| From: Glenn Petersen | 8/18/2006 7:54:28 AM | | | | | | Sears shopping around
Earnings surge 83%, but shares take a hit
By Sandra Jones
Tribune staff reporter
Published August 18, 2006
Owning stock in Sears Holdings Corp. just got riskier.
Billionaire investor Edward Lampert, the taciturn hedge fund manager who engineered the combination of Sears and Kmart last year, made it clear in Sears' second-quarter earnings report Thursday that he plans to put his investment acumen to work and suggested he could look outside the retail industry for deals.
That's good news for investors who don't have access to the Greenwich, Conn.-based magnate's elite hedge fund but are eager to benefit from his moneymaking skills. But it also means more risk.
Sears shares dropped $8.71, or 5.8 percent, to $141.29 in heavy trading, the biggest decline in more than a year, as investors worried about how the company is going to spend its $3.7 billion in cash. The stock fell even as the Hoffman Estates-based retailer's second-quarter profit jumped 83 percent on cost cuts and a slower decline in sales.
"You could think of it as a publicly traded private equity fund," said Arun Daniel, analyst at ING Investment Management, a New York firm that holds about 500,000 Sears shares. "You're not going in there for the fundamental improvement in business. You're looking at it as the KKR of retail."
Kohlberg Kravis Roberts, the buyout firm made famous in the 1980s book "Barbarians at the Gate," buys and sells undervalued companies.
Ever since Kmart Holding Corp. of Michigan purchased Sears, Roebuck and Co. in March 2005 for $12.3 billion, Wall Street has debated over whether to view the company as a retailer or an investment company.
Sears' shift toward investments has already begun. The company ratcheted back its longstanding aggressive buyback program, a strategy many investors viewed as a safe way to boost the stock. Sears repurchased 700,000 shares for $91 million in the quarter, far less than the $1.1 billion in shares bought back since the merger and a small slice of the $406 million remaining in the program.
Likewise, the company disclosed that it is using a portion of its cash to invest in derivatives, financial instruments that are often thinly traded, sometimes speculative and, while frequently used to control risk, are also famous for blowing up.
"They're not limiting themselves to retail-related investments, and that makes it unusual and something we would have to watch," said Philip Zahn, a Chicago-based analyst for Fitch Ratings, the New York-based credit rating firm. "The fact that they're bringing it up suggests they have some ideas of what to do with the money."
Credit Suisse analyst Gary Balter, who rates Sears an "outperform," wrote after the announcement that Sears is beginning a "new chapter" and added that the high-risk stock is "clearly not for many investors." He speculates that Sears could buy suppliers, real estate or unrelated companies.
Lampert has so far kept investors happy by posting steady profit improvements, but even that strategy appears to be running out of steam. In the most recent quarter, cost cuts barely kept up with the drop in sales.
Sales and administrative expenses as a percent of sales remained relatively unchanged at 22.1 percent in the quarter compared with 22.8 percent in the year-ago quarter.
Sears has suffered from five consecutive years of declining sales. Sales at all Sears Holdings' stores open at least one year, a key barometer of a retailer's health, fell 3.8 percent. The firm blamed "increased competition and lower transaction volumes" for the decline.
Same-store sales at Sears stores fell 6.3 percent, with declines across most categories and the biggest drops in home fashion and lawn and garden, the company said. At Kmart, same-store sales declined 0.6 percent as declines in home goods offset gains in apparel, pharmacy and food.
Sears and Kmart are under siege on several fronts from Home Depot Inc. and Lowe's Cos. in appliances, J.C. Penney Co. and Kohl's Corp. in apparel and home goods, and Wal-Mart Stores Inc. and Target Corp. in general merchandise.
Net income increased to $294 million, or $1.88 a share, from $161 million, or 98 cents, in the year-ago quarter as the retailer cut expenses and got a boost from proceeds related to the settlement of credit card antitrust litigation.
Excluding gains and charges, net income rose 45 percent to $272 million, or $1.74 per share. Revenue fell to $12.8 billion from $13.2 billion a year ago.
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smjones@tribune.com
Copyright © 2006, Chicago Tribune
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| From: Brumar89 | 4/17/2007 11:53:01 PM | | | | | | Sears Holdings (SHLD) Securitizes Main Brands
Eddie Lampert, Chairman of Sears Holdings has created $1.8 billion worth of securities based on the brand names Kenmore, Craftsman, and DieHard. What that means is he essentially transferred ownership of the brands to another entity, which it then pays for the right to use the brands. The deal, carried off last May, was the biggest "securitization" of intellectual property in history, according to Eric Hedman, an analyst at Standard & Poor's. The story hasn't gotten out until now because the bonds haven't actually changed hands, Sears is holding them in its Bermuda-based insurance subsidiary and because Sears has never disclosed them, nor has it had to do so. That would change if Sears were to decide to sell them to outside investors and collect the cash.
How does It work?
Sears has disclosed that it has created a "separate, wholly owned, bankruptcy-remote subsidiary". This is essentially a company within a company. It is called KCD IP (for Kenmore Craftsman DieHard intellectual property) and it has issued $1.8 billion worth of bonds backed by the intellectual property of Sears' three biggest brands, according to filings with the Patent & Trademark Office.
Sears has in effect now created licensing income from it's most known brands. First it transferred ownership of the brand names into KCD. Now, KCD charges Sears royalty fees to license those brands and uses the royalties to pay the interest on the bonds. It has sold the bonds to the insurance subsidiary, where, like any other security on an insurer's books, it serves as protection against future loss. The insurer, meanwhile, protects Sears from financial trouble and because it's a subsidiary of Sears, it does so at a lower cost than they could get from an outside party. Essentially, the deal at its current level allows SHLD to save money on insurance.
