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In the Socratic dialogues, his extended conversations with students, statesmen, and friends invariably aim at understanding and achieving virtue through the careful application of a dialectical method that employs critical inquiry to undermine the plausibility of widely-held doctrines. Destroying the illusion that we already comprehend the world perfectly and honestly accepting the fact of our own ignorance, Socrates believed, are vital steps toward our acquisition of genuine knowledge, by discovering universal definitions of the key concepts governing human life.

Source: Philosophypages.com "Socrates 469 - 399 BC"

CSK and Socrates
On Wednesday I received an email from a valued reader asking my opinion of the recent management changes at CSK Auto Parts (CAO). I apologize for taking a full week since the announcement to give you my opinion on the matter. But to be honest, I did not know what to say.

As many of you know, CSK is the fourth largest do-it-yourself [DIY] auto parts retail chain in the United States (with 1,334 stores in 22 west and Midwest states).

In September, following an internal investigation, CSK announced that its President and Chief Operating Officer, Martin Fraser, Don Watson, Chief Administrative Officer (formerly CFO), and several other individuals in the finance organization left the company after accounting errors and irregularities were discovered.

I cannot think of a more important time for the folks at CSK to question just about every pre-existing conception they have held about the industry and their strategy. And to be honest, it even provides a great illustration of why those of us in the investment community need to question everything. . . including management.

In this spirit, I thought it might be helpful to use quotations from the Greek Philosopher Socrates (compiled by brainyqutoes.com, and quotes.liberty-tree.ca) to help guide the discussion.

"False words are not only evil in themselves, but they infect the soul with evil"
I think those of us in the investment community need to start by being more truthful with ourselves. If we have concerns with management (not their strategy, but them), we should address it with them first, and then if not remedied, publish our concerns.

Sadly the general attitude on Wall Street is not to publicly criticize management (it's so much easier to do it behind their back on the phone with a big institution). If you operate in the world of big brokerage you gain nothing, and risk everything (banking business, road shows, management attendance at conferences, etc.) by being publicly critical of management. Well, except for maybe a few hedge funds short the stock who will abandon you three days later for the next trade. So it has become taboo to criticize management.

But it was watching what happened to CSK that is probably why I am so critical of management teams today (like AutoNation). Because at the end of the day, I think it is an analyst's job to criticize management.

We represent their bosses (the shareholders). And we'd be letting the shareholders down if we did not speak openly and candidly about our opinion of management. Sure, you try to criticize the action not the actor. But if the problem is the actor or actors (like it turned out to be in CSK's case) then yeah, we should be critical.

As I have said before, how many Enron's were created because of brokerage firms trying to "curry favor?" And how many Microsoft's were passed over because they lacked the connections on Wall Street?

Four priorities (using Socrates quotes) for CSK's new CEO
In any case, the era of bad management at CSK is hopefully now a thing of the past. And the big question becomes what lies ahead for CSK?

As you probably saw last week the company appointed Lawrence N. Mondry as the company's new CEO. The company's CFO, James Riley resigned and they are undergoing a search for a new CFO. Mr. Mondry joins CSK after having served as the CEO of CompUSA from 2003 to 2006.

I don't know anything about Mr. Mondry except the biography provided in the company's press release. And I know very little about CompUSA. Although after checking out the CompUAS website, I almost wish I bought my new lap top from them versus Staples as they seem to understand the needs of small business owners better.

Now for those of you that missed my May 22, 2007 newsletter article titled "5 trait's for Advance's CEO," I encourage you to go on my website (autoretailstocks.com), click on Advance Auto Parts and read the article. Because one of the things I mentioned was that tapping someone with experience in the area of technology might prove beneficial to a DIY retailer.

I never considered a technology retailer, however. And it intrigues me, to say the least.

Nonetheless, "I know one thing, and that is that I know nothing" (Socrates) about Mr. Mondry's leadership potential.

So instead of trying to predict what can happen to CSK, I thought I would simply lay out 4 priorities (drawing from famous quotes by Socrates) Mr. Mondry should try to address in his first 180 days on the job.

Priority #1: "Let him that would move the world first move himself"
So don't talk to investors for the first six months on the job. Before you can articulate a strategy to stakeholders, you first need to size up your assets and capabilities (particularly the employees) and then cast the vision for the company.

