Edward Lampert: The Straight Shooter
Not many believed Sears Holdings’ Edward Lampert when he said he wanted to return Sears and Kmart to their glory days as retail chains. Most, it’s pretty safe to say, were looking for Mr. Lampert to liquidate the company, selling off its vast real estate holdings and smile with investors all the way to the bank.
Now, it appears as though Mr. Lampert may have been telling the truth all along.
Despite both chains continuing to lose market share, Mr. Lampert seems intent on turning the businesses around. That is precisely why Michael Winer, portfolio manager of Third Avenue Real Estate Value Fund, is pulling his fund’s investment from the Sears Holdings.
According to a report in the Chicago Tribune, Mr. Winer believes Sears Holdings “should be valued as a going concern, as opposed to the theoretical liquidation value.”
Third Avenue’s moves are of interest to other investors in the company because it was the fund that joined with Mr. Lampert in 2002 to gain control of Kmart.
Last year, the fund sold most of the 2.25 million shares it owned in Sears Holdings because of the high price of the stock and because of its acknowledgment that Mr. Lampert and company’s plans to resurrect the retailers was “far from assured.”
Biff Ruttenberg, president of Atlas Partners LLC, is among those who have come to the conclusion that “Eddie Lampert may have been shooting straight. He won’t turn it into a real estate play. That’s Plan B. Plan A is, let’s run a retail business. If he can’t run it profitably, he’s got a back door.”
Mohnish Pabrai, managing partner at Pabrai Investment Funds, doesn’t see Mr. Lampert turning around Kmart and Sears.
“If you don’t buy into the story that Sears can turn around, you’re betting on real estate or on Eddie’s abilities as a master capital allocator,” he said. “I think the real estate values for Lampert give him a huge margin of safety.”
Discussion Questions: Have you changed your mind on whether or not Edward Lampert is serious about returning “Sears and Kmart to the position of prominence
that both brands and companies held in American retailing”?
If Lampert’s intent is to turn them into viable retailers, little that I’ve seen in the way of ideas or execution of those ideas has borne that out…..
Hello retail friends. I have to admit I think the odds continue to run against Eddie. I have never doubted his intentions, and believe that the real estate play is indeed Plan B, although perhaps an unusually good one. Like others here, I don’t doubt anything about him but his understanding of retailing. They say he is the next Warren Buffett, but Buffett buys companies with great management and leaves them in place.
While it is true that there have not been many retail turnarounds, there have been some. Macy’s NY was a basket case about 1970, when I analyzed the stock for Citibank. When I did acquisitions for the May Company in the late 1970s, you could have picked up sleepy Walgreens for well under $500 million. And look at Penney’s.
Like these firms, Sears (but not Kmart) still has a valid name with the consumer, it is not yet a joke. But if those comp store numbers — which Lampert has said he does not think are that important — don’t turn around fast, it is all over as a retail entity. The idea that the formerly huge volume Oak Brook store is sleepy says it all.
If Target and Wal-Mart and Home Depot and Lowe’s and Best Buy were sitting still, it would be hard work to turn Sears around. But given how good those competitors are, it will take more than the tweaks I see when I visit Sears these days. It would require Questrom-level leadership.
I agree with Mr. Livingston. It is a charade. Anyone can cut cost and not invest in the future. He is generating large amounts of cash while comp store sales keep declining. You can’t keep this up, especially in the hyper-competitive retail segment Sears is in. When the cash flow turns negative, we will have the fire sale. It is a good short-term strategy for a financier to milk the company before you dismantle it.
My mother, who is 90, still likes to go to Sears. But it’s clear from when I take her that there are not a lot of other people who share her view.
The closest Sears to her is in Oak Brook, Ill., which I was told was one of the chain’s top-performing stores (pre-Eddie).
Recalling some recent visits to the Oak Brook location, I can only imagine the echoes in some of the weaker Sears sites.
Fortunately for Sears and Kmart, the retail industry as a whole is not radically innovative, leaving Lampert a few good openings to jump ahead if he can take some important risks. Sears has incredible brands (Kenmore and Craftsman consistently among the best rated in Consumer Reports), and the reason many of us shop there is exclusively related to those brands. Perhaps the right moves toward success include acquisitions of other important brands, or conversely, wider distribution of their currently exclusive brands.
The stores need some excitement to get make those brands and those customers come alive, and excitement is expensive and can be clumsily mishandled. Customers don’t quickly forgive foolish marketing.
Lampert has shown bulldoggish determination as a leader and financier. If he continues to dump bad locations, heavily invest in good ones, put the brands on their pedestals, and make the store experience remarkable, then he’s got something. Optimism aside, I confess – I’m not buying shares, yet.
Anyone can raise prices and cut payroll to the bone to show a profit. But now same store sales are down in double digits and it shows. You cannot continue in this fashion for very long before having to go to plan B and sell stores and retail space off.
He certainly appears to be trying. Time will tell whether he will be successful.
I’m not sure people doubted Lampert’s INTENTIONS – though many probably did (and do)- it’s his ABILITY that people doubted; and, as most have noted, an epiphany has yet to emerge. Hopefully, the Apollo/L&T foray will turn out to be a gold plated success that we can point to in comparison (….hard to type with my fingers crossed like this).
This has been one of the most confusing situations of any retail takeover. When viewed as an aggregate, Mr. Lampert’s decisions do not create confidence in the future of Sears/Kmart as a retail entity. Individually, many DO make sense as short term cost cutting moves preliminary to an asset sell off.