The question you are most likely asking is: Who is making money off the transaction? The answer? As it is set up, nobody. The payments net out to zero because Sears owns every piece.
Why Do It Then?
It seems like a whole lot of work to do for no profit. Why do it and how then can Sears turn these bonds into money?
1- Sell the bonds to outsiders. Then, Sears would be holding up to $1.8 billion in cash, and investors would be holding the bonds.
2- License the brands: Many people (me included) feel there is a huge revenue stream for Sears in the value of these brands. Allowing outside manufacturers to make products and use the Craftsman, Kenmore and Diehard brand names in return for royalty payments is an easy way to increase profits without any additional expense. These payments would be virtually 100% profit for Sears. More importantly, by licensing these brands they would be expanding the availability of them. I feel that especially with the Craftsman tool line, this could really have a compounding effect. Tool buyers are a brand conscious lot. If their favorite brand came out with a Craftsman line, given Craftsman's reputation for quality, it would sell.
3- Swap bonds for debt. Lampert acquired K Mart through its debt. These new "brand" bonds allow him a vehicle to do a similar deal. How? Lampert could swap these bonds or a portion of them for the debt of another company. One morning shareholders of BJ's could wake up and find that Sears Holdings owns all their debt. The beauty of this scenario is that it would require none of the cash Sears has in the bank ($4 billion) to be used. Having these bonds as leverage also allows for the possibility of a much larger acquisition.
4- Insurance. In the past I have speculated on the possibility of Sears getting into the insurance business. Now we have an insurance subsidiary of Sears sitting there holding $1.8 billion in bonds that could be used for an acquisition. As I stated in the past, I think there are few acquisitions that would make the stock price of SHLD explode to the upside than the purchasing of an insurer.
The creation of these bonds opens up a plethora of situations in which they can be used to add value to Sears Holdings for shareholders.
At the end of the day, what Lampert will do with this is a mystery. It is great fun for us to speculate though. If we do it enough, eventually one of us are going to be correct. What I do know is that given his past track record, we shareholders will benefit greatly.
Things are getting exciting here.
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POSTED BY TODD SULLIVAN AT 11:49 AM
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| From: Brumar89 | 5/14/2007 8:48:43 PM | | | | | | Land's End: Expand It, Don't Sell It
There was a blog post out there this past week that said Sears Holdings (SHLD) should spin off it's Land's End line in order to create value for shareholders. It was a well written and thought out piece and I could not disagree with it's author more. I cannot find where I read it but if the author reads this and wants, they can drop me a line and I will link to it. Here are the reasons for my disagreement:
The future of Sears retail:
In February I wrote, "I am rapidly becoming convinced that the future of Sears Holdings retail clothing operations will be predominantly Land's End merchandise." This thought was further bolstered when in his annual shareholder letter, CEO Eddie Lampert said that the Land's Ends division had a record year in 2006 for both sales and profits. If this was not enough to convince people, at the annual meeting last week, Lampert said that the Land's end "store in a store" concept was being expanded from 100 to 200 locations in 2007. If you have not been to one of these yet, go (here me Maggie?). The layout is enticing, the merchandise is wonderful and the pricing is good. In short, there isn't anything not to like and based on this years results, I am not the only one who thinks this way. As these locations expand, watch as the retail metrics for Sears improve at an increasing rate. There has been some concern out there that the stores would just cannibalize the online operations. Results to date have proved just the opposite. People seem to be more willing to buy online if they are able to return merchandise to a store for an exchange rather than going through the annoying mail return procedure.
Selling Land's End now would actually destroy long term shareholder value. Each of these locations, as they open increases the value of the retail operations. It would no doubt give us a short term boost, but it would come at a far too heavy long term price.
Brand Value
Recently Lampert created $1.8 billion dollars essentially out of thin air. What he did was to create a bond out of the Craftsman, Kenmore and DieHard brands. He found a way to quantify the value of these brands. As Land's End becomes more prevalent and profitable for him, he can do the same for it. I have come to realize that Lampert is smarter than most people out there and sees things that most do not. If you look at it, he has created billions of dollars in shareholder value from two names, Kmart and Sears, both of whom were left for dead by the investing world. Land's End will eventually have a value to him as a brand that is far in excess of the simple annual sales and profits from the division. Rather than selling this increasingly valuable asset, I would love to see it's expansion grow at a faster pace. Lampert, however, is a far more patient and wealthier person than I so I will defer to him on it's pace (that and the fact he has yet to ask my advice). Now, how much value could it have? It is hard to tell since Sears does not breakout individual results in their 10K, making quantifying it guesswork. My opinion is that since Lampert has repeatedly given Land's End the lions share of credit for margins improving from 24% in 2004, to 27% in 2005 to almost 29% in 2006, its value is substantial and will continue to increase as more locations open.
Future Investments :
Now that Lampert has said he will begin to "look for investments" for Sears Holdings, between the cash on he has on hand and the value of the bonds he created he is sitting on almost $6 billion and multiples of that in borrowing power. The guessing games will begin. If Lampert's, recent activity within Sears is any indication of his plans, any acquisition will have "Brand Appeal". What is Dr. Phil's saying? "The most accurate predictor of future behavior is past behavior". He is the first retailer out there to quantify the value of a brand name in addition to it's immediate effect on the profit and loss column. Expect the acquisition(s) to be of strong, respected brand names as for Lampert, it provides him value few seem to be easily able to see..
