Sears Holdings Corp.’s latest quarterly report was dismal, but chairman and chief executive officer Eddie Lampert is doing just fine.
After seven years of working to transform itself by evolving into a more integrated retailer, the company continues to close stores and see its cash evaporate. In response, Sears plans to close another 100 stores this year, which will allow it to “optimize our cost structure and enhance our liquidity,” said Robert Riecker, the group’s chief financial officer after Sears Holdings posted a $424 million loss for the first quarter.
While executing Lampert’s “Shop Your Way” model of retailing (which includes a broad-based consumer rewards program), the cfo said the firm is simultaneously exploring “creative ways to unlock the full potential of our company’s assets, including through game-changing partnerships.” Indeed. Last year’s first-quarter earnings were buoyed by a net gain of $492 million from the $900 million sale of Craftsman to Stanley Black & Decker. The brand is now available at Lowe’s as well as via “flash sales” on sears.com.
The other asset deals include putting Kenmore on the block, and the buyer could be ceo and lead investor of Sears, Eddie Lampert himself. Also for sale is the Sears Home Services business. The move follows several years of financial deals engineered by Lampert that have helped keep Sears afloat.
Some analysts are saying time is running out for the company. At the current “burn rate” of cash, Sears has about a year to turn itself around. But I don’t think that Lampert is looking to turn Sears around or transform it. He just needs to reduce operating costs, increase cash flow and service the debt. Sears Holdings is indeed going through a transformation, but it’s not what most people imagine. It’s sort of like slowly deflating one balloon (Sears Holdings) and using the air to inflate another (Eddie Lampert’s pockets). But more on this in a second. First, let’s look at the company more closely.
Sears, Roebuck and Co. was first incorporated in 1892. It was a mail-order company with a catalogue that swelled to over 320 pages by the turn of the century. And it had stores. Lots of them. By the Fifties, the company rolled out department stores across major cities in the U.S. as well as Mexico and Canada. And through the Sixties and Seventies, Sears was the top choice among mall developers looking for anchors. It didn’t take long for it to become the largest retailer in the U.S. — until the late Eighties, when Walmart muscled in.
In the Nineties, Sears was roiled by a recession and an overall consolidation across the industry. But the company stabilized by 1999 or so. At the time, analysts praised then-ceo Arthur C. Martinez (formerly cfo of Saks Fifth Avenue) and his executive team for navigating a tough market. In the early Aughts, I had seen Martinez, who was chairing the National Retail Federation, speak at the association’s trade show and convention. The main hall at the Javits Convention Center in New York was jammed, and I found a table near the back with the late retail economist Kurt Barnard as well as Howard Schultz, who had recently resigned as ceo of Starbucks, he said. I didn’t know what Starbucks was. But as Martinez and others took the stage, all three of us took copious notes.
It was a riveting time to be involved in retail. E-commerce was new, and pioneers such as Jeff Bezos and Frank Poore (who created the drop-ship model) as well as Stephan Schambach (who created the software that made e-commerce possible in 1995) were not well-known to traditional retailers and were not among the speakers on stage. Still, there was a sense of renewed energy for retail. I don’t remember exactly what Martinez and the other speakers said that day. But I remember what they sounded like: merchants.
Merchants use words such as “customers” instead of “consumers.” They talk about end-caps and gondolas. And planograms, too. All aspects of products are discussed. With apparel, that means silhouettes, sizing, fit and feel.
In 1999, Sears was a top merchant, and it had over $33 billion in annual sales and profits of over $500 million. Today, Sears Holdings has sales that are less than half that at $15.3 billion. And it’s unprofitable. Moreover, as a public company, the market capitalization of Sears was $2.2 billion in the early Aughts. It’s market cap peaked around 2007 at more than $27 billion, according to S&P Capital IQ. That was a few years after Lampert and Kmart bought the company and renamed the new grouping Sears Holdings.
Today, the market cap is around $300 million and the stock is trading around $2.30 — down 93 percent from where it was five years ago and down 100 percent since Lampert took control of the company in 2005.
What happened? Eddie Scott Lampert is what happened.
Lampert is not a merchant. He’s a hedge fund manager who is the founder of ESL Investments, based in Bay Harbor Islands, Fla. Lampert is the top individual investor of Sears Holdings with just over 30 percent of the shares. Of the hedge funds that own the stock, Lampert’s ESL holds about 19 percent. The rest is divided up between another hedge fund and institutional investors as well as in public shares. So it makes sense that Lampert would use ESL to bail out Sears with loans, or, now, by wanting to buy up assets. He’s got a lot at stake.
Journalists, retail executives, investors and analysts have spent the past decade trying to decipher Lampert and his motives, and what that stake really means. Most recently, Lampert was extensively featured in an April Vanity Fair story that retold his famed kidnapping and also noted how critics are calling the company a complete failure as an investment. Two years ago, WWD tried to make sense of Lampert, too. In a 2016 article titled “Eddie Lampert: Saint or Sinner?” the story had industry observers question whether the ceo’s strategy would save or destroy Sears.
But everyone was wrong. Their analysis positions Sears as a retailer that is looking to turn itself around. It’s not. Remember the balloon? All Lampert needs to do is patch up any pinholes in the Sears balloon while it slowly deflates and fills into his balloon. That’s why he doesn’t care about the state of stores, or the impact of closures on consumers or employees. In the WWD article, Bruce Berkowitz, founder of Fairholme Capital Management (which owns 16 percent of Sears), who has likely studied Sears more than anyone else, said no one truly understands all of the assets and value of Sears Holdings.
But Lampert does. In fact, Seritage Growth Properties, a publicly traded REIT that currently owns 230 properties along with 23 joint venture properties, was created by Lampert in 2015 as a way to unlock the real estate value of Sears. He also controls about 35 percent of the debt of Sears Holdings, according to several analysts — which means if the company ever went bankrupt, he would be one of the entities to be paid first in a restructuring.
To reiterate, Eddie’s play is simple: He needs Sears to either generate more cash flow to fuel his alternative investments (such as derivatives) or unlock the value of the assets (even if ESL is the buyer) — or do both. The caveat is that he also needs to service Sears’ debt. In the first quarter, the total debt to equity was leveraged at a whopping 390 percent. But that’s down from where it was in the fourth quarter at 677 percent. Lampert needs to get it down to where it was in 2015 — at about 130 percent. Or even lower. Lampert can either do it or the company goes bankrupt. Either way, Lampert walks away a winner.
He founded ESL Investments in 1988 with $28 million. The company is an employee-owned hedge fund with three other executives. Aside from Sears Holdings and Seritage, ESL’s direct investments include Lands’ End Inc., Big Lots Inc. and AutoNation. As an investor, one of Lampert’s idols is Warren Buffett, the Oracle of Omaha. Years ago, the media pondered if Lampert would become the next Buffett.
At 55, it’s unlikely Lampert can make another $80 billion to catch up to Buffett. Still, through his various investments at ESL, Lampert’s net worth today is valued at a comfortable $2 billion. Not bad for the ceo of a distressed retailer.
Viewpoint is a periodic opinion column featuring an expert perspective on industry matters.