NEW YORK — Edward Lampert continues to leave them guessing.

Lampert is head of ESL Investments, the hedge fund that bailed Kmart out of bankruptcy and that holds the largest single stake in the firm. He’s also chairman of Kmart, but that hasn’t stopped him from building his Sears, Roebuck & Co. holdings to 8.9 percent of the firm, the second-largest stake, as of the March filing of the retailer’s definitive proxy with the Securities and Exchange Commission. ESL’s holdings trail only those of State Street Bank and Trust Co. While SEC documents have yet to bear them out, reports say ESL and State Street have increased their Sears holdings in recent months.

Lampert’s varied holdings have left some industry observers scratching their heads wondering about the nature of his game plan, and they’re certainly spurring debate about what could be happening behind the scenes between Sears, the nation’s third largest nonfood retailer, and Kmart, which ranked fifth in volume last year.

In the meantime, Lampert’s Sears stake, worth about $512 million when the stock bottomed out at $18.25 on March 17, has ascended to over $900 million, based on Friday’s closing price of $32.09.

“Not a bad return,” commented one credit specialist.

Lampert is no stranger to retail. In addition to being Kmart’s largest shareholder, he also holds positions in AutoZone and AutoNation. His other investments include Footstar, which operates the Thom McAn footwear departments at Kmart and has a growing business with Wal-Mart Stores too, and the bankrupt WestPoint Stevens, one of the vendors that produce Martha Stewart Everyday home products for Kmart. Lampert said following Kmart’s exit from bankruptcy last month that he planned to take an active role at the discounter.

Those retail ties and shareholder stakes have kept him busy, particularly since Lampert and his associates often take on active roles in pushing for change at firms where their investment stakes are high.

According to one retail source close to Sears, “This is definitely a story to keep an eye on.”

Lampert seems to delight in keeping pundits and media guessing. Abiding by previous practice, ESL didn’t return phone calls seeking comment for this story.As reported in WWD, the rumblings since February involved Lampert pushing for a possible link between Sears and Kmart, although an outright merger seems extremely unlikely. James Harris of the investment banking firm Seneca Financial Group observed, “He doesn’t have enough capital to do it and he doesn’t have a board seat [at Sears].”

That doesn’t mean he doesn’t have influence, though. A Sears spokeswoman declined comment on reports of an increased ESL stake in Sears or Lampert’s involvement in recent initiatives, such as the decision to sell its credit card business. He didn’t seek representation on Sears’ board at the firm’s annual meeting on May 8.

Lampert is likely to be paying close attention to the new Sears Grand concept, which is scheduled to debut with a freestanding 210,000-square-foot off-mall location in Salt Lake City in October. Similar stores are expected to open in Chicago and Las Vegas as early as the second half of 2004. In addition to the selection one might find in a Sears mall anchor, toys, CDs and a pantry section are included, with the assortment tailored to the locale.

The evolution toward mass merchandising is obvious, as is a possible tie-in with Kmart store sites. Both stores face uphill battles in the face of their own weak fundamentals and the growth of competitors ranging from Wal-Mart and Target to Kohl’s.

According to Emanuel Weintraub, an industry consultant, “Sears Grand has the potential to be a great idea, but there is acore business problem at Sears that first has to be fixed involving the merchandise mix and the value proposition relative to that. That should be Sears’ main focus. No one says that an American icon like Sears has to stay in business.”

One retail executive in the discounting sector pointed out that Sears and Kmart are stores with similar problems: “I haven’t seen a coherent and consistent merchandising policy and the logic of Edward Lampert putting money into the [two] no one knows….The two companies are adrift.”

Others continue to peg the 40-year-old Lampert’s interest as a real estate play, with Sears getting an advantage on some of Kmart’s lease interests should the discounter not survive. But Walter Loeb of Loeb Associates doesn’t think that is necessarily the case: “Many people think the real estate under the stores is worth a lot. But the real estate is only worth something as long as there’s a store sitting on top of it. With so many retail sites available, Sears could easily get better locations than the ones held by Kmart and possibly at just as favorable rents.”Sears on Tuesday was rated a “sell” by According to the investment firm that distributes research to institutional and individual investors, the ranking of Sears changed because “for the moment, it remains sluggish and investors may want to wait on a Sears position until improved conditions get the company’s earnings estimates higher.”

While Zacks noted that the latest same-store sales drop — 1.9 percent in U.S. stores last month — represented the retailer’s 21st straight monthly decline, it pointed out that Sears is a “staple of American retail and should be able to break through once the environment improves.”

On that note, a few are wondering if maybe Lampert is just doing what all vultures do best, making investments based on asset valuations even if that approach means that the fund ignores the retailer’s marketing position or retail merchandise strategy.

Richard Hastings, credit economist at Bernard Sands, said, “Lampert is definitely a name now connected to Sears. If you look at the stock price and how it has trended, one can argue that there was an opportunity for someone to move in and make some money. Lampert probably got some underlying value at a cheap price. Sears’ equity has been a bargain based upon its dividend yield, price-earnings ratio, and expectations of huge cash inflows from the credit card sale.”

Elaine Hughes, an executive recruiter who tracks the comings and goings of the executive merry-go-round at retail, noted there is potentially a huge opportunity for Lampert regarding a new strategy involving the two retailers, but not necessarily via a merger. “I’m betting that he and his advisers are in the process of determining who are their customers, what are the synergies, what are the possible combinations and which is the more dominant name,” she said. “If you think back to Woolworth, which had a connotation of being a five-and-dime, management at the time brought it back from the brink to a successful story through a name change and a reformatting of the strategy to fit the name change. That wouldn’t be a bad path for Sears and Kmart to follow.”

Another industry executive speculated that Lampert’s increasing interest in WestPoint Stevens could possibly give him control over a textiles firm that helps his investments at the two retail chains:Trading of Kmart stock last Tuesday moved to the Nasdaq, where shares finished the week at $18.50, down 6 cents, or 0.3 percent, in Friday trading.

Separately on Friday, Kmart confirmed that Barbara Firment, senior vice president of advertising, has left the firm.

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