Posted by Todd Sullivan at 7:09 AM
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| From: Brumar89 | 6/10/2007 10:56:49 PM | | | | | | Lampert Buying More Sears (SHLD) Shares
So you want to buy shares in Sear Holdings (SHLD) but aren't sure if this is a good price level? Apparently Eddie Lampert feels the current price is just fine. Between May 5 and May 25 the share count was reduced from 153.7 million and 152,492,175 shares according to today's 10Q. That means Lampert bought back 1.2 million shares at prices ranging from ranged from $175 to $182. This is the first meaningful repurchase of shares in 6 months as in the most recent quarter Sears bought back no stock and in the quarter before that it repurchased only 82,000 shares.
Accordig to Jim Cramer: "That means the lowest price Sears could have paid was $175, the highest price $182.52. Again, while we don't know the average price paid for those 1.2 million shares, we do know that it is higher than the $164.91 paid in the fourth quarter. That's very important. Sears has a ton of cash, more than $3 billion. At this pace, if Eddie miraculously paid the low for all of that stock, he would go through the part of the $600 million buyback authorization that remained as of the press release in about 60 days. When that's gone, I believe he will authorize another one."
I said on Wednesday that no matter what happened after yesterday's earnings release I was not going to sell shares, good thing, I would have been selling more stock to Lampert. Lesson learned..
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| From: Glenn Petersen | 11/28/2007 2:17:02 PM | | | | | | The state of Edward Lampert's world per the Chicago Tribune:
Lampert swings, misses
By Sandra M. Jones, Tribune staff reporter Tribune staff reporter James P. Miller contributed to this report
November 28, 2007
For more than two years, investors have been waiting for Sears Holdings Corp. Chairman Edward Lampert to unveil a blockbuster deal.
It finally happened. Sort of. And the response on Wall Street was underwhelming.
Sears is in the midst of a takeover battle for Restoration Hardware Inc., a money-losing, upmarket home-goods chain with a retro flair, whose wares span a $12 doorknob, $40 Turkish bath towel, $159 handmade birch sled and $4,000 leather love seat -- not exactly the merchandise shoppers expect to find at Sears.
Restoration has demonstrated little enthusiasm for Lampert's overtures, already having worked out an agreement to sell itself to an investment group that includes Restoration's chief executive. Investors are equally indifferent.
"I can't get excited about this, and I can't get upset about it either," said Scott Rothbort, president of LakeView Asset Management, a Millburn, N.J.-based shareholder in Sears.
Morgan Stanley analyst Gregory Melich put it more bluntly in a report, noting it is "not the transformational deal some have been hoping for."
Anticipation has been growing on Wall Street ever since Lampert engineered the combination of Sears and Kmart in 2005 that the top-ranked hedge-fund manager would make a big play for another retailer. Stocks at Gap Inc., Home Depot Inc. and Anheuser-Busch Cos. all surged at some point on speculation that Lampert was making a move for them.
Luster disappearing
In spite of Lampert's declarations that he sees himself as a retailer, investors focused instead on the billionaire's reputation as an investment mastermind, building what came to be known as a "Lampert premium" into the stock.
Shares topped $190 in April. On Monday, the stock hit $107.55, far below the $131 closing price on its first day of trading as a new company. Shares closed Tuesday at $111.56, down 2.3 percent since the proposed Restoration deal was quietly disclosed in a filing with the Securities and Exchange Commission on Nov. 19.
With Lampert's luster fading, Sears' long-standing troubles are being exposed. The initial profit improvement under Lampert, thanks to cost cuts and gains on investments, has run out of gas. Sales have been falling for years. And the combination of rising gas prices, tighter credit and falling home-equity values is taking its toll on just about all retailers. Sears is scheduled to report third-quarter results Thursday.
Sears officials declined to comment beyond the SEC filings, leaving investors to scratch their heads over what Lampert is doing.
Analyst sees a 'portfolio play'
Some of the guesses making their way around Wall Street: Sears could be looking for a brand to replace Martha Stewart Everyday once the licensing agreement expires in 2009. Or the company could be angling to replicate the Lands' End acquisition of 2002 by looking to expand the Restoration chain into the more than 800 Sears department stores.
Or this could simply be Lampert investing in an undervalued company that could benefit from cost cutting and signal the kinds of smaller deals he plans to make to build Sears into a true holding company.
"I think it's a portfolio play," said Don Delzell, an independent retail research analyst and chief executive of Future Merchants, a New York-based e-commerce start-up. "The big monster deals just aren't out there right now." Gimme Credit analyst Carol Levenson said the roughly $270 million Sears is offering for the retailer would be better spent on fixing up its own stores.
With $713 million in sales last year and about 100 stores, most of them leased, Restoration would be a blip in Sears' approximately $50 billion, 3,800-store operation. But Lampert has been after the company since at least June, according to filings with the SEC, and he has proven to be a tenacious suitor.
On Tuesday, Restoration held out an olive branch to Sears, saying it would be "pleased" to provide Sears with the non-public financial data Sears is seeking, after initially denying the Hoffman Estates-based company access to the information.
Sears, which has taken a 13.7 percent stake in the home-furnishings chain, complained in a regulatory filing that Restoration had been rebuffing its efforts to conduct an in-depth review of the company's books.
