Since “Hellhound on His Trail” came out in the spring of 2010, I’ve had occasion to think anew about the many conspiracy theories that swirl around the story of the King assassination…a lot of perfectly sane people believe that Martin Luther King was killed as a result of a vast, shadowy conspiracy.
—Hampton Sides, author, “Hellhound on His Trail.”
This being the weekend America honored MLK, we’re recalling that lament of the above-quoted author Hampton Sides—whose excellent, compelling account of the largest manhunt in FBI history is worth buying, right now, on your Kindle or iPad—about the persistence of weird conspiracy theories surrounding what was, in fact, the well-documented assassination of one civil rights leader by one sorry but clever-enough jailbird, as we consider the persistence of a weird conspiracy theory about a once-proud retailer brought low by one genius of a hedge-fund manager.
We speak, of course, about Sears.
The conspiracy theory, lately making the rounds on Wall Street, stems from the fact that the hedge-fund genius, Eddie Lampert, who also happens to be Sears’ board chairman, recently purchased nearly 5 million shares of Sears, mostly from his own hedge fund, at a price of close to $30 per share.
The conspiracy theory hinges on three verifiable facts: 1) Eddie Lampert is an extremely smart guy with a terrific track record; 2) Sears under Lampert has become even more of a basket case than it was before he took control; and 3) despite the obvious collapse in Sears’ business model, Lampert had been using Sears’ own coffers to buy up stock in the open market at absurd prices that were far higher than what he just paid for the stock, rather than invest in the business itself.
And on all three facts, the conspiracy theorists are correct. Lampert is smart—witness his success with AutoZone. And he has been using Sears’ own cash to buy stock in the open market at absurd prices, in hindsight:
Fiscal Year $MM Bt # MM Shares Bt Average Px
2010 $394 5.5 $72
2009 $424 7.1 $60
2008 $678 10.3 $66
2007 $2,900 21.7 $135
2006 $816 6 $136
2005 $590 5 $125
Total $5.8 Billion 55.6 million shares
Average price: $104/share. Last trade: $33.56 per share. Value destroyed: $3.9 billion.
As for the notion that Sears has become a retail basket-case, look no further than the credit default swap market in Sears Acceptance Corp—the Sears financing arm—and you’ll see they have blown out to levels that even the calculator-impaired credit monitors at S&P would recognize as, er, stressed.
“Why then,” the conspiracy theorists ask rhetorically, “would Eddie have bought back all that stock for the company at stupid prices before buying stock for himself cheap?” Their answer—and while we’re paraphrasing what we’ve heard, we’re not making up the gist of it—is this:
“Eddie wants Sears to go bankrupt so he can take control of the real estate and make a ton of money.”
And while the conspiracy theory seems to wrap up a lot of loose ends, it does not take into account the most obvious notion, which is that Eddie got Sears wrong.
By way of demonstrating just how wrong he may have gotten it, we herewith present a sample of howlers from various Sears filings over the years:
[Sears] completed development of new Internet technologies and migrated our selling websites to an improved e-commerce platform. This new platform positions us to attract and retain customers using a multichannel service approach to create a consistent experience across the channels and enhance the offerings and the shopping experience where channels intersect. Examples include store-to-Web, Web-to-store, special order catalogs and the sales hotline. Multichannel represents the potential for a sustainable growth vehicle for our company and represents an opportunity for us to unify and integrate the customer’s experience.
…in August 2007 we introduced the Ultimate Appliance Promise campaign. The purpose of this campaign is to show our customers that we are uniquely positioned to meet their appliance needs by offering the largest selection of appliances, a price guarantee, one year of free service and support, and next day delivery and installation in many markets across the U.S.
[Sears] remodeled approximately 30 Kmart stores to include Sears-brand products. We intend to continue our rollout of home appliances, including Sears Kenmore-brand products, into Kmart locations over the next several years as a means of expanding our points of distribution in response to competitor store growth. As of February 2, 2008, approximately 280 Kmart stores, including certain of the remodeled locations, offered broad assortments of home appliances.
MyGofer expanded its fulfillment options in a variety of ways, as well as serving as the engine behind additional integrated retail efforts. MyGofer.com provides features and benefits designed to create a one-stop shopping experience, offering a range of quality products including groceries, prescriptions, health and beauty products, and electronics. MyGofer was created to provide our customers with speed and convenience – the same day a customer places an order, it is ready within hours, with pickup now available in over 600 stores.
