He’s been called a visionary, a financial genius and the next Warren Buffett.
He’s also been called a calculating wizard of real estate who shuffles assets for financial gain while performing a slow disappearing act with a stalwart of American retailing, Sears.
The one thing Edward S. Lampert, the chairman and chief executive officer of Sears Holdings Corp., has never been mistaken for is a retail merchant. He’s said to micromanage at both Sears Holding Corp. and the hedge fund he manages, ESL Investments, and get deep into the details. He’s described as assertive, inspirational and motivating, particularly on a one-on-one basis, when he’s strictly business and avoids conversing on a personal level. But he maintains a rigid point of view and if one of his strategies flops, it wasn’t his problem — the fault was in the execution.
This year, Lampert’s reputation and the fate of his Sears Holdings Corp. — formed in 2005 from the merger of Sears and Kmart — are on the line. He’ll be deemed either the savior of Sears or the wrecking ball. Investors have become adamant that the company must return to the black in 2016.
Lampert took control of the two chains more than a decade ago when they were already well past their prime. A turnaround would be a challenge for even the most seasoned retail guru. Sears and Kmart have hung on for decades, despite sustained losses, shriveling confidence among vendors, executive turnover and increasingly questionable relevance to shoppers in the age of fast fashion, Amazon, Wal-Mart, Home Depot and Lowe’s.
When he formed Sears Holdings, it was a $55 billion corporation. Now it’s down to $25.1 billion.
He’s kept the business running (if not steadily shrinking) through a stream of funding maneuvers, spin-offs, advancing the Shop Your Way digital platform, and big real estate transactions. But his net worth has shrunk with the value of Sears’ stock and his fortune is now estimated to be about half of what it was shortly after the formation of Sears Holdings.
Today, Sears remains more viable in hard goods and appliances, with around a 20 percent share with brands like Craftsman, Kenmore and DieHard, according to analysts. Strength in consumer electronics, including televisions — where Sears bet big — has been eroded by price compression and by the market for tablets and mobile phones peaking. Of Sears’ $14.9 billion in total volume, $7.9 billion was in hardlines last year, and $2.9 billion in apparel and soft home. At the $10 billion Kmart chain, more than $2.9 billion was in hardlines; $3.43 billion in apparel and soft home.
“For new Americans with moderate to low income, there’s decent value. The emphasis is on family shopping,” observes Craig Johnson, president of Customer Growth Partners. “Otherwise, traffic is a fraction of what it used to be. The stores are hugely unproductive and thinly staffed.”
While the stores have been starving for upgrades, Sears Holdings last year sold 235 Sears and Kmarts locations to Seritage Growth Properties, a real estate investment trust formed by Lampert himself, along with 50 percent interests in ventures with Simon Property Group, General Growth Properties and The Macerich Co., which together hold an additional 31 Sears Holdings properties. Through the deals, Sears Holdings raised $2.7 billion for greater financial flexibility, and the company leases back the majority of the stores. The developers in the ventures have the ability to convert 50 percent of the space they obtained to other retail formats or uses, leading to reduced square footage for Sears and Kmart. Sears Holdings still owns 419 of the 941 Kmarts and 731 Sears stores operating in the U.S. as of Jan. 30, 2016. There are plans to close some, though the locations haven’t been specified. Officials say it’s “a very small percentage” of the overall fleet.
Mark Dufton, chief executive officer of DJM Real Estate consulting, which has worked with Sears Holdings, says Lampert and his team are aggressively examining “every location for opportunities to create value and redevelop.” Among the real estate maneuvers: seven locations were turned over to Primark, the fast-fashion chain from Ireland, which entered the U.S. last year with two locations. At six Primark locations, Sears will have streamlined stores of around 100,000 square feet. Seritage is planning a redevelopment of a Sears store and adjacent land in north Miami’s Aventura Mall, which is being litigated with Aventura’s owners over issues related to the mall getting approvals for its proposed 240,000-square-foot expansion.
In the fourth quarter of 2015, Sears Holdings dove deeper into the red with a $580 million loss, compared with a loss of $159 million a year ago. Included was a onetime noncash accounting charge for the impairment of the Sears trade name. On an adjusted basis, the loss was $181 million, from a loss of $36 million.