That filing made public a letter sent Friday by Sears to Restoration's board, in which Sears appeared to suggest Restoration wasn't being receptive to its efforts to buy the company because Restoration is focusing on a $6.70-a-share, $267 million buyout offer it recently accepted from a private-equity group. Sears offered $6.75 a share.
Once a highflying Wall Street favorite, with a stock price that briefly traded in the mid-$30s, Restoration has been out of favor for the past several years, and the collapse of the U.S. residential construction market only has added to the Corte Madera, Calif.-based company's difficulties. Its stock closed Tuesday at $7.01, off 6 cents.
Restoration officials declined to comment Tuesday.
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smjones@tribune.com
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| From: Glenn Petersen | 12/15/2007 10:32:39 PM | | | | | | Hold the Tears for Eddie Lampert
His big bet on Sears looks dicier as profits plunge, but the chairman has a built-in safety net
December 13, 2007, 5:00PM EST text size: TT
By Robert Berner
When Sears Holdings (SHLD) posted a 99% drop in profits last quarter and the stock sank 11% in one day, ESL Investments took another beating. The hedge fund, run by Sears Chairman Edward S. Lampert, owns 45% of the retailer, whose stock has fallen to 111 from a peak of 195 earlier this year. Given its other laggard holdings, such as Citigroup (C) and Home Depot (HD), ESL is on track for losses of 20% to 30%, the worst in its 20 years, according to estimates from one ESL investor.
But don't jump to conclusions. Lampert's well-heeled ESL investors stuck with him through the other dark periods, 1990 and 2002, getting richly rewarded in later years. It can take a while for Lampert's highly concentrated bets to work out, and a five-year lockup period makes it hard for fickle investors to sell. Lampert declined to comment.
Meanwhile, Lampert has cut expenses drastically since he used his controlling stake in Kmart to buy Sears Roebuck in 2005. So the combined company has a hefty pile of cash, which may buy management time to figure out how to fix Sears and survive an extended industry downturn.
Even if the turnaround doesn't pan out, he still can sell the chain's real estate for a tidy profit. "Lampert has far more financial flexibility [than do other retailers]," says Deutsche Bank (DB) analyst Bill Dreher. "He should be appreciated for being so prudent."
Like many retailers, Sears has struggled to attract shoppers in an overcrowded sector and a slumping economy. But compared with other mid-market chains, Sears is in a stronger financial position, giving it more breathing room during these lean times. The company has $1.5 billion in cash, more than J.C. Penney (JCP), Kohl's (KSS), and Macy's (M)—its biggest rivals—combined. Lampert also has been paying down Sears' debt in recent years. As a result, its debt load is only 25% of the total capital on its balance sheet, compared with 46% for Penney's and 53% for Macy's. "There's wisdom in holding back in uncertain times, being cash-rich when your competitors are not," says Charles W. Mulford, an accounting professor at Georgia Institute of Technology, who recently studied retailers' cash flow.
For now, Lampert remains committed to Sears. The value investor, who is not shy about dumping assets if he thinks the money could be more productive elsewhere, has sold few Sears locations since coming on board. He also has been buying back shares aggressively. In the third quarter he spent nearly $1 billion on repurchases, a sign that he thinks the stock is a good deal. He's not the only one. Activist investor William Ackman of Pershing Square Capital Management bought a 3.5% stake in the third quarter, while Steven Munchin, a Sears board member and Lampert's roommate at Yale, picked up 75,000 shares.
The question, though, remains whether Lampert can fix the troubled retailer. Its recent results were especially ominous: the third straight quarter of deteriorating profit margins and sales at stores that have been open more than a year. And after months of slashing headcount and expenses, there's nothing left to cut. Some analysts say Lampert has grossly underspent on store improvements, contributing to the poor results.
Mostly, Lampert has to find the right retail formula. In November, Sears launched a bid to buy Restoration Hardware (RSTO), the home-goods purveyor, which is facing sluggish sales as well. If that deal works out, Sears could decide to create an upscale boutique within stores. It did the same, somewhat successfully, with the once catalog-only brand, Lands' End, says Credit Suisse (CS) analyst Gary Balter.
And if the situation at Sears sours too much, Lampert can always sell off his prized properties. The problems in real estate haven't spilled over much into retail. The reason: supply. Fewer malls are being built, and it's hard to find space for big-box stores in metro areas. That makes Sears' assets attractive to players like Target (TGT). Sears owns 518 of its 816 locations outright, and many of the 1,333 Kmarts are located in strip malls close to big cities. So Lampert can get some juice out of Sears even if the turnaround doesn't materialize.
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| From: Glenn Petersen | 1/20/2008 7:40:49 AM | | | | | | The WSJ is reporting that Sears is going to restructure itself into several separate units.
Report: Sears to Reorganize Into Units
Sunday January 20, 6:10 am ET
Report: Ailing Sears Holdings to Break Into Separate Units As 4Q Forecast to Miss Estimates
HOFFMAN ESTATES, Ill. (AP) -- Sears Holdings Corp. plans to reorganize into several companies in another bid to pull the ailing 121-year-old retailer out the doldrums, according to a report published Saturday.
The restructuring could create separate units to manage Sears real-estate holdings and run brands such as Diehard and Craftsman, the Wall Street Journal reported.
Edward Lampert, the hedge fund kingpin and Sears Holdings chairman, sees the move as a way to revitalize the company in the face of tough competition from companies like Wal-Mart Stores Inc., the newspaper said, citing unnamed people familiar with the situation.
