Is Lampert the Cause or the Cure for Sears' Sickness?

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The slow, painful decline of the once-mighty retailer Sears has accelerated this year, taking on something of a soap-opera quality. Lousy customer service, deteriorating stores, and management problems took their toll, as Sears Holdings (Nasdaq: SHLD  ) , the new company born of the merger between Kmart and Sears, began to crash. The holiday shopping season was a bust, and Sears' CEO, hedge fund manager-cum-retail store owner Edward Lampert, announced the closing of 120 Sears stores. Soon after, CIT Group said it wouldn't finance additional loans to the company, and rumors of Lampert taking the company private started to circulate. Meantime, the retailer's stock continued to plummet. Could anything else go wrong?

Well, yes and no. Fourth-quarter results revealed a staggering $2.4 billion loss, a surprising result even for Sears. Of course, much of retail reported disappointing Q4 results, due to a less-than-stellar holiday season. Kohl's (NYSE: KSS  ) , a direct competitor of Sears, reported an earnings decline of 8%, and even the mother of all discounters, Wal-Mart (NYSE: WMT  ) , turned in disappointing numbers. The malaise at Sears went much deeper, though, and all looked lost. That is, until the company's stock rallied -- and kept rallying. Investors saw hope, apparently. But where?

Lampert had come up with a plan to save Sears, it seems. To raise cash, the embattled CEO proposed spinning off 1,250 stores encompassing hardware stores, Sears Outlets, and Hometown locations. This would net the retailer $400 million to $500 million, and another $270 million would be raised by selling 11 Sears stores to General Growth Properties (NYSE: GGP  ) , which operates shopping malls. Interestingly, General Growth spent the lion's share of the purchase price -- $250 million -- for just one store, located in Ala Moana, Hawaii. The mall in which the Sears anchor store resides does approximately $1 billion in yearly sales, so the purchase price makes sense. Was the sale of the Hawaiian site contingent upon going home with the other 10, perhaps?

Lampert's plan may not be to save Sears, after all
Herein lies the rub: Although investors are concentrating on the positive aspects of Lampert's Sears salvation plan, it still looks like a fire sale. Shedding stores, spinning off side businesses, and drastically cutting inventory could be construed as desperate measures taken by an entity whose very existence is in question. What will be left after all the spinning and selling?

Understanding Lampert's plan may take a little digging outside of the current flurry of activity surrounding the dismal returns on the Sears brand. As Floyd Norris of The New York Times notes, Lampert had a particular vision when he created Sears Holdings, which was laid out in a letter to stockholders near the start of his tenure. To paraphrase, his belief was that a business model that improves its property and caters to the customer is for losers. A much better plan, he proposed, was to take profits and plow them back into the business via stock buybacks and acquisitions. Why renovate scruffy stores just because your competitors do so? Because customers will leave your store and go to theirs. Lampert has found this out too late.

But does he care? While investors are cheering his austerity measures and running up the stock, the fact remains that Lampert has caused the very problem he is supposedly trying to fix. If you are wondering where he put the money that did not go into store maintenance, I'll give you a hint: He did what he said he would do. Since acquiring Sears back in 2005, Lampert has been buying back stock at a pretty good clip. According to the Times, the company shelled out over $6 billion for stock repurchases, while spending a little more than half of that on pesky capital expenditures.

The passel of real estate that Lampert acquired with Sears must certainly have looked like money in the bank in 2005, when real estate investments still held promise. Since then, well, we all know what happened. The General Growth deal shows that Lampert has the chops to squeeze all he can out of Sears' shoddy assets, but I can't help wondering if selling off other Sears offshoots won't lose him money in the long run.

Where will Lampert steer Sears now?
There seem to be three scenarios in Sears' future, all orchestrated by Lampert. The first entails the continued downslide of Sears until it exists no more. Secondly, Lampert may take what is left over after his current plan runs its course, coddle it, and nurse it back to health. This scenario actually holds some water, as the Sears CEO has stated publicly that he wants to elevate the Kenmore and Craftsman brands to superstar status. Perhaps he cares, after all.

The other outcome involves Lampert taking the company private. Rumors have been circulating about this for a while, although they were discounted at the time. But Lampert recently paid $130 million to the Ziff family, longtime investors in his hedge fund, for $160 million worth of Sears shares, bumping up his stake in the company to a sizable chunk.

Just like a soap opera, the saga continues, and you have to watch one bad episode after another to see how it ends.

As the economic picture continues to brighten, retail promises to be one of the most interesting and profitable sectors in which to invest. Check out our free report, "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail," to find out more!

Fool contributor Amanda Alix owns no shares in the companies mentioned above.

The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2012, at 9:36 PM, EnzyteBob wrote:

    @MSF Investments - What Edward Lampert is doing with Sears has been successfully done before by Meshulam Riklis in the 1970's and 1980's. Riklis kept assembling variety store chains such as McCrory's, TG&Y amd H. L. Green. He did with them what Lampert is doing with Sears. He invested zero money and basically milked as much cash flow as he could until the chains finally died off. It doesn't matter how well Sears does because he bought the company dirt cheap and Sears keeps increasing his stake through stock buybacks.

    Lampert is making money on this because he got in low via buying up all the Kmart bonds prior to bankruptcy. The average investor, however, is never going to get Sears at the price he paid for it and is going to get hosed.

    The sad part about it is that Sears could have been a high class Target making Lampert far more money. Unfortunately, he has the scavenger mentality.

    Run. Run from this stock and run fast.

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