I fell in love with retailing by the time I was 13. After studying economics in college at the University of Chicago, I wanted to become a securities analyst covering the retail industry on Wall Street (which of course means the industry, not necessarily on that street). I was able to arrange 4 or 5 interviews, which were most interesting. One hotshot young airline industry analyst said I’d be stupid to want to do this work unless I was only interested in the money! But I loved retailing, and knew a fair amount about it, having talked to dozens of retailers and read everything I could find. I considered a job on the Street as part of my education, so I could ultimately become a retailer.
Nevertheless, I found that, since each firm had just one analyst for each industry, my desire to only cover retailing made it hard to find a spot. Few firms had 2- or 3-person teams working on retailing, or junior analysts helping. Other job-seekers took whatever industry they were assigned to.
But at Citibank, then still called First National City Bank of New York, I met many people, and we got along well. Veteran retail analyst and Citibank VP Charles A. “Pete” Wetzel decided to give me a chance, helping him cover the retail industry.
Pete had been a renowned retail analyst at Paine Webber (sell-side) and had then been lured over to Citibank’s Investment Research operation (buy-side), part of its Investment Management Group. He really loved and understood retailing and was a meticulous writer. He covered my first report drafts in red ink, in the tiniest writing ever seen! He could take hours of notes at a meeting, on one sheet of paper.
Pete had started at Value Line, where founder Arnold Bernhard just gave an IQ test to applicants. If you were bright, Arnold figured he could teach you to analyze stocks. Pete said that Value Line, which had an excellent track record, was in those early days full of socialists, actors, and other bright people with no business background (Pete had been an English major in college).
Pete led a small group (your “unit”)….his loyal assistant was Kathy Redmond, from Queens. Assistants like Kathy have more power in most companies than most admit. Paul Reese covered food and beverages and specialty chemicals, Janice Montle worked with Paul, and Pete (and sometimes me) covered retailing, restaurants, hotels, and tobacco. I became good friends with all these people.
One of the other unit heads was VP Howard Marks, who went on to a great career as a major investor.
I also tried to have lunch or chat with all the other analysts. Learning about the differences between industries and between companies has always fascinated me. The diverse economics and business models in each industry; which strategies work? The job at Citibank was the perfect place to study all the industries. (My next job was as a buyer at Federated Department Stores’ Dallas division, Sanger-Harris. I tried to meet as many other buyers as I could, to find out the different workings of the stationery, camera, toy, luggage, apparel, and other industries.)
The early 1970s was the era of the Nifty Fifty, the key companies “you had to own.” Some were called “one-decision stocks” – buy them, never sell. There was not much skepticism about the obvious powerhouses like IBM, Johnson & Johnson, and Coca-Cola.
As of December 29, 1972, 3 or 4 months before I arrived, the Investment Management Groups’ ten largest holdings on behalf of customers were:
- IBM $1.028 billion
- Xerox $668 million
- Eastman Kodak $507 million
- Avon Products $404 million
- Merck $345 million
- Coca-Cola $338 million
- General Electric $317 million
- General Motors $288 million
- Sears, Roebuck $259 million
- Phillips Petroleum $250 million
Followed by numbers 11 through 20: 3M, Kresge (soon renamed Kmart), JC Penney, Johnson & Johnson, Exxon, Atlantic Richfield, Caterpillar, Corning, Eli Lilly, and Texas Instruments.
McDonald’s was our 34th largest holding overall, Federated Department Stores 41st, and Marcor (the merged Montgomery Ward and Container Corporation of America, which Pete covered) 50th.
My memory is that the investment philosophy was a pretty straight belief in growth stocks, especially big ones. As one of the largest stockholding institutions in America, it was hard for Citibank to invest in small-float or small capitalization stocks and be fair to all our customers, though we did create a smaller company growth fund for clients to participate in.
Citibank as a whole was very dynamic then. Brilliant CEO (Chief Executive Officer) Walter Wriston led the company. We were a global banker to these same Fortune 500 companies, but also an innovator. As a leader in consumer banking, the bank had a big branch operation and was an early adopter of ATM’s. Citibank invented the CD (Certificate of Deposit) and had its own global traveler’s checks, the most important US competitor to dominant American Express.
Wriston surrounded himself with energetic young men and women with brains. John Reed was in his 30’s when I was there. He went on to become the bank’s CEO. His colleague Larry Small later briefly headed the Smithsonian.
The Investment Management Group was largely two big parts: portfolio managers and research analysts. The more numerous portfolio managers knew their customers and those customers’ desires. They made all buy, sell, and timing decisions. But they could not buy a stock unless it was on the approved list we analysts determined.
For me, the best part was to be able to spend time meeting retailers, asking questions, touring stores, and traveling the country to see what was going on. I learned a huge amount from Pete Wetzel, from the sell-side analysts who called on us for commission business, from the other analysts at Citibank, and from the retailers themselves.
Investing in Retail Companies
Our biggest holding was Sears, Roebuck, which was also one of the bank’s biggest overall holdings. The company was at or just beyond its peak. There were cracks in the armor. Goldman, Sachs’ analyst Joe Ellis, one of the best, claimed Sears had deep trouble, but Pete was unswayed. The company had delivered well on its promises and potential for a long time.
During my 2 years there, Kmart was the hot rod, and Pete was fully onboard. The company was growing dramatically, even though it was getting huge. They could do no wrong.
Third among our big three holdings was JC Penney. McDonald’s and Federated Department Stores were other large holdings. Pete’s “unit” also covered Philip Morris and Coca-Cola.
