Friday, September 09, 2005

Eddie to the Rescue

Edward S. Lampert, the billionaire who bought Kmart when it was in bankruptcy and then used it to buy Sears, Roebuck, put himself in charge of creative decision making on Thursday, taking a measure of personal responsibility for lifting two retailers out of a long sales slump.

A person familiar with Mr. Lampert's thinking, who declined to be named because Sears keeps tight control of all disclosures about its business, said the financier believes there is a shortage of talented merchants in the industry. "This is a work in progress," the person said. "It's going to be a bumpy ride." But he noted that Kmart's sales have pulled out of a nosedive under Mr. Lampert and that both chains are also forsaking mere sales growth through discounting.—New York Times

It’s hard to choose where to begin here.

Let’s start with the obvious: Eddie Lampert is one of the all-time great hedge fund managers—in fact, as we have observed in prior discussions of Sears, one of the greatest investors of all time.

Then there’s the other obvious fact: Eddie Lampert has no apparent merchandising skills whatsoever.

And if you want to argue with me about that—well, I suggest you first get yourself to a “Sears Essentials” store and see for yourself how Eddie’s vision of combining the best of Sears’ merchandising with the best of the old K-Mart real estate locations is working out.

I’ve done it, and I can tell you that it’s about as effective as, say, combining US Trust and Charles Schwab.

For starters, the stores all carry bilingual signage—English and Spanish—in one of those corporate money-saving moves that looks good on paper but looks really dumb in a store in rural Putnam Connecticut, with an Hispanic population of zero.

For another, the Lands’ End merchandise is mixed in with all the other Sears apparel brands, further destroying whatever equity value the Lands’ End brand had after the last few years of intensive destruction by the old-line Sears “merchants.”

The list could go on—but suffice it to say that while the store looked clean, thanks to a fresh paint job; and cheery, thanks to new light-bulbs…it uses the same old K-Mart fixtures and the same old K-Mart layout and (I hate to say it because they are the sympton, not the problem) the same old K-Mart employees.

For comparison purposes, the TJ Maxx store right next door not only looked like a real store run by real merchants, but with only half the square footage of the “Sears Essentials” store it was doing more business.

Sears Holdings needs a lot of things—great merchants among them.

And there are plenty of great merchants around—but they work at Abercrombie or Penney or Nordstrom or Williams-Sonoma or Quiksilver…not at hedge funds.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


tahoe kid said...

"We now return to your regularly scheduled blog:"........"Sears-Where America Shopped"

whydibuy said...

This touting of E. Lampert is really misplaced. First, he forced a viable co, Kmart, into bankruptcy giving him with his bondholders control on the cheap. Kmart had assets and cash to continue working their turnaround. Lampert saw that and initiated a bankruptcy preemptively. He has done nothing to the Kmarts around me. They look like they are being starved of capital with no improvements whatsoever. Kmart is now one of a very few that don't have self serve checkouts. In fact, their checkouts look like they were got second hand used. The shelving is old and faded dingy. The stores I've been in have a mismash of worn tiles on the floor. Seems like the genius can't even think to redo the floors, something practically every homeowner does. And this comp to W. Buffett is silly. Buffett would never try to rebuild a dying business, much less combine two and make a real corp zombie. Nor can I remember Buffett ever pushing a co into bk for his own benefit. This guy is another shyster, except now he's believing his own press about how he's such a genius. Speaking of W. Buffett, he's said " when a mgr with a great reputation meets a business with a poor one, its usually the reputation of the business that remains intact". Are you listening Eddy?

Chad Brand said...

Kmart had little choice but to file bankruptcy. Also, Lampert did not push Kmart into bankruptcy. He bought the bonds on the cheap (since they could not survive) so he would have a controlling interest in the new company, an interest that nobody else dared to touch.

Its_strange said...

Did CNBC get more viewers after they built that $130,000,000 studio a few years ago ? Well we have more than enough choices and more than enough bills . Time to be still

Sam S. Park said...

I haven't done any on-sight research (nor do I claim any expertise in merchandising). But from what I've been reading, Kmart seems to have received a simple cosmetic make-over. Just because you put some lipstick on the pig, it doesn't necessarily mean that people will mistake the pig for a prized cow. Like Jeff mentioned, Mr. Lambert probably acknowledges the dire need for great merchants. It's probably too early to tell how this turnaround will play out, but this will be interesting.

