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

OID: You mentioned that Canadian retailers were particularly hard hit among those in North America and that women's apparel retailers were especially hard hit.
   McElvaine: That's right. And these were mall-based, women's wear retailers to boot -- which happened to be particularly out of favor.

OID: And to a large degree, I gather still are.
   McElvaine: Neither one has moved up since the Fall. So you're right. And both expect business to be significantly better this year than last.

OID: Although Robert Noel tells us that you have to be an optimist to be either a retailer or an entrepreneur, although we think stupidity is the more common trait -- at least among investment publishers...
   McElvaine: To start a retailer from scratch today, you would indeed have to be an optimist. But to buy an existing, profitable retailer at a price well below the cost of recreating it is quite another story indeed.

OID: But what's to keep 1996 from being the first of many tough years -- for the industry in general and Chateau and Reitman's in particular?
   McElvaine: Well, anything's possible. But last year saw the convergence of a number of negative factors: First, retailers entered the Fall with above average inventories because of a very weak back-to-school season. Second, a number of competitors' balance sheets were strained already. Third, the consumer was unusually selective in their buying. And, fourth, there was a very nasty price war last year between Wal-Mart and Zellers -- which created still more price competition, besides pulling traffic away. So they were kind of hit from all sides at once.

OID: And you think those negatives are nonrecurring -- at least simultaneously?
   McElvaine: That's right. For example, inventories were better going into this year. And one result has been better pricing. Plus, it's hard to imagine a repeat of the pricing problems that happened in the Fall of last year.
   Also, again, both Chateau Stores and Reitman's are optimistic that this year's earnings will be better than last year's. However, even if they're not, in both cases, we're confident that they'll be around for the recovery -- whenever it may come. So if the industry takes 3-4 years to turn around, that's fine with us -- because both of these companies are cash flow positive even in this environment.

OID: And, in effect, you're purchasing the survivors while there's still blood on the streets...
   McElvaine: Exactly. We're getting the retail businesses for very little. And, these two have been very good businesses economically. Of course, I'm not talking about whether they add fashion to the world...

OID: That's a different publication, actually...
   McElvaine: The nature of the retail business, however -- as I've described -- forces you to be careful because it doesn't have an enduring quality.

OID: Aside from its negatives, in any case.
   McElvaine: So there's a price at which you want to own these businesses and a price at which you don't. And as long as you don't mislead yourself into thinking that you have something you can hold onto forever, you're fine. You have to be as price sensitive as a shareholder as you might be as a shopper. How's that for a snappy phrase?

OID: Don't give up your day job.
   But maybe you have a manager who'll do intelligent things in terms of capital allocation and reward you for holding it a long, long time.
   McElvaine: I don't disagree with that on Reitman's. But investors have sometimes valued that highly and sometimes they haven't.

OID: And right now, they aren't.
   McElvaine: That's right.

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