Lots of people have the idea that you can "milk" a business of cash. The notion goes that you can take a viable, but slow (or no) growth business and stop investing. Then "milk" the cash out of it. What a great idea. Too bad it doesn’t work.
Take Sears for example (see chart here). Eddie Lampert got KMart out of bankruptcy, and then bought up Sears. He quit investing in Sears, and revenues and profits dived. He told investors that was OK, because he was improving profit margins. He said he would keep flying the plane well, just at a lower altitude. But sales and profits have continued to dive even further. Just recently (see article here) Sears had to announce that profits were off yet another 40%. Margins have declined from 28.4% to 27.7T. Even though the company has been buying its own shares to prop up earnings per share, even that figure is down almost 40%. And, revenues are down (not the growth rate down, the actual revenues have again declined) by 4%. Same store sales at both Sears and KMart are down by about 4%. The President of Sears, Aylwin Lewis, said he was disappointed. Oh really?
Many investors have said not to worry about Sears slide. After all, they said Mr. Lampert would "milk" Sears of its cash to make hedge fund investments – which are supposed to be wildly profitable. Especially since that is ostensibly Mr. Lampert’s forte. But, there are now more hedge funds than you can shake a stick at. The price of deals has been bid up, and returns have fallen. So those investments haven’t paid off. Now the Sears war chest has declined by almost 50% – so much for "milking" to maintain cash.
Sears went into a growth stall, and those who ignored it have lost 27% on their equity investments. The reality is that in today’s competitive global marketplace, no one has the option to slow investing and "milk" the business. Competitors swoop in and push you down faster, and harder. Competitors find those who want to "milk" easy prey. Especially when they are as good as Target, Kohl’s and JC Penney – or as large and desperate for growth as WalMart.
When a Success Formula grows old and tired, the portfolio notion of "milk it" so you can invest in another investment is, well, hopelessy out of date. Portfolio theory is a great idea, but do you really think slow-growth, defensible cash-rich businesses exist? Let’s get real. When a Success Formula stops producing good returns management has to move fast to set up White Space and MIGRATE to a new Success Formula. That’s the only option to keep from losing everything in the Whirlpool. "Milking" is not possible. Migrating is what management has to do. By migrating to a new Success Formula companies can be reborn- like the Phoenix. But Sears has no White Space – none. Leadership keeps bleeding out cash, revenues fall, profits fall, and there’s no great saving alternative investment. With every month, that option gets farther away for Sears and its inevitable demise becomes clearer.
I posted to this blog the day Lampert announced his acquisition of Sears that the company would not resurrect. But a lot of people wanted to believe in Mr. Lampert. Better to believe in reality. Company’s have to migrate toward a new Success Formula by using Disruptions, White Space and working hard at it. Not by wishing for portfolio theory, clever transactions and efforts at "milking" to somehow miraculously create value.