Revenues fell 9.9 percent to $7.3 billion from $8.1 billion. Comparable-store sales dropped 7.1 percent for the quarter, with Kmart down 7.2 percent and Sears falling 6.9 percent.
Over the past five years, Sears Holdings has tallied net losses of $8.2 billion.
“Sears can’t go on losing that much money, but Eddie deserves credit for being among the first to see value in retail real estate assets when no one else was looking,” says one retail chairman who competes against Sears. “All along from the start, he knew it was going to be a slow liquidation, but of course he couldn’t say it. Then again, he made money for his investors,” largely through ESL Investments, which includes Sears Holdings, AutoNation, Lands’ End, Gap, Seritage and Sears Canada in its portfolio.
Lampert acquired a controlling stake in Kmart in 2002 for $1 billion, taking it out of bankruptcy and merged Kmart with Sears in 2005 to form Sears Holding Corp. Lampert’s entrance into retailing was greeted with rousing shareholder approval, catapulting the stock price from $14.75 at Sears, Roebuck in 2003 to $193 for Sears Holdings in 2007, and stirring those Buffett comparisons. Lampert’s fortune — and those of Sears Holdings investors — rose. Sears Holdings’ market capitalization was around $20 billion back then, and Lampert’s own net worth was close to $4 billion.
Fast-forward to the present: The stock hovers between $14 and $15; market cap is down to $1.6 billion, and Lampert is listed with a $2.3 billion net worth by Forbes. The euphoria has been supplanted by concern for the future of Sears and Kmart. Some see Sears Holdings as a zombie company undergoing a slow-motion liquidation, with a hidden agenda to use the retail cash flow to boost financial investments rather than elevate the stores and the merchandise.
Not everybody buys that theory. “Eddie genuinely wanted to build the company back,” says a former colleague at Sears Holdings. “Remember, he came into the business in 2003. He wouldn’t have stayed with it for these 13 years if he didn’t believe in it. If it was one of these Wall Street financial plays, Eddie would have sold it all off years ago. Unfortunately, he had to make some hard decisions to keep the business going.”
The retail iconoclast has had supporters, notably Bruce Berkowitz, a mutual fund giant and founder and chief investment officer of Fairholme Capital Management, which owns a quarter of Sears’ stock. Yet the stock declines have begun to irk Berkowitz, who in December repositioned himself as a Sears activist. Berkowitz’s own investors have been keen to understand Fairholme’s bet on the retailer.
During a conference call, Berkowitz told his backers, with no small amount of confidence, that: “Our thesis on Sears cannot be disproven: Sears has a vast real estate empire complemented by unique businesses. Sears also has constraints, and we understand those constraints.…We do understand today that the retail world is morphing, and we understand the challenge of optimizing a huge set of company assets.”
Still, Berkowitz stresses that Sears must start making money. “It is taking longer than I thought to maximize and monetize the enormous asset base under the Sears umbrella than we would have expected, but it is happening.”
Asked if the money Sears has spent trying to stay competitive has been worthwhile, Berkowitz says, “If Sears is able to return to profitability this year, which is the company’s most important focus during 2016, then yes, it has been worthwhile. A considerable portion of the past cash burn is voluntary based on the transformation of the retail businesses. The remaining portion is based upon the pension and rent expenses, which will go down with time.”
When he addressed the Sears board in January, Berkowitz focused on the continued cash burn and deteriorating confidence among all of Sears’ constituents. “I’m talking about Sears’ customers, vendors, suppliers, employees, creditors and investors,” he said at the time.
“The bottom line is not everyone has the ability to spend as much time studying Sears as we do,” Berkowitz notes, adding, “Most do not understand the vast asset base at Sears, and I recognize that most do not understand the complexity of optimizing all of the assets. More information and a little more hand-holding may be helpful — it sure won’t hurt.”
That leaves Lampert and Sears with the balance of 2016 to stem the flow of red ink.