Aaron Koral said...

I agree with Sam Park's opinion. The interesting thing about Eddie Lampert is that he focuses his investments on retailing. Witness his successes in AutoNation (ticker AN) and AutoZone (ticker AZO). Even though Mr. Lampert may not know a thing about retailing, he has a knack of surrounding himself with people who do know the retail business (be it cars or car parts) and wring out cash flow from low operating margins. I wouldn't be surprised if he turns SHLD around too, though it may take a while, not with all the cosmetic changes withstanding.

Harvard Homeboy said...

The synergies between KMart and Sears are almost as obvious and compelling as those between, say, Sears and Dean Witter.

You gotta ask: What were they thinking?

Did they really expect folks to go into the Sears store shopping for kids underwear and see the Dean Witter sign and say to themselves, "Oh, Dean Witter. Of course. Excuse me, but I need to go take a forward contract on the Deutschmark," or something?

EricBrock said...

Not many people talk about this, but Lampert was seemingly controlling both K-Mart and Sears when he effectively sold real estate between the 2 companies at what most people thought at the time was an arms-length transaction. That price "validated the market price" for all that "terrific land" the companies owned. It also spiked the stocks enabling Lampert to take over both companies.

Of course, since then there has been very limited independent validation of the real estate values imbedded in the companies. I am not privy to the compensation terms of his funds, but if they are anything like a standard hedge fund incentive structure, he has already booked and been allocated his personal gains. This is different than a private equity firm that gets paid once they monetize their investment.

This of course was a brilliant personal financial move for Lampert and his investors if he is able to maintain the value of the combined company, something that is anything but a slam dunk... especially since the early premise of substantial real estate value being monetized seems highly unlikely, if not speculative.

tahoe kid said...

For the Sears/KMart turnaround to work, Mr. Lambert must convince the retailing masses to TRY his reborn retailer. That means creating enough interest to get people to begin skipping their regular trips to Wal-Mart, Target, Costco, Kohl's or JC Penny. That is no small task.

Sith Lord said...

The Sith Lord is amazed that underling Matthews can't work out the answer.

Sell any excess stock through the world's greatest sales channel.

I talk of the one that will come after me, whose operational parameters I am not worthy to calculate but which I pave the way for.



Student said...

First of all Eddie Lampert DID NOT force Kmart into bankruptcy – Kmart lost their swagger to Wal-Mart in the late1970’s. Wal-Mart built an exceptional sales distribution, merchandise channels, and an amazing proud workforce (which is collapsing as we speak). Kmart and Sears can’t compete – they can’t just build it now and they will come now! Lampert bought this for the real estate value, if I am right he plans to beat Wal-Mart with quality rather than price. Has anyone walked into a Wal-Mart and enjoyed the experience? I HATE IT. I hate the idea of having these employees who are helping me, resent me. It’s as simple as that. It’s all about morale and eventually I predict Sears/Kmart will be bigger than Wal-Mart! As soon as Wal-Mart’s exhausts their international expansion plans – we will ALL start to watch a dynasty end.

cdub said...

A Jeff blog posting, followed by a Jesse WSJ article only 3 days later? A strange "coincidence."

gregshrock said...

To me, the most interesting point from the article: "Sears keeps tight control of all disclosures about its business." So did K-Mart during its bankruptcy. I don't agree with whydibuy that EL forced the company into bankruptcy. But I do suspect that EL had a lot to do with the company's keeping public investors completely in the dark about what was going on during the bankruptcy -- encouraging the spread of wildly pessimistic rumors, and incidentally, enabling EL to buy a huge stake at a cheap price. I don't know why Sears is keeping such "tight control" of information today, but it's hard to see how that benefits anybody other than EL and other insiders who have the benefit of already knowing all of the information that the rest of us don't know because it isn't being disclosed.

Matthew Leonard said...

If any of you have interest I'd be more than happy to discuss what is going on at SHLD. Send me an email

For those of you that have interest, you should write to Mr. Lampert with your inquiries.

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Eyemanc Speaks said...

I shopped at K-Mart today.
I was impresed with all the improvements and the new merchandise from sears. This store layout has been completly changed.
The employees were attentive and helpfull.
Mr.Lampert and associates are doing a very good job.