Details, including which units might run the Hoffman Estates-based company's 3,800 Sears and Kmart stores in the United States and Canada, weren't clear.
Spokeswoman Kimberly Freely issued a short statement Saturday confirming Sears Holdings is "introducing an organizational structure that provides operating businesses with greater control, authority and autonomy." She declined to comment further.
Analysts say the changes contemplated by Lampert -- who acquired Kmart in 2003 and Sears, Roebuck and Co. in 2005 -- run against prevailing trends where retailers try to craft a single, cohesive business image.
"He's looking to turn it around by using a different approach," said retail consultant Walter Loeb. "I think it's risky."
On Monday, Sears Holdings told investors it would likely post fourth-quarter earnings well below Wall Street forecasts as eroding sales push its profit down as much as 57 percent.
It expects to earn between $350 million and $470 million, or $2.59 to $3.48 per share, for the quarter ending Feb. 2 -- far less than the $4.43 per share sought by analysts surveyed by Thomson Financial. Sears earned $820 million in the fourth quarter a year earlier.
Sears blamed growing competition, a slowdown in the housing market and consumers' credit fears for slumping sales figures.
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| From: Glenn Petersen | 1/26/2008 7:44:21 PM | | | | | | Saving Sears Doesn’t Look Easy Anymore
January 27, 2008
This article was reported by Gretchen Morgenson, Michael Barbaro and Geraldine Fabrikant and written by Ms. Morgenson.
BY all accounts, Edward S. Lampert, the billionaire hedge fund manager whose investment savvy earned him renown as “the next Warren Buffett,” is a man not accustomed to rebukes.
But that is precisely what the stock market delivered in mid-January as Sears Holdings, the Kmart and Sears combination engineered by Mr. Lampert in 2005 and his hedge fund’s biggest holding, sank to $86.02 a share. It was a level last seen three years ago, just after the ballyhooed merger was announced, and far below the stock’s peak of $193 in April 2007. In the course of nine months, $14 billion in market value had evaporated.
So it was perhaps not surprising that last week Sears Holdings announced a revamping plan that would divide the company into five units to “simplify the way its business lines are managed.” Although details were scant, the stock rallied 13 percent on the news. It ended the week at $99 a share.
The announcement may also have been timed to precede Mr. Lampert’s annual meeting with his hedge fund investors, scheduled for late next month in New York. After all, investors in his ESL Investments fund saw their holdings fall 26 percent last year. Although it was only the second down year for him since he started his hedge fund in 1988, some of his investors privately acknowledge that they are worried. At 48 percent of the shares outstanding, Mr. Lampert’s stake in Sears is the biggest in his fund, a portfolio recently estimated to be worth $11.5 billion.
Has Mr. Lampert lost his Midas touch? His woes, unlike those of most other investment managers, cannot be attributed solely to market turbulence and wrong-way bets that may soon right themselves. Much of the loss absorbed by his investors last year was a direct result of his hands-on management at Sears Holdings.
Since combining the two retailers, Mr. Lampert, 45, has raised prices even as he has cut capital spending and marketing budgets. The dearth of investment shows up in stores, many of which look shabby next to those of rivals like Target and J. C. Penney. Mr. Lampert’s major use of cash has been to buy back Sears Holdings’ shares.
And in 2008 he faces three problems that were only partly evident last year: belt-tightening by consumers, a falling housing market and a possible recession. “Sears is woefully unprepared to handle this kind of consumer spending slowdown,” said Bill Dreher, an analyst at Deutsche Bank Securities. “The underinvestment in stores has hurt sales, hurt customer good will and will hurt their long-term competitiveness.”
Mr. Lampert, through a spokesman, declined to be interviewed for this article. But a handful of his hedge fund investors, several retailing analysts and a host of people who have worked alongside Mr. Lampert over the years spoke about his operations and results, although some asked not to be identified in order to preserve business relationships with Mr. Lampert.
Just a year ago, shares of Sears Holdings were marching to their all-time high. Other big positions amassed by Mr. Lampert — in Autonation, a car dealership chain, and in Autozone, a car parts retailer — were firing on all cylinders.
Now they’re stalled or moving in reverse. While shares of Autozone rose 3.7 percent last year, Autonation stock ended 2007 down 27 percent. Last spring, Mr. Lampert made another big bet, on shares of Citigroup, which are also down significantly. Some analysts say Mr. Lampert’s misfires at Sears and Kmart may reflect his earlier success at Autozone, where he used the same cost-cutting strategy and generated enviable profit increases. But selling windshield wiper blades and brake hose plugs to do-it-yourself auto enthusiasts is different from creating an inviting shopping experience for home furnishings, jewelry or clothing.
The announcement last week that Sears would simplify its business units did not impress Carol Levenson, a credit analyst at Gimme Credit, an independent research firm in Chicago.
“We just can’t avoid the cliché ‘rearranging the deck chairs on the Titanic’ when considering the proposed new operating structure for Sears,” she wrote in a note to clients. “The goal of making the merged Kmart and Sears into a retailing success has become increasingly less achievable, as same-store sales plunge and excuses abound.”
The stock’s collapse last year — down 40 percent — reflects deteriorating operations at both Sears and Kmart, together the nation’s third-largest retailer, generating $52 billion in sales during the past four quarters. For the first nine months of 2007, the most recent period for which figures are available, sales fell 3.4 percent and operating income declined 31 percent for the combined companies.
Same-store sales, a closely watched measure of financial performance for any retailer, also fell throughout 2007. During the crucial holiday season, same-store sales at Sears — those for stores open at least a year — fell 2.8 percent, while Kmart’s dropped 4.2 percent.