And, our favorite:
With regards to social media, we deployed a variety of campaigns and applications to make our experiences more engaging and “sticky,” both on sites like Facebook and Twitter, as well as on sears.com.
Maybe—just maybe—like when a loser from a broken home of whom nobody had ever heard managed to kill the leading civil rights leader of his times and almost get away with it, the facts are just the facts.
To support this perspective, we now harken back to an early report on Sears that spookily heralded everything that came afterwards: a 2006 Fortune Magazine piece in which Lampert is called “The Steve Jobs of the investing world,” yet contains enough evidence of the penny-pinching narrow-mindedness that destroyed Sears to be almost prescient:
The mood was tense at the Bel Age Hotel in West Hollywood, Calif., early last year. The top two dozen executives of Sears Roebuck & Co. were gathering for a strategy session with Eddie Lampert, then 42, the billionaire hedge fund manager who had just engineered an unlikely takeover of their venerable but struggling company. The fact that the vehicle of his acquisition was discounter Kmart--which Lampert had come out of nowhere to snatch control of during bankruptcy--was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea. "What's the benefit of that?" he asked again and again. "What's the value?" He shot down a modest $2 million proposal to improve lighting in the stores. "Why invest in that?" He skewered a plan to sell DVDs at a discounted price to better compete with Target and Wal-Mart. "It doesn't matter what Target and Wal-Mart do," he declared.
Eyes began rolling…
—Patricia Sellers, Fortune Magazine, February 8, 2006
And the eyes should have rolled. Because, as it turns out, it does matter what Target and Wal-Mart do, just as improved lighting does matter in stores where women bring children to shop for clothes.
How much such things matter is evident in the numbers ever since Eddie began second-guessing the expenditure of cash on anything, it would seem, excepting high-priced stock.
From 2006 to 2010, Target and Wal-Mart together spent $16 billion and $33 billion, respectively, on capital upgrades to their businesses (we’ve arbitrarily cut Wal-Mart’s actual capital expenditures of $67 billion in half, to account for the company’s international spending). Sears, meantime, spent a miniscule $1.4 billion, or about 3% of Target and Wal-Mart combined—and less than a quarter of the share repurchase cost—on silly things like “improved lighting.”
The result? While Target’s annual cash flow from operations grew from $4.9 billion to $5.3 billion in that time, and Wal-Mart’s grew from $10 billion to $12 billion (again dividing that company’s total figure in half), Sears was watching cash flow from operations drop 90%, from $1.4 billion—almost 10% of Target’s and Wal-Mart’s combined cash flow—to a nail-biting $130 million…which is less than 1% of its rivals.
And Sears has done that while generating over $40 billion in annual sales—not easy to manage, negatively-speaking-wise.
None of this, of course, is new-news. The 2011 numbers, previewed last month, were even bleaker for Sears.
But beyond the obvious value destruction and the conspiracy theorist-like attempt to reconcile conflicting facts, the company’s recent performance and its chairman’s ensuing share purchase in January raise a rather obvious question that doesn’t appear to have crossed any minds in the press corps: why is it that Eddie Lampert, who directed Sears Holdings’ share repurchases of 55.6 million shares at an average of $104 over the 2006-2010 period, bought for himself rather than for Sears Holdings those 4.8 million shares at around $30 a share (technically the 'purchase' was likely an allocation of his annual performance fee in stock, but still...)?
After all, a company that had spent nearly $6 billion on its stock at an average price of $104 would presumably have found the shares even more attractive at $30.
Wouldn’t Sears Holdings have liked to average down?
To the conspiracy theorists, the answer is self-evident: it clinches their view that Eddie has purposely been buying back stock at silly prices in order to shrink the share base and drive up his personal percentage of the remainder, while simultaneously disinvesting in the stores so aggressively that the Sears parking lot is the only place to find a space at the mall during the holidays, making it worth more to Eddie dead than alive.
But we don’t buy it.
We think Eddie’s mother, quoted in the above Fortune article, had it right:
“I never thought he would go into retail,” Dolores Lampert says. “It's a very hard business. But it's a challenge, and Eddie likes a challenge.”
Still, if Warren Buffett is looking for scapegoats on Wall Street, he might want to direct some attention to Sears. Unlike Staples, for example, which private equity nurtured and grew into an industry-creating powerhouse, here’s a business that was an industry-creating powerhouse that has, pretty systematically, been destroyed by private equity.
Retail is indeed a very hard business.
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011) Available now at Amazon.com
© 2012 NotMakingThisUp, LLC
The content contained in this blog represents only 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. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
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