Eddie Lampert’s Debacle at Sears

Kmartmarriagelarge
This morning, the papers are rife with stories about the debacle that is Sears (SHLD).

Once America’s largest retailer, it now finds itself between a rock and a hard place — down market from Target, but not as cheap as Wal-Mart.

Jesse Eisinger’s piece in Portfolio — The Marriage From Hell — is a must read; he calls to task the man who has been prematurely called "the Next Warren Buffett."

Lampert’s most recent investment’s have been in Citigroup — at significantly higher prices. (Not very Buffett-like) 

You can then round out the morning with the WSJ (Why Sears Must Engineer Its Own Makeover) and NYT (Sears Warns of Another Steep Drop in Profit).

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Go figure: A hedge fund manager with no retail experience is having a hard time turning around these two faded giants on the cheap . . . Who ever could have seen that coming?

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Sources:
The Marriage From Hell
Why Eddie Lampert’s failing Sears-Kmart experiment could mean trouble
for dealmakers everywhere   
http://www.portfolio.com/news-markets/national-news/portfolio/2008/01/14/Kmart-Sears-Merger

Why Sears Must Engineer Its Own Makeover
Retailer’s Profit Warning Signals a Persisting Slide; Rivals Hurt Storied Brands
GARY MCWILLIAMS
WSJ, January 15, 2008      
http://online.wsj.com/article/SB120031054573888263.html

Sears Is No Berkshire Hathaway, Just A Troubled Retailer
Maxwell Murphy
Dow Jones, January 14, 2008: 03:00 PM
http://money.cnn.com/news/newsfeeds/articles/djf500/200801141500DOWJONESDJONLINE000635_FORTUNE5.htm

Sears Warns of Another Steep Drop in Profit
MICHAEL BARBARO
NYT, January 15, 2008 
http://www.nytimes.com/2008/01/15/business/15sears.html

Lampert: Architect of Sears-Kmart Deal Compared To Buffett
Greg Levine,
Forbes, 11.17.04, 5:49 PM ET
http://www.forbes.com/2004/11/17/1117autofacescan05.html

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What's been said:

Discussions found on the web:
  1. Deborah commented on Jan 15

    Lampert should have sold the real estate when it would have commanded a high price. He should have hired a management team with extensive retail experience.
    I do give him credit for cleaning up K-Mart, but the prices for staples there are high, and its cooler to shop at TGT. SEARS needs to get rid of their line of junky, smelly clothes. It’s still a good place to buy tires.

  2. JT commented on Jan 15

    Jim Cramer did not see it coming!

  3. dukeb commented on Jan 15

    But Eddie is Crazy Jim Cramer’s man! He *believes” in Eddie! He *believes* in the stock! Eddie and Crazy Jim were at *GOLDMAN* together! They’re buds!

  4. Wayne Mulligan commented on Jan 15

    He has great financial discipline – much like Buffett — but no operational experience. He should have stuck to his core competency and just focused on capital allocation. Then the move would’ve been to go out, find the best managers, incentivize them with some of that equity he owns and let them run the show. I feel like I’m watching the movie Wall Street and Bud Fox is trying to run Blue Star airlines.

  5. jds commented on Jan 15

    I took my disabled sister shopping just before Christmas to Sears, Kohls, Target, ToysRUs, WalMart and Burlington Coat Factory, in that order, all in one day.

    The Sears store was virtually empty, as was the parking lot, I thought we would have easy sailing at the rest of the stores we planned to visit. At the other stores, we could barely find a parking spot, and had to fight our way through the stores and endured endless lines.

    Sears was a mid century brand, now it can’t compete with the discounters or the mid-market retailers.

  6. jds commented on Jan 15

    I took my disabled sister shopping just before Christmas to Sears, Kohls, Target, ToysRUs, WalMart and Burlington Coat Factory, in that order, all in one day.

    The Sears store was virtually empty, as was the parking lot, I thought we would have easy sailing at the rest of the stores we planned to visit. At the other stores, we could barely find a parking spot, and had to fight our way through the stores and endured endless lines.

    Sears was a mid century brand, now it can’t compete with the discounters or the mid-market retailers.

  7. Strasser commented on Jan 15

    Sears: one of the difficulties with Sears is their inventory, or lack of. We have not gone into one for several years and wouldn’t think of shopping there now: on several occasions we would go to buy an advertised item, and it would be out of stock. Reminded me of Montgomery Ward’s problems. Montgomery Ward?

  8. cinefoz commented on Jan 15

    Why I rarely shop at Sears:

    1) Stores look like sloppy messes. Departments exist, but look more like organized corners than differentiated products areas with distinct purposes.

    2) Cloths are of unknown quality. Lands End is good but only partially available. Other brands are frequently house labels. Style is is below average mass market. Quality is acceptable. I’d rather go to a store that has mostly name brands or famous house brands than Sears substantial number of underclass brands.

    3) Craftsman is good, but not longer king. More differentiation needed. Home Depot or Lowes is more of a first choice for tools and other home improvement needs. No reason to consider Craftsman first.