Most rivals of Sears and of Kmart showed similar results during the holiday period. Same-store sales at Macy’s fell 1 percent in November and December, for example, while those at Target dropped 5 percent in December. Wal-Mart was a standout: its same-store sales rose 2.7 percent that month.
Based on figures provided by the company, Mr. Dreher estimates that earnings at Sears before interest, taxes, depreciation and amortization — the figure that Mr. Lampert says best measures the company’s performance — will drop to $1.94 billion in 2008 from $2.49 billion in 2007.
If he is right, it will mean that Mr. Lampert’s combination of Sears and Kmart, after rising for a few years, will have fallen back to the same level of profitability that both companies showed before they got hitched.
SUCH a round trip was not what investors had in mind when Mr. Lampert combined the companies in 2005. Confident in his ability to increase profit for Sears as he had for Autozone, and certain that the Sears real estate holdings alone were worth more than $150 a share, investors bid up Sears Holdings to almost $200 a share last April.
When Mr. Lampert announced the Sears-Kmart merger, his plan for the combined companies seemed simple: Marry the strength of the world-renowned Sears brands, like Kenmore appliances and Craftsman tools, with the attractive locations of Kmart stores. Mr. Lampert had bought Kmart on the cheap in 2003, when it emerged from bankruptcy.
“We’re going to work toward best-in-class financial metrics and best-in-class customer metrics,” Mr. Lampert said when announcing the deal in November 2004. Analysts praised the merger, contending that economies of scale in the combined companies would translate into increased profits.
But three years later, neither financial metrics nor those related to the company’s customers can be considered best in class. The gross margins of Sears Holdings, for example, were expected to expand under Mr. Lampert’s influence just as they had at Autozone when he was its biggest investor. But the gross margin rate of Sears fell during the first nine months of 2007 to 27.7 percent, from 28.2 percent in the period a year earlier.
And in spite of the fact that Sears spent almost $3 billion buying back its own stock and reducing shares outstanding, net income per share fell 38 percent for the first three quarters of last year from the comparable period in 2006.
The problem, analysts say, boils down to this: Customers are avoiding Sears stores in droves. Indeed, at many Sears stores, clerks at times seem to outnumber shoppers.
The Sears Essentials strategy, now called Sears Grand, offers a case in point. This was a plan by Mr. Lampert to compete with the new breed of smaller strip shopping centers, anchored by stores like Best Buy, Home Depot and Target. Sears stores, found mostly in enclosed malls, were losing prized customers to the smaller centers. But by converting Kmart stores, which were near the smaller centers, into Sears Essentials, the company hoped to lure shoppers back to buy Kenmore washers, Craftsman tools and Diehard car batteries.
“I have always believed that Kmart customers had the inclination to buy more valuable products at Kmart if presented with the right value offerings,” Mr. Lampert wrote in a letter to shareholders in late 2005.
But Sears Essentials flopped. It was not because Kmart shoppers rejected Sears products, but because the experiment seemed to consist only of tossing Kenmore stoves and Craftsman hammers into an old Kmart store, rather than creating a vibrant new shopping experience.
The former Kmart in Parsippany, N.J., is typical. Three years ago, it was converted into a Sears Essentials store. By all accounts, the store could have been a success; it sits in a bustling suburban shopping center, surrounded by popular retailers like a ShopRite grocery store and a Bed Bath and Beyond.
But beyond introducing new brands, Sears invested little money in the store. In November, a visitor found mismatched floor tiles in the lobby, Reagan-era beige shelves in the food aisles and a ragged brown carpet in the clothing department.
Near a customer service desk, a broken pipe dripped water from the ceiling into a garbage pail. Workers said the pail, intended as a quick fix, had been in place for two weeks while they awaited repairs. They also said business in the store was terrible.
Burt Flickinger, a longtime retail consultant, said: “Eddie has cut costs and raised prices for two years. But shoppers are not stupid. They figure it out and shop someplace else.”
A Sears spokesman disputed that the stores were down at the heels but acknowledged that the company must work to “improve the customer experience.” He said the company has improved the profitability of the Sears Grand stores and still considers the original concept valid.
Customers who did venture into the Parsippany store found that dozens of products — from contact lens solution to dolls — were sold out. The store did not have enough inventory or employees to replace them on the shelves.
Much of the commodity merchandise that was in stock was more expensive than at nearby competitors. A 32-ounce bottle of Gatorade was $1.59, compared with ShopRite’s price of $1.25. Sears charged $4.19 for a box of Cheerios, compared with $3.29 at ShopRite.
Rita Marra, 69, browsed but said she bought nothing. “Everything here is twice as expensive as anywhere else I shop,” she said. “Even the employees complain: ‘We know, we know our prices are expensive.’ ”
Analysts at Goldman Sachs have found that over the last year, average prices on nationally branded products at Sears Essentials and Kmart stores were 18 percent higher than those at Wal-Mart. “The prices are totally out of whack,” said Adrianne Shapira, an analyst at the firm.
Shoppers and workers are not the only ones complaining. Vendors who sell to Mr. Lampert say his relentless cost-cutting has steadily eroded their business at both Kmart and Sears, giving them little incentive to offer the chains their best new products. A result: a vicious circle of poor sales and second-rate merchandise.
“They are not a priority with anyone,” said the former chief executive of a major clothing manufacturer. “Nobody wants to partner with them on a new project.”
