 

in facing our common problems, and (4) the business should 

average modest cash returns relative to investment.” I further 

said, “As long as these conditions prevail – and we expect that 

they will – we intend to continue to support our textile business 

despite more attractive alternative uses for capital.” 

     It turned out that I was very wrong about (4).  Though 1979 

was moderately profitable, the business thereafter consumed major 

amounts of cash. By mid-1985 it became clear, even to me, that 

this condition was almost sure to continue.  Could we have found 

a buyer who would continue operations, I would have certainly 

preferred to sell the business rather than liquidate it, even if 

that meant somewhat lower proceeds for us.  But the economics 

that were finally obvious to me were also obvious to others, and 

interest was nil. 

     I won’t close down businesses of sub-normal profitability 

merely to add a fraction of a point to our corporate rate of 

return.  However, I also feel it inappropriate for even an 

exceptionally profitable company to fund an operation once it 

appears to have unending losses in prospect.  Adam Smith would 

disagree with my first proposition, and Karl Marx would disagree 

with my second; the middle ground is the only position that 

leaves me comfortable. 

     I should reemphasize that Ken and Garry have been 

resourceful, energetic and imaginative in attempting to make our 

textile operation a success.  Trying to achieve sustainable 

profitability, they reworked product lines, machinery 

configurations and distribution arrangements.  We also made a 

major acquisition, Waumbec Mills, with the expectation of 

important synergy (a term widely used in business to explain an 

acquisition that otherwise makes no sense).  But in the end 

nothing worked and I should be faulted for not quitting sooner.  

A recent Business Week article stated that 250 textile mills have 

closed since 1980.  Their owners were not privy to any 

information that was unknown to me; they simply processed it more 

objectively.  I ignored Comte’s advice – “the intellect should be 

the servant of the heart, but not its slave” – and believed what 

I preferred to believe. 

     The domestic textile industry operates in a commodity 

business, competing in a world market in which substantial excess 

capacity exists.  Much of the trouble we experienced was 

attributable, both directly and indirectly, to competition from 

foreign countries whose workers are paid a small fraction of the 

U.S. minimum wage.  But that in no way means that our labor force 

deserves any blame for our closing.  In fact, in comparison with 

employees of American industry generally, our workers were poorly 

paid, as has been the case throughout the textile business.  In 

contract negotiations, union leaders and members were sensitive 

to our disadvantageous cost position and did not push for 

unrealistic wage increases or unproductive work practices.  To 

the contrary, they tried just as hard as we did to keep us 

competitive.  Even during our liquidation period they performed 

superbly. (Ironically, we would have been better off financially 

if our union had behaved unreasonably some years ago; we then 

would have recognized the impossible future that we faced, 

promptly closed down, and avoided significant future losses.) 

     Over the years, we had the option of making large capital 

expenditures in the textile operation that would have allowed us 

to somewhat reduce variable costs.  Each proposal to do so looked 

like an immediate winner.  Measured by standard return-on- 

investment tests, in fact, these proposals usually promised 

greater economic benefits than would have resulted from 

comparable expenditures in our highly-profitable candy and 

newspaper businesses. 

     But the promised benefits from these textile investments 

were illusory.  Many of our competitors, both domestic and 

foreign, were stepping up to the same kind of expenditures and, 

once enough companies did so, their reduced costs became the 

baseline for reduced prices industrywide.  Viewed individually, 

each company’s capital investment decision appeared cost- 

effective and rational; viewed collectively, the decisions 

neutralized each other and were irrational (just as happens when 

each person watching a parade decides he can see a little better 

if he stands on tiptoes).  After each round of investment, all 

the players had more money in the game and returns remained 


     Thus, we faced a miserable choice: huge capital investment 

would have helped to keep our textile business alive, but would 

have left us with terrible returns on ever-growing amounts of 

capital.  After the investment, moreover, the foreign competition 

would still have retained a major, continuing advantage in labor 

costs.  A refusal to invest, however, would make us increasingly 

non-competitive, even measured against domestic textile 

manufacturers.  I always thought myself in the position described 

by Woody Allen in one of his movies: “More than any other time in 

history, mankind faces a crossroads.  One path leads to despair 

and utter hopelessness, the other to total extinction.  Let us 

pray we have the wisdom to choose correctly.” 

     For an understanding of how the to-invest-or-not-to-invest 

dilemma plays out in a commodity business, it is instructive to 

look at Burlington Industries, by far the largest U.S. textile 

company both 21 years ago and now.  In 1964 Burlington had sales 

of $1.2 billion against our $50 million.  It had strengths in 

both distribution and production that we could never hope to 

match and also, of course, had an earnings record far superior to 

ours.  Its stock sold at 60 at the end of 1964; ours was 13. 

     Burlington made a decision to stick to the textile business, 

and in 1985 had sales of about $2.8 billion.  During the 1964-85 

period, the company made capital expenditures of about $3 

billion, far more than any other U.S. textile company and more 

than $200-per-share on that $60 stock.  A very large part of the 

expenditures, I am sure, was devoted to cost improvement and 

expansion.  Given Burlington’s basic commitment to stay in 

textiles, I would also surmise that the company’s capital 

decisions were quite rational. 

     Nevertheless, Burlington has lost sales volume in real 

dollars and has far lower returns on sales and equity now than 20 

years ago.  Split 2-for-1 in 1965, the stock now sells at 34 — 

on an adjusted basis, just a little over its $60 price in 1964.  

Meanwhile, the CPI has more than tripled.  Therefore, each share 

commands about one-third the purchasing power it did at the end 

of 1964.  Regular dividends have been paid but they, too, have 

shrunk significantly in purchasing power. 

     This devastating outcome for the shareholders indicates what 

can happen when much brain power and energy are applied to a 

faulty premise.  The situation is suggestive of Samuel Johnson’s 

horse: “A horse that can count to ten is a remarkable horse – not 

a remarkable mathematician.” Likewise, a textile company that 

allocates capital brilliantly within its industry is a remarkable 

textile company – but not a remarkable business. 

     My conclusion from my own experiences and from much 

observation of other businesses is that a good managerial record 

(measured by economic returns) is far more a function of what 

business boat you get into than it is of how effectively you row 

(though intelligence and effort help considerably, of course, in 

any business, good or bad).  Some years ago I wrote: “When a 

management with a reputation for brilliance tackles a business 

with a reputation for poor fundamental economics, it is the 

reputation of the business that remains intact.” Nothing has 

since changed my point of view on that matter.  Should you find 

yourself in a chronically-leaking boat, energy devoted to 

changing vessels is likely to be more productive than energy 

devoted to patching leaks.