The talent drain and exodus continues. Operationally, many who do business with Kmart find it a challenge to develop anything like sensible business. Many replenishment orders are still haphazard and the replenishment management appears more cash flow based than rate of sale motivated, plan-o-gram reviews and resets are difficult to understand, and store staffing and operational procedures seem to barely keep doors open.
As with other observers, I agree that it is very possible Mr. Lampert is trying to turn his ship around and manage toward long term operating profits. If so, he’s doing it in ways that most industry veterans fail to recognize as precursors to success. On the other hand, perhaps the Federated – May sell off of property changed the timing? Maybe economic conditions did not materialize as expected, requiring a holding position until the market changes?
Any reasonable investor who buys a troubled company has a timeline with goals and alternative plans, too. Through 6/30/2006, the Wilshire REIT (Real Estate Investment Trust) Index is up 22%, and this trend is similar to the trend for the past 5 years. So if Edward Lampert’s Plan A was simply real estate liquidation, Sears and Kmart would be history by now. Ed Lampert has really been trying to improve the business. His success has been mixed, but neither Sears nor Kmart was built (or wrecked) in a day. It may take a long time to find winning strategies for these troubled brands. The Third Avenue people are stock traders, not committed owners. Of course, Ed Lampert could sell the real estate anytime, but my guess is that his evaluation of the turnaround progress will wait until after Christmas.
I just don’t see this happening. Kmarts are ghost towns and operating at sales per sq. ft. levels that would justify closing. Plus they are just getting worse. Even if sales per sq. ft. doubled, they would still be below average. There have been a few conversions to Sears Grand and some stores have received a coat of paint, but this just seems to be window dressing. The results have been disastrous which they will admit. I think this is all just a charade. They hired some industry personalities along with some no-name MBAs with bad hair and a briefcase to give the impression they were pumping up management. However they don’t seem to hang around for very long. I’m not quite sure why they would want to say they want to stay in the retailing business, but I’m sure its all part of a larger strategy to keep the hope alive. Wal-Mart and Target keep expanding which will further squeeze Kmart/Sears out.
My jury is still out.
In regard to Edward Lempert’s sincerity and skill in returning Sears and Kmart to their previous retailing “glories” —
Somebody said it could be done
And Eddie Lempert said with a sigh,
Maybe it could and maybe it couldn’t
But how would I know until I try?
Whether you believe that Edward Lampert is serious or not about “trying” to return Sears and Kmart to positions of prominence, or whether he’s just looking at selling off the stores for their real estate value, it doesn’t matter. What matters is that two of America’s top retailers and its employees are on the brink of extinction, and their revival is dependent on what Lampert’s ego tells him to do. He may be a successful businessman, but if he was serious about reviving Sears and Kmart he would stick to what he does best, and leave retail to retail experts. But since he wins either way, he can play a real life game of retail and if he loses that game he can always fall back on his other career and sell the real estate; he’s a winner either way.
The investment community will never understand how many years it will take to turn around ailing large retail chains such as Kmart and Sears. Sure, you want to remodel the aging Kmart stores with their tired paint and narrow aisles, and dated checkouts. But there are many, many Kmarts. And yes, you want to dress up Sears with with great brands from Kmart. But that requires remodeling, too. Even if they get it right, it will require many billions in capital expenditure. All of the this investment and disruption will not necessarily retain a disloyal customer who is presented with a treasure chest of choice.
If you look at the history of retailing, there are very few examples of effective turnarounds, and none on the scale the Lampert is attempting. Old brands just fade away as their format loses its luster. The retail grave yard is filled with them: Montgomery Ward, Woolworth’s, WT Grant, John Wanamaker, and Kresge.
Eventually, market and capital realities will force Lampert to look into his playbook for the real estate and liquidation plays.
Both Sears (Where America Used to Shop) and Kmart (where Martha used to dominate) are tired brands whose long-term future is still suspect. Other retailers have done a better job of satisfying the needs of specific market segments. These flagship brands have become marginalized and represent aging liners. What value there is emanates from the real estate.
Today I got my answer. I visited two new Sears Grand stores. Both were recycled Kmarts. Both were totally dead with the only cars in the parking lot belonging to me and the employees. The skeleton crew outnumbered customers about 5 to 1 — my wife and I and ten employees.
It was merchandized similar to an FW Woolworth from the early 1980s. Eddie could probably raise millions by selling off 6 of the 7 cash registers in each store. I asked a manager if they ever had to open more than one register and she said no. We both agreed this will not go on much longer. Pretty soon the landlords will be paying them to leave
Mr. Lampert needs to develop a plan and soon. Sears Holdings needs to do what was promised at the time of the merger: Take the best of both chains and eliminate the rest. If two nameplates are going to remain, each chain needs a tighter market focus.
The Sears brand is capable of being resurrected if Mr. Lampert copies the turnaround plan used at J.C.Penney. Sears is known and respected as a hardlines retailer. The chain needs to eliminate apparel, jewelry and shoes from their stores and build up consumer electronics, game systems, high tech toys, music/DVD’s, and home furnishings instead. Sears needs to become a hardlines category killer taking on Best Buy, Home Depot, Lowes and to a limited extent Wal-Mart and Target.
The Kmart name is probably beyond repair. Mr. Lampert really should consider phasing out the Kmart name in favor of a fresh brand. Perhaps bring back the “Kresge’s” name for a new chain. This new chain could concentrate on softlines, home fashions and consumer goods. This new chain could easily make use of such strong brands as Land’s End, Martha Stewart, Joe Boxer, etc.
These changes may not save the company. But at least they could go down swinging.