    4) Ditto for Sears appliances, but you can add Best Buy and many other outlets for good places to buy.

    5) Given the weaknesses above, there is nothing special about going to one of their sales.

    6) Considering I can buy Nat Nast or Tommy Bahama on eBay for a fraction of list if I shop wisely, why would I go to Sears?

    The Best Thing About Sears … Their extended warranties and related service. They are several steps above outstanding. We have a treadmill purchased about 10 years ago from Sears. As is common, it breaks. Sears in home service is always on the spot in repairs. The cost is not too bad, as compared to the cost of a service call without a treadmill warranty.

  9. Michael C. commented on Jan 15

    Regarding these comments on Sears, ie. smelly clothes, empty stores, etc…I remember thinking these exact things when the stock was at $15. That didn’t stop it from going to $150.

  10. cinefoz commented on Jan 15

    I can imagine the Sears bureaucracy hindering the improvement process. The status quo factions and their low level functionaries probably excel at telling top management what they want to hear, which probably involves the great success of all of their ideas. Clashes with reality are probably met with blank stares and innocent looks.

    As is common with all incompetent managements, anyone with real creativity or good ideas is probably sent packing. Job protection is priority one. Political instincts are king, not the customer.

  11. Greg0658 commented on Jan 15

    It is so hard to retail in this blitzy world of gotta be seen where its cool to be seen – everyone needs a job – what kills me is an empty retail heated or air conditioned store

    Detroit cars are not that bad – but momentum got going – add the push for foreign growth – here we are

  12. Ross commented on Jan 15

    I am old enough to remember when Mobil Oil bought Monkey Wards. That didn’t turn out well either.

    When I was a kid, the rule was: Go to Sears for appliances and tools. Monkey wards was great for automotive and J.C. Penny had the best underware at the best price. Then K Mart whacked them all. Then Wally World whacked K Mart.

    Seems to be just a cycle.

    My great uncle exclaimed to my great grandmother back in the 30’s “we sure had a lot of company this summer. In the outhouse we’re all the way to the farm implement section in the Sears Roebuck catalog!”

  13. cinefoz commented on Jan 15

    There is something garish about many GM cars. The Chevy Malibu is a departure from the Chevy ‘look’. GM frequently has big round lights, funny looking grills, and giant emblems that shout “Here’s a cheap car”. Ratcheting down the uglies would make a big difference in GM sales.

  14. cinefoz commented on Jan 15

    Ross said:

    J.C. Penny had the best underware at the best price.

    reply: Still true. Probably always will be.

  15. dblwyo commented on Jan 15

    Actually in fairness to Jesse he called it the due the original buyout occurred if you could go back and look at his Ahead of the Tape columns from then. You’d then also notice that, ahem, in the comments is my strategic assessment arguing that Sears needed an operational makeover, innovation in it’s business model and value proposition and serious investment. We jointly speculated this was a) a real-estate/financial engineering play by b) somebody who didn’t know what they were doing. It looks like reality has converged on the theory. So here’s the interesting point – while reality was catching up it was sure a great short-term investment opp. And conversely for shorting on the downside.
    Why didn’t anybody else see it/play it that way ? Who/What else is out there now ?

  16. me commented on Jan 15

    Eddie is a prime example of how MBAs ruin good companies (or as president, the country). They are all numbers and financial machinations and don’t know a damn thing about running a business.

    I also have noticed Lands End quality taking a pretty big slide lately. Has Mrs. Big Picture said anything about having to return a lot more stuff?

  17. zero529 commented on Jan 15

    Ross wrote:
    My great uncle exclaimed to my great grandmother back in the 30’s “we sure had a lot of company this summer. In the outhouse we’re all the way to the farm implement section in the Sears Roebuck catalog!”

    What’s wrong with reading on the potty? oh wait . . .
    * * *

    I have a special place in my heart for Sears after the KMart shares my dad bought for me were instantly wiped out, and new SHLD stock was issued for the new management but commoners like me were left completely out in the cold. punks.

  18. larry commented on Jan 15

    Shortly after Eddie got involved and after the first round of layoffs, a friend of ours that was one of the survivors at hq legal asked for a Blackberry due to the massive travel that she was now undertaking due to the cutbacks. She was told to go buy one herself and if it worked out they would reimburse her. It worked out as she shortly left Sears and got a hq legal position with a Fortune 100 co. Who do you think still works at a company that treats people like this- has beens,, never weres and never will bes.

  19. m3 commented on Jan 15

    Lambert is too busy running his hedge fund ESL Investments to deal with SHLD. Lampert doesn’t even run the company; the CEO is some guy named Aylwin B. Lewis.

    I never understood why Cramer thought that someone who really isn’t even with the company on a day to day basis could turn it around.

    Also, Lampert doesn’t even have experience running retail; he’s a fund manager for heaven’s sake.