The best-performing retailers of the era included Southland (7-11), Tandy (Radio Shack), Melville Shoe (later CVS), and Petrie Stores, all four of which we held. Sustainable earnings growth was the holy grail. These two lists show the “universe of stocks” for us – the retail companies large enough that we could easily invest in them.
Each company had a personality. Coca-Cola did not welcome analyst interviews. We were one of their largest stockholders, but my friend Paul Reese only saw their CEO maybe once a year at some formal group event. On the other hand, when looking for mid-sized companies with good growth prospects, it wasn’t uncommon for me to spend 3 hours one-on-one with the CEO, sometimes as he drove you from store to warehouse to store.
Pete assigned me department stores, then added apparel stores, then added supermarkets and food wholesalers.
My first job was to write a report recommending we sell department and discount store operator Dayton-Hudson. Pete gave me this as a test (just to see how I’d do), because it was a meaningless document. Pete had already gotten the “sell” word out, and Citibank had sold all the Dayton-Hudson stock in our clients’ portfolios. We just needed a report for the file. Pete had me take a good look at the company and told me to write the report seriously.
This great company was struggling with its 10-year-old Target division, which along with other attempts by other department store companies, struggled to develop a profitable upscale discount store chain. The stock had dropped to $18, from $27 earlier in the year. Target had caused Dayton-Hudson earnings to badly disappoint the Street. But when I looked at the company, it seemed to have a lot of strengths, and a “buy” at the current low.
Pete said, “They screwed the Street. You are probably right, but the stock will be dead for a couple of years.” For what happened to Target later, see this article. An investment in the company then would have paid well over the many years since.
My first major opus was a “Basic Report” on Federated Department Stores, the largest holding for which I was responsible. I loved the company and went to work for them after two years at Citibank. Another highly educational job!
Another great company was Melville Shoe, later Melville Corporation. The company was based around Thom McAn, the nation’s second shoe store chain (after Woolworth’s Kinney Shoes) and operation of the shoe departments at booming Kmart. Under the brilliant Frank Rooney, they experimented with many retail concepts. Today it is one of the ten biggest American companies! Read the full story here.
We had invested in Petrie Stores, the phenomenally profitable multi-brand (Stuart’s, Petrie, and Marianne) young women’s mall-based apparel chain. Petrie was still run by its founder, the legendary Milton Petrie. Perhaps to see if I would survive, Pete assigned me Petrie and sent me out to New Jersey for a day at Petrie’s headquarters.
Milton Petrie, then in his early 70s, very personally ran a tight-fisted company. His Chief Financial Officer jumped when Milton barked. As I sat in Milton’s office, a kid in my early 20s asking questions, he’d bark into a speakerphone, “get in here!” to the CFO. I am surprised the poor man didn’t have a heart attack.
The Petrie stores system revolved around three all-powerful Jewish women who picked the clothes. They had all been married for decades, but they had also spent their lives working for Milton. He called all of them “Miss,” followed by their maiden names, despite their marital status.
Then Milton took me on a tour of their state-of-the-art warehouse. Competitors admired Petrie because they turned around inventory fast and responded to fashion changes quickly. Something was out of place, and Milton profanely barked at the woman in charge, saying, “Look, we have this very important analyst from Wall Street here and this is #!!*!!# awful!” I just wanted to melt away.
But Milton and I got along because we loved retailing and department stores. He had begun his career at the great JL Hudson department store in Detroit (which later merged with Dayton’s). Then he started his own store but went broke in the depression. That taught him to be wary of debt and to conserve cash.
Petrie Stores had mounds of cash, which it later used to try to buy Toys R Us, because Milton wanted the talents of Toys’ genius leader Charles Lazarus, possibly to succeed Milton. Milton also expressed interest in buying a department store. (When I later worked in mergers and acquisitions at the May Department Stores Company, I tried to engage Petrie and May, to no avail).
Milton Petrie was very tough but generous, funding museums etc. Long after his death, Petrie Stores also died. Young people’s apparel is a fickle business!
Note that the Petrie report is on pink paper because this was a “small cap” (market capitalization) stock.
My last story is about Mervyn’s. This then-small Bay area-based retailer sold affordable clothes like JCPenney but carried national brands rather than private label like Penney. Founder and CEO Mervin Morris put a “y” in the store names because it looked classier. Mervyn’s had recently gone public and was growing like a weed in California.
I spent a day with Mervin, visiting stores. He was a master merchant. I learned grand opening techniques that we later used in my first startup, Bookstop.
My colleagues at Citibank had asked me to see if Merv needed our investment management services, to help with the fortune he reaped from the Initial Public Offering (IPO). “No,” he said, “I have $100 million in (government) Treasury Bills, and the rest of my fortune in Mervyn’s. I believe in putting all your eggs in one basket, and then watch that basket!” I returned to New York and successfully recommended the stock, the first company that was “mine,” not one Citibank had previously covered. In 1978,, Mervyn’s sold out to that same Dayton-Hudson for $300 million and Merv Morris became their biggest stockholder after Minneapolis’ prominent Dayton family. Later, Mervyn’s string ran out, too, and the last stores closed in 2008. Like several other formerly great retailers, Mervyn’s by then was saddled with debt loaded on by later buyers of the company.
After my two-year education at Citibank, I got a bus pass (unlimited US travel, $99 for 99 days) and set up 13 interviews with department stores. At the time, they were the best place to learn retailing. I got a few job offers, but the best one was with Federated ‘s Sanger-Harris in Dallas, which turned out to be another lucky break with great teachers and mentors.
If there is one lesson in all this, it is that retailing is tough, it is highly competitive. Few retailers last more than 50 or so years. Which makes durable, lasting retailers even more remarkable. And makes analyzing retailers, which I still do, a great deal of fun!