I believe it would be irresponsible to rush the strategic planning process. It has taken years for the company to lose its way. And I am committed to getting it right this time.

Source: Jeff Rachor, the new CEO of Pep Boys (NYSE:PBY) said on the company's 1Q07 conference call

I think CSK is in a similar situation (albeit a very different "box").

And therefore encourage Mr. Mondry to follow Mr. Rachor's example and focus first on "collaborating with senior leadership and board of directors to define the company's purpose and develop a comprehensive long term strategic plan."

Priority #2: "I am not an Athenian or a Greek, I am a citizen of the world"
And so this is where it begins: figuring out the real value proposition CSK delivers to this world. Develop a mission statement around that capability. And then run with it.

Here is the closest thing I have found to a mission statement for CSK:

At CSK Auto, we are focused on developing and operating stores that appeal to customers. Our stores are easy to shop, and we offer a broad selection of brand name products on a timely basis, in convenient locations, and we work hard to create a customer service driven culture. We recognize that offering value to our customers ultimately translates to value for our shareholders.

Source: Maynard Jenkins, former CEO, "About Us" section of CSK website

It needs work (in my opinion).

Priority #3: "Think not those faithful who praise all thy words and actions, but those who kindly reprove thy faults"
Don't surround yourself with "yes people." Establish a management team and board of directors who are experts in their specific field. The only "yes" part should be that they all agree and buy into the same mission/vision for the company. But hopefully they've played a part even in the formation of the vision/mission.

Once the mission is set (or as it is forming), I think Mr. Mondry should hire an expert in the area of category management. CSK is overweight consumer discretionary and "fringe" products (in my opinion). The merchandising, frankly, has lacked direction. And so once management has established a mission, they should stock the shelves accordingly (with products and product categories that help fulfill the mission).

And for CFO, the company should hire someone who is proven at bringing a focus on return on investment. An individual that focuses the capital (resources) of the company only on things that help CSK achieve its mission.

Also, I think he should hire outside consultants to review the company's current Board of Directors. The consultants should evaluate the board and provide recommendations about how to broaden (and improve) said Board of Directors.

As a reminder:

And this (history) is why today's option grant amendment is so infuriating. . . As a result, Maynard Jenkins (the company's current CEO) had 36,000 stock options extended. Shareholders do not have the option to "amend" their purchase price in the stock of CSK, even though they were buying the stock on earnings that were being incorrectly reported. As such, why in the world should the CEO be able to amend his stock option agreement when the accounting irregularities occurred under his watch? In my opinion, this was a ridiculous and irresponsible move by CSK's Board of Directors.

Source: the Auto Retail Informer, December 22, 2006

Priority #4: "I am the wisest man alive, for I know one thing, and that is that I know nothing"
There is a lot Mr. Mondry doesn't know. And so the quickest way to try to get up to speed is to learn from the people at the company.

I'd be very careful about that.

Don't get me wrong he should try to get out to as many stores as possible and meet as many store managers as possible (maybe doing some group meetings by district, etc).

But I'd be a little careful about drawing too many opinions from the people within corporate (at least initially). Instead, I'd spend 2 - 3 solid weeks meeting with vendors, industry consultants, and commercial customers to find out the real scoop.

Ask those vendors: "what don't I know?" What employees are really good at corporate, and who is not? What do I need to understand about the business? What are my competitors like? What do they know that I don't?

And of course, look at key comparable metrics and start asking people (inside and outside the organizations) why? Like why do we have less than 12 employees per store (corporate and distribution support functions included) when competitors like AutoZone and Advance run over 14?

Why are our stores an average of 7,300 square feet? Have AutoZone (NYSE:AZO), O'Reilly (NASDAQ:ORLY) and NAPA (that all run under 7,000 square feet per store) figured out something we haven't?

And does Advance (NYSE:AAP) really use all 7,500 square feet? Or did they convert the excess space acquired with the Western Auto Parts stores into employee eating areas? And what about store and employee productivity? Full/time versus part time employees?

Here are a few stats to get Mr. Mondry started with questions:

CSK figures

Source: Company SEC filings, press releases, and Pep Boys Annual Meeting Slides. All results are based on the most recent fiscal year end (for CSK I had to use fiscal 2005 since fiscal 06 is not available).

CAO 1-yr chart:

CAO 1-yr chart

Source: Four Priorities (Using Socrates) For CSK Auto's New CEO