Where Sequoia Finds Value in Retail

Mike Breen: You guys are very shareholder friendly. You have a great annual meeting and a transcript that's on your website. And when I read that, David, you seem to have a special knowledge of the retail sector, TJX and some of those stocks. You guys have actually done well in those stocks in a really tough environment over the last few years. You've owned them even longer than that.

Maybe you could talk about some of the things in that sector, and what you're seeing going forward, and what has happened over the last few years?

David Poppe: I think our retail focus has really been over the last few years on companies that have an extremely strong value-oriented position. We've owned TJX for 10 years, so that goes way back. TJX is just a remarkable franchise.

Breen: That's T.J. Maxx?

Poppe: T.J. Maxx and Marshalls are the two main stores, and they sell basically surplus that's in the marketplace. I think it's a little bit misunderstood, and people seem to consistently worry that they are going to run out of things to buy one day. It seems like it would make sense that you wouldn't have an endless supply of surplus, but I think the reality is, most of the vendors like dealing with them. They give the vendors an outlet and an ability to take risk, and it's just a very strong, defensible position.

TJX has, I think ... quadrupled over the last 10 years in a stock market environment that has done nothing. It has been a very good stock, but the rationale for owning it is the value that it offers to consumer.

And the other two big retail positions for us, Wal-Mart and Target, I think, are similar in that [they have] very, very strong franchises, but a value orientation for the consumer. Target is a little bit more upscale demographics than Wal-Mart, but a similar orientation.

I think we have not tried to take a lot of risk with trying to guess on consumer discretionary, or what the consumer is going to do next. We've tried to find franchises that are extremely powerful and offer extremely good values, and we own a little bit of Costco, and I would put that in the same category.

Robert Goldfarb: The other thing I would emphasize about TJX is, it is a good enough business so that it was able to withstand--would you call it "mediocre management," David….

Poppe: I'd say they went through a period where the management was not great.

Goldfarb: It was suboptimal.

Poppe: I think right now, we are pretty happy with management.

Breen: The old saying, you buy a business that an idiot can run because maybe one day there will be an idiot running it?

Goldfarb: Well, he wasn't an idiot, but it was night and day when Carol Meyrowitz took over.

Poppe: Ben Cammarata the founder came back around 2005, I think, and brought back Carol Meyrowitz, who had been one of the lead buyers, merchandisers, and it's just been on a tear since then…

Breen: We've spoken in the past about that, and that was a key issue--how her merchandising skill was so good.

Goldfarb: It didn't take six months to show improvement. Some turnarounds take longer than that. But in this one, if you've got the right merchandise at the right prices...

Poppe: It was a good business before, but then Carol came in, and in the last five years, it has been a great business.