Sources tell WWD that apparel suppliers are keeping an arm’s length, providing merchandise to fill the shelves, but not thinking long-term to move their Sears businesses forward or assume much risk. Sears Holdings’ apparel business consists of an office with buyers and merchandisers for Sears and Kmart in San Francisco in 2010, which helps the company attract talent and stay closer to trends. Design offices are located in Lower Manhattan and there’s a support team with planners operating at Sears headquarters in Hoffman Estates outside Chicago, posing some coordination challenges.
“We’re just going to service them. We’ll ship them goods, but not spend money building the business,” says one vendor. “The problem has been the turnover. There’s been so much, they can’t get a footing on what to do. There’s no jockey, no Marvin Ellison. No Michelle Gass,” the source says, referring to J.C. Penney’s ceo, and Kohl’s chief merchandise and customer officer, respectively. “No one is pushing. If Sears went away tomorrow, it’s not a problem for me. When you don’t engage with a supplier, you have nothing. They’re not engaged. For sure, I am building businesses with other companies.”
The partnership with Lands’ End, sold at more than 200 Sears doors, “needs to be more profitable,” Lands’ End ceo Federica Marchionni said last year. She hinted at changes to the wholesale distribution, but noted there are commitments with Sears that must be honored. Lands’ End was owned by Sears from 2002 until 2014, when it was spun off into a public company.
Lampert declined to be interviewed for this story, though in his last letter to shareholders, he writes: “While the weather conditions magnified our apparel problems in the fourth quarter, our apparel business nevertheless needs significant improvement. The operating leverage in our apparel business is significant — it can change our profitability meaningfully if we manage the business differently. As a result, improving our apparel business will be a priority for the leadership team in 2016.”
Last year “was more positive for us in other areas,” Lampert contends. “For example, we continue to be the leader in home appliances and complete solutions for homeowners. In 2015, we successfully launched our Kenmore PRO Appliance Suite, a new premium line of appliances that gives homes an elevated look without the need for costly remodels.”
Sears Holdings executives suggest that stores are not being ignored, despite industry impressions to the contrary. They tell WWD that they’re trying to bring “the fun” back to Kmart and last year restored the retailer’s “Blue Light Special,” considered the original flash sale introduced in 1965. The famous “Attention Kmart shoppers” tag line is back, too, heralding each special. Blue Light Specials are also online for the first time. Kmart started “freebie Saturdays,” giving out such things as cotton candy and mini footballs to kids, and there’s a new dress code for associates who wear Blue Light blue T-shirts with funny sayings on the back. Kmart also is “working on the functionality” of its Web site, and to lower inventory costs recently began sourcing “extreme-value” deals including inventory from liquidated firms and “other opportunistic situations” that could fuel the Blue Light Specials.
Sears, they say, is cooking up a yet another new strategy for apparel, which has been the Achilles’ heel for years. The company has said that in 2016 and future periods it intends “to improve the performance of our apparel business through changes to our sourcing, product assortment, space allocation, pricing and inventory management practices.”
“We are working to improve the softlines business,” a company spokesman says. “We still have strength on the hardlines side.” It’s premature, he adds, to divulge details of the strategy.
Lampert spends much of his time on Shop Your Way, which launched in 2009 essentially as a store loyalty program. It’s evolved to what he describes as “an engaging desktop and innovative mobile experience” and continues to grow its assortment, membership and benefits. He’s been on the forefront of technology, ahead of the industry on buy online, pick up in stores and delivery services.
His emphasis on Shop Your Way amid Sears Holdings’ shrinking store footprint has fueled perceptions the retailer is turning all digital. But Lampert states in his shareholder letter: “We are not becoming solely a digital company.” Rather, Sears Holdings is becoming an “integrated retail” company. “That means that our stores and our associates who work in our stores matter more than ever.
Last year, an array of services was introduced linking the shopping channels: a “meet with an expert” service enabling online shoppers purchasing home appliances, mattresses or lawn and garden departments to meet with Sears associates in the stores; an “in-vehicle” service so shoppers can pick up, return or exchange online purchases at Sears stores, in five minutes or less, without leaving their vehicles, and an in-store shipping service, providing free shipping on orders placed through mobile apps.
But only so much can be done, and as Lampert notes in his letter, cost burdens like higher minimum wages can be “the straw that breaks the camel’s back.”
