Sears Is Screwed, But Eddie Lampert’s Gonna Be OK

The hedge fund manager has done some hedging of his terrible investment.
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By Jonrev at English Wikipedia [Public domain], via Wikimedia Commons

By Jonrev at English Wikipedia [Public domain], via Wikimedia Commons

By now, you’ve heard the news: Sears and Kmart look set to go the way of other American icons like Woolworth’s, American Apparel, RadioShack and the Senate filibuster. And, as far as the tabloids are concerned, there’s only one man to blame:

The retailer’s fate was sealed roughly 10 years ago when owner Eddie Lampert, the hedge fund billionaire, bought the chain, merged it with Kmart and then decided to all but stop investing in the chains’ upkeep and capital spending.

The strategy has been questioned many times but Lampert, who eventually took over as CEO of the chains despite no retail experience, refused to budge from it. In fact, his 15-page manifesto in 2005 stated that conventional measures of retail success, such as same-store sales, were no longer relevant.

Sears would regain its health by closing struggling stores and focusing instead on profitable sales, he wrote.

It is not known if any other retailer followed Lampert’s advice.

Sears is in a pretty bad place right now, to be sure, as would be any company that’s lost 90% of its market capitalization and half of its revenue over a period of a few short years. Just ask Valeant Pharmaceuticals. And yeah: It doesn’t sound good when your annual report says that “substantial doubt exists related to the company’s ability to continue as a going concern.”

Here’s the thing though: Sears probably doesn’t really mean it. They just have to say it, because Carl Icahn hasn’t gotten around to icing this annoying new regulation that Sears had to follow.

In the next breath, Sears said it believed it was “probable” that the steps it’s taking to alleviate problems — including amending its credit lines, cutting costs and selling assets — would work.

Both sides of the disclosure are required under a new accounting rule that recently took effect, requiring companies to be more upfront in evaluating and discussing risks to their operations….

The new requirement from the Financial Accounting Standards Board, which sets accounting standards for U.S. companies, was enacted in 2014. It has just taken effect with the end of companies’ latest fiscal years; for Sears this was in late January….

The FASB requires companies to disclose whether there’s a problem and whether the company expects to be able to alleviate it, while auditors disclose only the end result of their assessments, after looking at both sides.

And see? Sears says it can probably fix everything, especially as long as Lampert allows it to keep burning through his investors’ money. We have previously expressed skepticism as to the wisdom of such a strategy on Lampert’s part, but as it turns out, he’s gonna be fine.

As well as owning 48 percent of Sears, Mr. Lampert and his hedge fund, ESL Investments, have provided a drip feed of debt funding, keeping the cash-burning business afloat. That means that while Mr. Lampert’s equity holdings — which date back more than a decade — could end up worthless, he has collected interest on the debt and he will be near the front of the line of creditors if the company goes under.

Mr. Lampert, meanwhile, has deconstructed the company, spinning off the Lands’ End clothing business and a portfolio of property, among other things. Mr. Lampert and ESL own 59 percent of Lands’ End, a $630 million publicly traded company, and slugs of the $1.3 billion real estate vehicle Seritage Growth Properties, and related entities….

That means there are paths by which Mr. Lampert can recoup some of what he has sunk into Sears. Barring a miracle, the retailer’s own stock may only go one way, but its boss’s financial bets are at least partially hedged.

Survival of Sears and Kmart Is in Doubt, Owner Warns [DealBook]
This is how you destroy an American icon [N.Y. Post]
What Investors Missed in the Sears ‘Going Concern’ Warning [WSJ]
Alternative Endings Seen for Sears and its Hedge Fund Chief [DealBook]

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