Charlie Munger Blue Chip Stamps Annual Letters 1977 – 1982

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To Our Stockholders

Consolidated net income of Blue Chip Stamps and its subsidiaries for the calendar year 1977 amounted to $16,993,000 ($3.28 per share) compared to $11,703,000 ($2.26 per share) in the previous fiscal year.

Improvement in normal operating income was small and much less than indicated by these figures because this year's results included $.79 per share from securities gains of the parent company plus $.12 per share attributable to the parent company's share of net capital gains realized by Wesco Financial Corporation.

We have three major subsidiaries, See’s Candy Shops, Incorporated (99% owned), Wesco Financial Corporation (80% owned) and Buffalo Evening News, Inc. (100% owned). If we used "equity accounting” instead of “consolidated accounting" for See's and the Buffalo Evening News as well as Wesco, our consolidated income for our two reporting years just ended would break down as follows:

Charlie Munger Blue Chip Stamps

  • 1 After reducing income by amortization of intangibles arising from purchase of See's at a large premium over its book value.
  • 2 After increasing income by amortization of the discount from Wesco book value at which the interest was acquired. The December 31, 1976 figure, due to our reaching 80% ownership of Wesco, includes reversal of income taxes provided in prior years.
  • 3 After reducing income by amortization of relatively minor intangibles arising at acquisition of the newspaper in April 1977.
  • 4 After deduction of interest and other general corporate expenses. In each year there was an operating loss before securities transactions and before crediting income for (i) interest and dividends resulting from investment of the funds available through "float" caused by trading stamps issued but not yet redeemed, plus (ii) income tax benefit caused by 85% exclusion of dividends in computing federal income taxes.
  • 5 The 1977 amounts include $4,100,000 or $.79 per Blue Chip share from securities gains, net of taxes. In 1976 securities losses reduced income by $77,000 or $.01 per Blue Chip share.

Charlie Munger - See's Candy Shops, Incorporated

First in importance again in our earnings picture last year was our equity in our 99%-owned subsidiary, See’s Candy Shops, Incorporated, See’s had another record year under the skilled leadership of Charles Huggins, with the percentage gain in earnings (11%) approximately equal to the percentage gain in sales (12%). Comparative figures for See’s for the last two years are set forth below:

Charlie Munger Blue Chip Stamps

  • These earnings figures are a little higher than Blue Chip Stamps' share of See's earnings shown in the table above because Blue Chip's share reflects (i) deduction of the approximately 1% share of See s earnings owned by minority stockholders of See s, (ii) amortization of intangibles arising from purchase of See's stock at a large premium over book value and (iii) state income tax on See's dividends received by Blue Chip.

Boxed chocolate consumption per capita in the United States continues to be essentially static, and the candy business has been subject to extraordinary pressure from various factors in the last few years. Considering these business conditions, See’s 1977 operating results reflect a remarkable achievement attributable to excellent management, manufacturing and selling an outstanding product. See's is a very old-fashioned company, having been founded in 1921 by a redoubtable woman, then 71 years old, who established a tradition of extreme attention to quality control. From inception, See's has consistently followed the admonition published by Ben Franklin in Poor Richard: “Keep thy shop and thy shop will keep thee." The result of its old-fashioned attention to quality control and cheerful retail service is the highest sales per store of any candy store chain in the world. We are privileged to own See's and to be stewards of its business tradition and example.

Charlie Munger - Wesco Financial Corporation

Almost equal to See’s in our earnings picture last year was our equity in net income of our subsidiary, Wesco Financial Corporation (80% owned). The substantial improvement in Wesco’s contribution to our consolidated net income was caused by a combination of capital gains and increased operating earnings in Wesco’s savings and loan business, coupled with an increase in our ownership. Wesco is a separate public corporation, with its stock listed on the American Stock Exchange. Summarized financial information for Wesco is contained in Note 1 to our consolidated financial statements. Wesco's consolidated balance sheet is exceptionally strong, showing substantial assets outside its subsidiary savings and loan association and available for commitment elsewhere. For more complete information, we encourage Blue Chip shareholders to obtain a copy of Wesco’s 1977 Annual Report, which embodies an unusual clarity of reporting and reflects an excellence of management— both directly attributable to Louis Vincenti, Chairman. Simply make your request to:

Wesco Financial Corporation
315 East Colorado Boulevard
Pasadena, California 91109
Attention: Mrs. Bette Deckard, Secretary & Treasurer

Charlie Munger - The Buffalo Evening News

On April 15, 1977, we purchased, through a newly organized wholly-owned subsidiary, the newspaper assets of Buffalo Evening News, Inc., publisher of one of two competing area-wide daily newspapers in Buffalo, New York. This was a substantial transaction, and subsequent events in Buffalo have required qualification of our auditor's opinion for 1977. Accordingly, extended discussion is appropriate in this annual report to our shareholders.

The total price paid was $35,509,000, of which $34,076,000 was paid in cash, with the balance representing assumption of certain pension obligations. Although profitable in 1977, the News has thus far made an insignificant contribution to consolidated earnings, and, as discussed below, future operating results may well be less favorable than those of 1977. The pro forma effect of the acquisition, assuming ownership of the News throughout all of 1977 (including the normally unprofitable early months of the year), would have been to reduce consolidated earnings by $.10 per share.

Nonetheless, we are very pleased to have purchased the News. So far as we know, no newspaper acquisition in recent years looks sensible based on past earnings related to the purchase price. Recent buyers of newspapers have paid prices reflecting what they hope to achieve over a very long-term, inflationary future, and we, of necessity, conformed to this pattern in our acquisition.

Our investment decision was based on the belief that the existing journalistic merit of the News, encouraged and nourished, will eventually prosper in the marketplace and that inflation will eventually make a prosperous newspaper company a safer asset than any other company which we could then buy at the price paid for the News. Experience and reconsideration have made us more confident than ever that we were right in our original appraisal of the journalistic merit of the News. The News is a meritorious newspaper partly because it was dominated and molded for decades by a legendary editor, Alfred Kirchhofer, who, although retired, still comes to the News every day at age 83. Mr. Kirchhofer had and has a passion for accuracy, fairness and service. Present management had continued these standards before our purchase, and we have encouraged their perpetuation.

We have long wanted to buy a large daily newspaper, as demonstrated by our unsuccessful bid for the Cincinnati Enquirer in 1971. In order to get a large newspaper property, we have been

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