By and  on February 26, 2009

Sears Holdings Corp. chairman Edward Lampert had harsh words for the company’s apparel business Thursday in his annual letter to shareholders, but he cited the firm’s Lands’ End operation as a model of how the rest of the company could operate productively on a multichannel platform.

Lampert’s letter was posted as Sears reported lower but better-than-expected fourth-quarter results and said it would close another 24 stores.

The 8,525-word document gave Lampert, among the top hedge managers in the U.S., a chance to weigh in on the economic tumult of the past year and to outline Sears’ progress — or in some cases lack thereof — in better managing its internal operations and customer relationships. Pointing to a $1 billion reduction in inventory over the past year and a $200 million reduction in fourth-quarter selling and administrative expenses, he stated, “Despite these actions, we are nowhere near competitive levels of productivity or efficiency in all of our businesses. This is especially true in our apparel businesses at Sears and Kmart.”

But he said the Lands’ End business “sets a great example for the rest of our business units on how to use technology and innovation to drive growth. Despite a very difficult year for the apparel industry, Lands’ End had record profits in 2008 for the third consecutive year, with EBITDA [earnings before interest, taxes, depreciation and amortization] up over last year in its direct business and up even more including the Lands’ End shops at Sears.”

He added, “Over the past several years, Lands’ End has reinvented itself by shifting the balance of engagement in its catalogue business from phone and mail to online with a substantial majority of orders currently placed online.”

(For the full text of Lampert’s letter, visit

However, much of what Lampert had to say concerned the state of the economy, and he was highly critical of actions taken by the government to stave off financial disaster. “I appreciate that the free market can be a difficult master and that there is an important role for government and regulators, but I hope that as we move forward the rules of the game and the methodology for changing those rules will be more consistent and fair than they have been over the past year,” Lampert wrote.

He endorsed the writings of “Friedrich Hayek, the esteemed Austrian economist,” who warned in the early part of the 20th century “against the damaging impact of socialist policies” and “heavy intervention in markets and society at large.”

Referring to the importance of protecting civil liberties in times of war, Lampert wrote, “In times of economic and financial distress, we need to be similarly vigilant in protecting economic and contract rights so that we can continue to have a system that functions properly.

“Attempts to threaten or eliminate those rights will chase away the capital and investment that our country needs to restore prosperity and to thrive in the future,” he concluded.

Lampert has hardly escaped the ravages of the financial crisis. His 51.9 percent stake in Sears, worth $6.65 billion last Feb. 26, has fallen by almost two-thirds in the past year, to about $2.23 billion, based on Thursday’s closing price of $35.54, which was off 29 cents, or 0.8 percent.

For the three months ended Jan. 31, the owner of Sears and Kmart said net income fell 55.4 percent to $190 million, or $1.55 a diluted share, from $426 million, or $3.17, in the comparable quarter a year ago. Excluding charges for impairment, earlier store closures and other items, earnings per share was $2.94, ahead of analysts’ estimates of $2.68 tallied by Yahoo Finance.

Revenues declined 11.9 percent to $13.28 billion from $15.07 billion with comparable-store sales off 8.3 percent, 5 percent at Kmart and 11 percent for Sears.

For the year, income fell to $53 million, or 42 cents a diluted share, versus $826 million, or $5.70, a year ago. Revenues decreased 7.8 percent to $46.77 billion from $50.70 billion.

In his letter, Lampert said, “The decline in profit has been a source of concern, but we remain highly profitable with overall adjusted EBITDA for the year in excess of $1.6 billion.”

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