Companies viewed through “a more traditional lens, like Sears Holdings, are met with skepticism even though we have an enormous asset base and a proven history of monetizing these assets and raising additional capital to fund our obligations and transformation,” Lampert writes. “The good news is that we have a vast portfolio of assets and businesses to draw from.” He also cites the possibility of one day opening smaller stores, though that seems remote now with the core base reducing square footage.
Credit is another concern. As one Seventh Avenue executive says: “I’m told Sears is borrowed to the hilt. They can’t really borrow much more and will continue to liquidate the assets to raise cash. Most of the plum assets have been sold [through the Seritage REIT] so I’m not sure what they have left.”
“Basically, they have made it clear they will need to raise money this year,” says the source. “Eddie is a financial engineer so he may pull something out of the hat.”
There’s speculation Sears could cut real estate deals with such companies as Amazon or Alibaba, which are evolving from pure online plays to omnichannel businesses requiring warehouses and brick-and-mortar stores. Any deal could help pull Sears Holdings out of its hole.
“Somebody at Sears once told me that Eddie’s biggest problem is that he has been a billionaire too long, that he’s lost touch with the consumer,” says the Seventh Avenue source. “He makes decisions, but doesn’t really understand the consumer. He’s shy, reclusive, awkward, but very bright, more of a real estate, value guy than a retailer. You’ve got to know something about the merchandise. You’ve got to be outgoing like Terry J. Lundgren or Burt Tansky,” Macy’s ceo and the former ceo of Neiman Marcus Group, respectively. “You’ve got to be able to step down onto the sales floor and sell something.”
Sources say Lampert doesn’t like to get on a plane and prefers people flying in from the San Francisco and Chicago offices to his offices on the East Coast.
“He would drive everybody nuts. He would create this daily or twice-a-week conference call and totally not be aware of the time zone. People on the West Coast would have to wake up at an ungodly time — 4 a.m.,” says an industry source who no longer deals directly with Sears Holdings.
“When Eddie articulates, he makes you feel like you can really make something happen. He’s very dynamic. He thinks outside the box. Unfortunately, once you got into it, it was hard to get traction. Over time, it just waned,” says a source who worked at Sears Holdings and requested anonymity. For someone running a huge public company, the 53-year-old Lampert has managed to maintain a relatively low profile. “He definitely keeps to himself.”
One former ceo and competitor who knows Lampert says, “He’s never been a public kind of guy. He’s very introverted. When he lived in Greenwich [in Connecticut], I never saw him. He may be very charitable, but you don’t see him out and about.”
The low profile could partly stem from being kidnapped in 2003 by four men from the Greenwich parking lot of his ESL office. After being held in a cheap hotel for two days, Lampert, using his powers of persuasion, convinced the kidnappers to free him for $5 million. While he was presumed to be getting the money, the kidnappers used Lampert’s credit card to order pizza, a transaction that the fraud department of the credit card company used to tip off the FBI, which proceeded to arrest the kidnappers.
“His intelligence is almost a negative,” says the former ceo. “It’s like he’s smarter than everyone else in the room. When companies fail it’s because of leadership. They succeed when leadership conveys to management how important they are. Lampert impresses me as a very smart guy, but that doesn’t necessarily mean he can be successful. You’ve got to be very close to the product, the people and the competition.”
“He is better as a real estate asset owner than as a retailer,” adds Johnson, of Customer Growth Partners.
Founded as a mail-order catalogue company in 1886, Sears, Roebuck & Co. didn’t open its first store until 1925. Sears eventually became a broadlines retailer and the iconic American department store. It was the largest retailer in the U.S. until 1989, when Wal-Mart took the lead.
The golden era for Sears and Kmart extended from the Fifties to the early Eighties during America’s suburban sprawl and when malls and strip centers proliferated. Sears was typically the anchor of choice for mall developers and Kmart was the anchor of choice at strip centers.
