CUNDILL VALUE & CUNDILL SECURITY FUND'S
PETER CUNDILL & TIM MCELVAINE
(continued from preceding page)

OID: Still, how have they done it?
   McElvaine: Well, they certainly haven't done it with huge operating margins -- because over the last five years, their net profit margins have only averaged 2.8% and never exceeded 4.2% for any fiscal year. In contrast, Chateau's net profit margins have been more in the 5-8% range.

OID: What accounts for the difference?
   McElvaine: Chateau's apparel is a little less commodity apparel than Reitman's. A Reitman's shopper tends to be somewhat more price conscious. The Chateau shopper is price conscious, too. Only they may be willing to pay up just a bit more.

OID: Is Reitman's a particularly efficient operator?
   McElvaine: Reitman's has an enormous presence in a number of malls -- which gives them leverage on the leasing side to pull down their costs, on the buying side and on the distribution side. Again, however, both Chateau and Reitman's are mall-based -- which some people say is a negative and others say is a plus.

OID: And you?
   McElvaine: Well, that will change your cost structure somewhat versus someone like a Wal-Mart...

OID: And cause a higher percentage of sales to go to SG&A?
   McElvaine: That's right -- although Reitman's actually doesn't break out their statements in a way that you can determine their SG&A or gross margins. However, SG&A tends to be 25-28% of sales for Chateau -- versus more like 15% for Wal-Mart. And I'd guess that Reitman's SG&A might be somewhere in the mid-20s.
   In terms of gross margins, Chateau's is in the neighborhood of 33% versus around 22% for Wal-Mart. And I'd guess that Reitman's might be in the high 20s.

OID: Does that represent a fatal disadvantage for them long term vis-a-vis Wal-Mart and other more efficient retailers?
   McElvaine: That's always possible. But Wal-Mart is much more hard goods-oriented in Canada than they are in the U.S. -- although there is talk of them trying to do more soft goods or clothing sales.
   But I'd think that a 21-year old fashion-conscious purchaser would be less inclined to drive to a Wal-Mart than to go to one of Chateau's stores where they have the fashions that they're interested in at a reasonable price. Frankly, I worry more about a Sears than I do Wal-Mart.

OID: How do you think Chateau Stores and Reitman's stack up in terms of SG&A and gross margin vs. other mall-based retailers?
   McElvaine: I don't think those figures are all that different for Chateau or Reitman's than other comparable, mall-based retailers.

OID: And The Gap isn't eating their lunch the way that I gather that they're eating everyone's in the U.S.?
   McElvaine: The Gap takes part of the market. And I don't mean to downplay them as a competitor. But I'm not saying Chateau or Reitman's will become the next Gap. All I'm saying is that they have a neat, profitable little niche today. They're making good money on it. And that's fine.
   And the fact is that it tends to be nasty weather-wise up here for longer than many of us would like. Therefore, malls are where people tend to be -- at least for five months of the year.

OID: And I thought you guys were out moose hunting...
   McElvaine: Only when we're not at the mall.

©Copyright 1996-2008 Outstanding Investor Digest, Inc. All rights reserved.
295 Greenwich St., Box 282, New York, NY 10007 (212) 925-3885