Several months ago, for example, executives from a well-known clothing maker met with Sears buyers to discuss their business for 2008. One executive who participated in the meeting said the Sears buyers praised the clothing company, saying that it was a top performer in its category but warning that sales of the clothing would nevertheless fall by 10 percent over the next year because traffic in the stores was declining. “You are joking, right,” the executive recalled thinking. “We are a top performer and sales are down 10 percent? What is happening to the worst performers?”
SEARS HOLDINGS’ performance has alienated no less a power broker than Martha Stewart, who sells a line of home goods at Kmart. She chose to introduce a new line of furniture last fall at Macy’s, a Sears competitor.
The spokesman for Sears said, “We have thousands of vendors and value them,” adding that the company changes the mix periodically as any retailer does.
Wall Street analysts and former Sears executives also express frustration that Mr. Lampert has not recruited many seasoned retail executives to the company. Only one of the Sears Holdings directors has a retailing background, and Mr. Lampert’s choice for a chief executive, Aylwin B. Lewis, is a former fast food executive who oversaw chains like KFC and Taco Bell.
“Eddie says this is a retail-driven turnaround, but we have not seen marquee retail executives come to the company,” said Ms. Shapira of Goldman Sachs. “Less savvy people than Eddie Lampert realize that retail begins with management. He doesn’t seem to get it.”
According to people with knowledge of the discussions, Mr. Lampert has put out feelers to several top retail executives, including Millard S. Drexler, the former Gap chief executive, and Allen I. Questrom, the man behind the J. C. Penney turnaround. But neither has agreed to join the company.
Mr. Lampert’s prickly personality may be part of the problem. Executives who have made the pilgrimage to his office in Greenwich, Conn. — from where he oversees Sears Holdings, which is based in Illinois — describe their meetings with him as impersonal, if not chilly.
An intensely private man, Mr. Lampert keeps chit-chat to a minimum, rarely asking a personal question or engaging, as most retail and clothing executives do, in industry gossip.
“He is the iceman,” said one clothing company’s chief executive. “There is nothing warm about him.”
The Sears spokesman said the company has executives with significant retail experience and values that diversity.
Mr. Lampert is also decidedly thin-skinned, scolding those who challenge the performance or strategies of Sears. He gets especially riled by those who say that he has starved Sears and Kmart, investing little money in the day-to-day business. “When other companies manage expenses carefully, it is often characterized as a sign of good management and prudence,” he wrote in a late November memo to Sears employees. “In the case of Sears Holdings, meanwhile, expense controls are often cited as a root cause of poor performance.”
STILL the question remains. Would the performance of Sears have improved if Mr. Lampert had not cut the company’s capital investment? In 2004, before the merger, Sears and Kmart managers spent a combined $1.1 billion on investments like new-store openings and renovations. In 2005, Mr. Lampert took that number down to $546 million, and in 2006, capital investment at Sears Holdings fell to $513 million.
Marketing budgets have also been cut. In 2004, the two companies spent $963 million; last year, the amount was $782 million, according to TNS Media Intelligence, a research firm, a decline of almost 20 percent.
But Mr. Lampert has been willing to spend big money on share repurchases. In 2007 and into this month, Sears has bought some 21.3 million shares, or 13.6 percent of its outstanding stock. The company has spent $2.9 billion to retire the shares, paying $105 to $145 a share.
“Poor operating performance can be disguised by aggressive share repurchases, and Lampert is very, very aggressive” in that regard, Mr. Dreher said. He called Mr. Lampert’s reorganization of Sears Holdings “haphazard and spontaneous” and warned that without giving the five new divisions bigger budgets to invest in stores, the changes “could make things even more difficult.”
Mr. Dreher added that the Sears chairman could be moving to take the company private and use the cash generated by Sears Holdings’ retail operation to finance ESL Investments.
Mr. Dreher estimates the liquidation value of Sears Holdings to be about $150 a share, after tax, including the value of its stores and leases and its well-known consumer brands.
Craig Schmidt, an analyst at Merrill Lynch, and Gregory Melich, an analyst at Morgan Stanley, value Sears real estate at around $16 billion. The company’s market capitalization is $14 billion, as of Friday’s close. One investor who has bet against Sears said he believes the real estate may be worth just $10 billion.
Certainly, the commercial real estate market has cooled in recent months. A retail consultant, Howard Davidowitz of Davidowitz & Associates, says he believes that the value of Sears stores is declining, as chains like Rite Aid and Macy’s close stores. “That real estate is worth a lot less than it was a year ago,” Mr. Davidowitz said.
Steven Roth, who heads Vornado Realty Trust, seems also to have lost his enthusiasm for Sears stock. After buying 4.3 percent of Kmart just before the Kmart-Sears marriage, Mr. Roth has sold his stake. He did not return a phone call seeking comment.
If Mr. Lampert finds it difficult to sell in an anemic real estate market, he will have to improve the retail operations to generate shareholder value.
“There is no exit strategy to my knowledge,” said Richard Rainwater, the hedge fund manager and entrepreneur who was an early backer of Mr. Lampert. “He will probably own it forever, and he wants to. My guess is that he has a plan. He is not going to tell you or me. My guess is that it probably makes sense financially.”
WORRIED investors in Mr. Lampert’s fund may soon press him to articulate his plan more clearly. Mr. Lampert’s annual meeting with investors is scheduled for Feb. 28 in New York.
Still, there is no doubt that the Lampert luster has faded; comparisons to Mr. Buffett have quieted in recent months.