Lampert acquired Sears, Roebuck in 2005 in an $11 billion deal. He merged Kmart and Sears into Sears Holdings Corp. Initially, he was seen as Sears’ savior, given his rescue of Kmart, though from the get-go at Sears, there was skepticism that Lampert’s vision to combine two antiquated companies could create one bigger, healthier company, even given the opportunities for consolidations, greater buying clout and synergies. The financial strategist side of Lampert continues to take heat from those claiming he was primarily interested in DieHard, Craftsman and Kenmore, and monetizing Sears Holdings’ vast retail real estate, the best of which is believed to have been sold to Seritage.
In other deals, Lands’ End was spun off into a public company to generate a $500 million cash dividend for Sears; a rights offering for senior unsecured notes and warrants raised $625 million; a rights offering for Sears Canada raised $380 million, and a short-term $400 million loan was obtained from Lampert’s ESL. And that’s just between 2014 and 2015. Lampert also spun off Sears Hometown, Sears Outlet Stores, Orchard Supply Hardware and Sears Canada. And in 2006, he transferred ownership of the intellectual property for Sears’ key brands — Kenmore, Craftsman and DieHard — to a bankrupt-protected entity called KCD in a $1.8 billion securitization bond. KCD now charges Sears a royalty fee for the licensing of the brands and is listed as a subsidiary of Sears Holdings.
Jeff Edelman, director of retail and consumer products advisory services for RSM, was a retail and apparel analyst for more than 40 years. He recalls that in the Seventies, while he worked at Dean Witter, “Sears had a campaign that said ‘Sears Is Where America Shops.’ I put out a report that said, ‘Sears Is Where America Used to Shop.’ Sears was already starting to struggle back then. This was before the growth of Kohl’s. The malls had started changing and we saw the [early] growth of Wal-Mart and Target.
“I went into a Sears store the other day and there’s no merchandise creativity. Lingerie is displayed on pegboards. There’s nothing exciting about the stores. That’s why we see the steady decline in sales per square foot.” Edelman estimates that the transaction volume at the average Target store is three times that of a Kmart, and almost two times that of a Sears.
“I think the original reason [Lampert] bought Sears and Kmart was because he felt the real estate value was greater than the market value of the whole company,” Edelman says. Now he believes the hedge fund manager doesn’t have much left in his financial bag of tricks and is “running out of options.” Remaining real estate sites may be harder to monetize, he adds.
Mary Epner of Mary Epner Retail Analysis did have an option in mind for Sears Holdings: encourage e-tailers to lease permanent space or create pop-ups inside Sears and Kmart to create some interest, though that would be a tough sell given the traffic and productivity concerns. She believes the two chains can’t stay as they are. “Sears may have more validity than Kmart because Kmart product could be found anywhere. It’s hard for Sears and Kmart to compete with Wal-Mart, Target and Amazon. There are not enough distinguishing characteristics,” although Kmart’s layaway program is appealing for customers, the retail consultant says.
Fitch Ratings has a “CC” rating on Sears Holdings, meaning “very high levels of credit risk” and “a default of some kind appears probable.” A default can be caused by a distressed debt exchange, a bankruptcy filing or a missed payment, according to the ratings agency.
Monica Aggarwal, managing director at Fitch covering Sears, says, “Department stores as a whole have had strong recognition that there’s been mall traffic declines, with the channel leakage having shoppers headed to Wal-Mart, Amazon and other online sites and retail outlets.” Sears and Kmart, she adds, “have been losing market share for years, which is not a surprise when they are spending 1 percent on capex [capital expenditure] and their competitors are spending 3 percent.”
Fitch projected the Sears Holdings cash burn rate at between $1.6 billion and $1.8 billion for 2016, and earnings before interest, taxes, depreciation and amortization in the negative $800 million to $1 billion range. The plan to obtain a term loan of up to $750 million due in 2020 will help offset the April 2016 reduction of the credit facility — the revolver will shrink to $2 billion from nearly $3.73 billion — during the third-quarter peak borrowing season.
Aggarwal is not optimistic about Sears Holdings: “The fact that we are projecting midsingle-digit negative comps and an EBITDA performance the same [in 2016] as in 2015 shows that we don’t think the turnaround is going to happen.”
Dealing with labor and rent costs, and managing for liquidity, makes it hard to invest in the store base, she explains. On the other hand, Aggarwal points out, “When you still get $25 billion in sales, it’s hard to say the customer has entirely gone away.”