Sears Going Belly Up

My “Free” Advice for Sears Holding CEO Eddie Lampert

by Wolf Richter • Sep 14, 2018 • 91 Comments

“Don’t write any more blog posts to blame pensioners for the collapse of Sears Holding after you wasted $5.8 billion on share buybacks.”

I don’t give “free” advice to hedge fund managers. But if I were to give free advice to Sears Holding CEO and hedge-fund manager Eddie Lampert, it would sound like this:

“Don’t write any more blog posts in which you explain who all is at fault for the decade-long collapse and coming bankruptcy of Sears Holding without doing some serious soul-searching and navel-gazing first.”

And I would add: “Because…”

  • You bought the place — Kmart in 2003 and Sears in 2005 to form Sears Holdings in an $11.5 billion deal – and knew what you were getting into.
  • You ran the place.
  • You refused to listen to your customers and failed to value your customers as the most precious asset the company had, and thought it would be more profitable to run them off.
  • You were focused on slashing inventories and expenses, including promotions and advertising, to increase short-term profits and cash flows and inflate the stock price.
  • With this focus on cutting, cutting, cutting, you ruined the customer experience and customer service along with the brand – suicide in retail.
  • It seems you were too focused on stripping out real estate assets, but not for the benefit of Sears Holding shareholders but for other entities you control.
  • And most importantly: You blew, wasted, and destroyed $5.8 billion on share buybacks between 2005 and 2010 to manipulate up the share price, paying as much as $170 a share. Now they’re trading at $1.26.

To humor me, let me just add this: If you had invested that $5.8 billion in creating a vibrant customer-focused online presence, Sears would be in much better shape today. 2005 through 2010 would have been the perfect time to do this. But no. Your hedge-fund mentality doesn’t believe in investing in a company and its customers.

So, you killed the place. And that’s OK in American capitalism. As long as you follow the rules of the law and make money doing it, great. To heck with shareholders and other stakeholders. That’s what we’re all about.

But given this background, as a smart CEO, you should never-ever write another idiotic blog post, as you just did, trying to defend your record by blaming others, including retired employees and their pension fund.

Maybe Sears and Kmart would have gone out of business anyway if you hadn’t acquired them, but that’s a hypothetical consideration whose train has left the station a long time ago.

In your blog post, you specifically blame Sears’ slow-motion demise on two main things:

The “very difficult retail environment” where customers are shifting to online purchases of just about all the goods Sears and Kmart are trying to sell. OK, that’s correct. I have come to call this the “brick-and-mortar meltdown.” But you should blame yourself. This has been going on for 20 years, and many retailers have succeeded in building a thriving online presence.

Pension fund obligations. Here is what you said:

Sears has also been significantly impacted by its long-term pension obligations. In the last five years, we contributed almost $2 billion, and since 2005 we have contributed over $4.5 billion, to fund our Pension Plans.

OK, let me interject here: You blew $5.8 billion on share buybacks over this period, even as you knew that these pension obligations would have to be dealt with. This is money that is owed. Did you think you could just walk away from these pensions – and let the Pension Benefit Guaranty Corporation pick up the tab, even as the older folks that had worked for Sears all their lives, would suddenly see their benefits get cut? Were you nuts, or something?

These funding levels have been significantly higher than they otherwise would have been because of the historically low interest rates driven by Federal Reserve policy since the 2008 financial crisis, increases in Pension Benefit Guaranty Corporation fees, and required changes in mortality assumptions.

Here you’re correct for once: The monetary policies of the Fed (QE and zero-interest-rate policy) will cause a painful reckoning among all pension funds, and has already done so for a decade for retirees living off their savings. But your hedge fund also benefited hugely from low interest rates, cheap leverage, and the Everything Bubble these policies have created. And on you go (I added the bold):

Had the Company been able to employ those billions of dollars in its operations, we would have been in a better position to compete with other large retail companies, many of which don’t have large pension plans, and thus have not been required to allocate billions of dollars to these liabilities.

Let me fix that paragraph for you: “Had the Company been able to employ in its operations those $5.8 billion we wasted on share-buybacks, we would have been in a better position to compete with other large retail companies….”

Yup, you got it. No one to blame but yourself.

But let me assure you that I hope it works out for you, your hedge fund entities, Seritage (which extracted some of the best real estate, and of which you’re chairman), and all the other beneficiaries of your strategy. That’s the American way. But for crying out loud, don’t put this stuff into blog posts. It looks terrible and gives hedge-fund-manager-CEOs a bad name.

And to stay on topic, here I explain how, despite all your claims that you’re trying to turn around the company, both revenues and store count will hit zero by the end of 2020, just using basic math. In reality, it won’t take that long – defying my dictum that nothing goes to hell in a straight line. Read… Dead Meat Walking: Sears Revenue & Store Count to Hit Zero by 2020

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