Sears has survived two world wars and the Great Depression. But after a decade under the control of a former Goldman Sachs executive turned hedge fund manager, the 130-year-old retailer is imploding.
Sales have fallen by half since 2007, and the company is burning through cash, closing stores, and slashing jobs in an attempt to stanch the bleeding. Even after it raised $3 billion by spinning off assets last year, it ended 2015 with less cash than it started with.
The man in charge of Sears, Edward S. Lampert, has blamed the company’s decline on shifts in consumer spending, the rise of e-commerce, and unseasonably warm winter weather. And while other retailers are also struggling, analysts take the demise of Sears, which owns Kmart, as a matter of when, not if.
What sets Sears apart from other suffering retailers is something that’s not as easy to understand: Lampert’s obsession with putting shareholders before everyone else, which has been attributed to his dual role as the company’s chief executive and its largest investor. But in that position, Lampert has suffered along with other investors.
When Sears was flush with cash, it took the form of billions of dollars of share repurchases, even if it meant the stores suffered years of underinvestment. Repurchases, or buybacks, are common among cash-rich companies, but also derided in some corners as a waste of a company’s resources as they only serve to create the appearance of improving earnings.
In the early days, Lampert was unapologetic about this. According to an executive at the company then, Lampert was genuine in his belief that Sears could be run differently than other retailers and that the shares were being acquired at a bargain price.
“Unless we believe we will receive an adequate return on investment,” he wrote in a 2007Â letter to investors, “we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do. If share repurchases or acquisitions appear to be more productive, then we will allocate capital to those options appropriately.”
And for years Lampert concluded that share buybacks were the best use of the company’s money. They continued even through the financial crisis, and totaled $5.8 billion between 2005 and 2010, sometimes at prices as high as $170 per share. Sears’ earnings in the same period were $3.8 billion.
Now that Sears is short on cash and faces mounting debt, Lampert has turned from buybacks to dismantling what was once America’s largest and most successful retailer, says David Tawil, president of New York-based Maglan Capital. Tawil has spent his career working in corporate restructuring and bankruptcy proceedings. Sears spun off its Lands’ End brand to investors in 2014 and is exploring “alternatives” that could include sales of Kenmore appliances and Craftsman tools.
“Eddie has orchestrated for himself, and for the benefit of shareholders, the most protracted liquidation in history,” Tawil said in an interview with Business Insider.
A Sears spokesman, Howard Riefs, said the spinoffs were meant to create shareholder value and to fund Sears’ turnaround.
We believe separating businesses from Sears Holdings would allow them to pursue their own strategic opportunities, optimize their capital structures and allocate capital in a more focused manner while enabling Sears Holdings to focus on its own business and provide additional flexibility to execute our transformation. Since 2012, we have generated $8.9 billion of liquidity from a combination of asset monetization and financing activities within the framework of sustainable shareholder value creation. These transactions have provided liquidity to help fund our transformation, and enabled us to focus on our best stores, best members and best categories.
Our critics are entitled to their opinions, however we think they’re missing some very key points when it comes to our business. Sears Holdings is highly focused on restoring profitability to the company. We continue to make progress as we transform from a traditional, store-network based retail business model to a more asset-light, member-centric integrated retailer.
Wall Street superstar
Lampert got his start at Goldman Sachs, working in the New York-based bank’s risk-arbitrage department. He left the bank after four years and in 1988 started a hedge fund, ESL Investments, at 26 years old.
For a time he was a Wall Street superstar. BusinessWeek compared him with Warren Buffett. That’s because Lampert had an incredible track record as an investor. ESL Investments generated annualized returns of more than 20% per year for 20 years, marking one of the strongest long-term investment records in history, according to a 2013Â Wall Street Journal article.
Through ESL, Lampert gained control of Kmart in 2003 and he combined it with Sears in 2005 to create Sears Holdings in an $11.5 billion deal. ESL, long one of Sears’ largest shareholders, now owns about half of the company.
It was soon after he took the reins at Sears, first as chairman, that Lampert began the share buybacks. In his annual letters to Sears shareholders, Lampert defends buybacks as a way to provide “liquidity” (or a buyer) for shareholders who are looking to sell, and increase ownership of the company for investors who hold on.
But to critics, they are simply a financial maneuver to drive up per-share earnings and create the illusion that a company is doing better than it really is.
With the buybacks came cuts in spending on the retailer’s stores, as well as reduced promotions and advertising, despite Lampert’s promises to revive the company.