“He did really well on Autozone,” said Bruce Greenwald, a professor of finance and economics at Columbia University. “Most of his stocks are retail stocks, and he has done really well with them. So he decided he was a genius at retail, and it didn’t occur to him he could be wrong about it. He believed his own press.”
Jenny Anderson contributed reporting.
Copyright 2008 The New York Times Company
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| From: Glenn Petersen | 1/28/2008 10:40:17 PM | | | | | | Smart move:
Sears’ Chairman Will Take a Step Back
By MICHAEL BARBARO
Published: January 29, 2008
Edward S. Lampert has a new strategy for Sears: less Edward S. Lampert.
With Sears Holdings’ sales, profit and stock price plunging, its billionaire chairman on Monday removed himself from day-to-day oversight of the ailing retailer and pushed out the company’s chief executive.
It was a humbling admission from the powerful hedge fund manager that his hands-on style and three-year-old strategy for Sears and Kmart are not working.
Until now, the heads of several major departments, like marketing and merchandising, reported directly to Mr. Lampert, even though he has no background in retailing or advertising. But from now on, those department heads will report only to the chief executive, the company said.
The executive changes appeared to answer two criticisms: that the company lacks a management team with the retail experience to pull off a turnaround and that Mr. Lampert, 45, is a micromanager who is hampering, rather than helping, the business.
But analysts said that, unless Mr. Lampert begins injecting money into the company’s increasingly shabby stores, the shake-up is unlikely to fix what ails Sears Holdings, the combination of Kmart and Sears that Mr. Lampert orchestrated in 2005.
Burt Flickinger, a longtime retail consultant, said that even with such a infusion of money, “there will be at least two or three years of suffering before there is going to be any success.”
Analysts said the changes raised a new set of questions, like whether Mr. Lampert, whose hedge fund owns 48 percent of Sears Holdings stock, can really step back from a close control of the business; and who would sign up for the difficult job of running the embattled company as its new chief executive.
“Sears will have a very tough time filling this job,” said Bill Dreher, a retail analyst at Deutsche Bank Securities.
Sears Holdings has earned a reputation for starving its stores of money, anathema to experienced retailers. The company is in trouble. And Mr. Lampert has already clashed with — and tossed out — several executives.
Joining that parade will be Aylwin B. Lewis, the departing chief executive, a former fast-food executive who oversaw chains like Taco Bell and KFC. He will step down later this week.
Mr. Lewis had little background in traditional retailing and never earned the support of Wall Street analysts, who referred to him as “Mr. 1+1=2” because of a gaffe during the original conference call announcing the merger of Sears and Kmart in 2004. (During the call, Mr. Lewis tripped over the business cliché frequently used to describe the economies of scale achieved through a merger — “1+1=3” — instead saying “1+1=2.”)
At Mr. Lampert’s urging, Mr. Lewis oversaw several years of cost-cutting at Sears Holdings. Spending on new-store openings and renovations has fallen to less than 2 percent of sales, half that of rivals like Wal-Mart and Target.
As a result, scores of Sears and Kmart stores look ragged next to their competitors, alienating shoppers and eroding both chains’ sales and profits. Earnings for the crucial fourth quarter of 2007 are expected to drop by more than 50 percent, the company has said.
Over the last nine months, Sears Holdings’ stock price has tumbled, wiping out $14 billion in market value, and three big banks have downgraded the stock, advising investors to sell. Shares of Sears Holdings closed Monday at $100.28, up $1.28.
In a memo to employees, Mr. Lampert defended the company’s performance and cost-cutting, saying, “I remain confident in our ability to ultimately succeed, even if there are steps backward along the way.”
Monday’s executive changes come less than a week after Sears Holdings reorganized the company into five units to give executives “greater autonomy and accountability for their businesses,” Mr. Lampert said.
But Mr. Lampert has given little detail about how the new units would work, or who would run them. Mr. Dreher, of Deutsche Bank, called the plan “haphazard” and warned that without bigger budgets, the new divisions could make a turnaround more difficult.
The company said it had appointed W. Bruce Johnson, the executive vice president for supply chain and operations, as interim chief executive while Mr. Lampert conducts a search for a permanent successor.
Speculation over who might be considered for the job centered on James L. Donald, who was just ousted from his job as chief executive of Starbucks, and Vanessa Castagna, a former senior executive at J. C. Penney, who now works for a private equity firm.
The new chief executive will have to contend with Mr. Lampert, who is known for his prickly personality and a hands-on management style that is unusual for the chairman of a company.
Indeed, Mr. Lampert has struggled to recruit top retail talent. According to people with knowledge of the discussions, Mr. Lampert has reached out to several top retail executives, including Millard S. Drexler, the former Gap chief executive, and Allen I. Questrom, the man behind the J. C. Penney turnaround. But neither has agreed to join the company.
In his memo to employees, Mr. Lampert seemed to acknowledge that he needed to step aside and let experienced retailers run the company.
“I believe the reorganization will allow our leaders to be more productive and efficient,” he said, “and allow us to attract talented executives who are eager to take on the challenges of running their own businesses.”
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| To: Glenn Petersen who wrote (811) | 8/28/2008 4:01:06 PM | | From: Sr K | | | | Monster short squeeze in SHLD.
All the headlines today (Bloomberg, WSJ) were about the decline in profit and revenue and no turnaround.
But the company bought back 5.6 m shares for ~$78 per share in Q2 and now has only 126 million outstanding. That's down from ~164 million st the time of the KMRT-S merger. |
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