  20. Ellis commented on Jan 15

    Gotta love TBC: from the macro perspective on capital markets to the best deal on undies

  21. michael schumacher commented on Jan 15

    A title for a new Fox reality show:

    “When financial Engineering goes wrong”

    or gets greedy……

    Ciao
    MS

  22. Innocent Bystander commented on Jan 15

    I too am old enought to remember when Mobil bought Montgomery Wards. It was a case of an oil company wanting to diversify. Mobil finally did get rid of it Montgomery Ward. It was truly a dumb MBA idea. Sears did have a brand of jeans for fat kids though.

  23. Andy commented on Jan 15

    Always park at Sears at the mall though. It will always get you the closest parking spot to a door. This advice has never failed me, even the busiest malls, like Woodfield near Chicago. Try it sometime.

  24. Mike G. commented on Jan 15

    God I hope they don’t go under. I can always count on a parking spot outside of Sears!

    In fairness, when real estate was booming Lampert had a shot at leveraging that un-tapped $ into something not remotely resembling the sick combination of crappy retailers he purchased in the same way Buffet leveraged a men’s clothier into the colossus that is Berkshire Hathaway today. But when his bank (the property value) went south, he traded the potential of colossus-ness for the reality of a financial/retail colostomy bag.

    But even in the original plan, I don’t see how he thought he was going to lever anything unless he did something to actually get people into the stores. It makes no sense to corner the gulag segment unless you are going to fix it up and make them places people actually want to set foot in.

  25. crack commented on Jan 15

    The linked to article makes Lampert seem almost like an anti Buffett. Buffett isn’t into running companies. He finds management teams he likes and companies he thinks are in a position to maintain their positions indefinitely.

  26. Joe Terralinda commented on Jan 15

    Wait a minute, Buffett bought both USB (US Bancorp) & WFC (Wells Fargo), those both sound kind of like C (Citigroup) to me. Eddie is doing the same stuff that Buffett did, I don’t think this story is over yet. I think Sears goes lower, but I would be a buyer below 60 as long as there isn’t a huge load up on debt, because I think that there will be some much needed high profile bloodletting.

  27. Larry commented on Jan 15

    Another story of squeezing the company for cash, but not investing in the stores, information technology, marketing or people.

    From http://consumerist.com/tag/sears/, we have stories of under staffed and unmotivated sales people, abysmal customer service, etc.

  28. BDG123 commented on Jan 15

    I realize we all make mistakes but Lampert has little in common with Buffett. Either in investing acumen or ability. He benefited from the biggest asset bull in history of the last fifteen years and he top ticked the real estate market plus or minus a few years when he bought Kmart and Sears. Prognosticators were calling him genius because of the underlying value of his real estate holdings. But, now we know all he is holding is a very large bag of very undesirable retail real estate. The models used to value that real estate were as incorrect as anything discussed this cycle.

    Lampert showed a clear lack of appreciation of economic dynamics and risk when buying both as well as buying Citi. In addition, Lampert appears to be a control freak who has replaced professional managers with decades of experience with…… ….himself. I know this first hand because I worked with the executive team of one of his acquisitions that he has apparently screwed up even more than the king before him.

    Buffett? More likely comparison is to the local $5.99 all you can eat Chinese Buffett.

  29. Loren Steffy commented on Jan 15

    BizLinks | 1.15.08

    Citigroup Posts Record Loss on $18 Billion Writedown Worker dies at BP refinery in Texas City Nobel winner’s bottom line: No poor people Disconnect in Oil Prices ($) — demand appears to be declining in industrialized nations. Support grows…

  30. Michael Donnelly commented on Jan 15

    BR great post, thanks for the laugh.

    crap-mart and Sears was always two drowning giants clutching each other on the way down it was never going to work.

    But this deal was never about running a retail store the entire reason the deal was done was to sell the K-Mart real estate and reap the billions.

    Mission accomplished. If you sell a few hammers along the way all the better.

  31. donna commented on Jan 15

    I hate Sears for merging with and destroying Lands End. Used to love that company.

    Sears sucks.

  32. Shrek commented on Jan 15

    There is a limit to the amount of financial engineering the US economy to take. Seems like we’ll be finding this out for at least a couple of more years.

  33. red95king commented on Jan 15

    Quit picking on cramer! Its not his fault he made his (hundereds of) millions on favorable IPO deals before it was illegal! sheesh…lol

  34. Comma8 commented on Jan 16

    After a layoff 5 or 6 years ago, I worked at a Sears in rolling out a market test of an in-store internet cafe concept. The idea was that young adults would try the stores and that the cafes would generate foot traffic. Didn’t work in the slightest. Just a few more employees with idle time.

    Even back then, an anchor store where I spent a lot of time had maybe a dozen customers on two floors – a virtual 1:1 ratio to on floor employees. I also noticed a high proportion of “career” Sears people. 10 + year employees pulling benefits and presumably better than average retail wages. It really seemed like I was in a bit of a time warp and I wondered how they kept it going.

    My theory was that their near predatory credit practices were one part of it — subprime before it was cool, they’d extend credit to folks and lock them in at APRs between 32 and 40%. The statements and rates that walked through the door for cash payments were astronomical – near indentured servitude for the folks unfortunate enough to get roped by the Sears machine.

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