Private Equity May Be The Only Way To Save Sears


As restructuring and turnaround advisers and investors, we here at ACM Partners are often asked about the big retail “stories of the day” (meaning companies on the brink of distress). GAP, Tiffany & Co., and now Sears and Kmart are the most recent “big cases” we’ve received the majority of inquiries about. 

Given Eddie Lampert’s recent repurchase of Sears shares and the news that CIT’s pulling the store’s supplier loans, we thought it’d be best to take a closer look at the next steps for the retailer.

Here, then, are a few questions (and answers) about Sears, and its future.  (We’ll tackle Kmart tomorrow.) 

Do we even need Sears (the store; not the corporate parent) anymore?

Sears has essentially, through hedge fund manager Eddie Lampert’s mishandling of the brand/store, disappeared from the retail landscape.  Gone are the days of Midwestern families (like mine) setting aside Sundays to peruse Sears’ sales-floors to see the “latest and greatest” offerings.  Instead, as Lampert “has tried one strategy after another,” including one move  “converting 400 Kmart stores to a format called Sears Essentials with grocery and convenience items. Sears Grand, another concept, hewed to a superstore model.”  Worst of all, “all have failed to reverse falling sales and ceded customers to the likes of Wal- Mart and Macy’s.”

Here, then, is where Sears went wrong:

•    Financial Shortcomings:  While “‘their balance sheet is fine…for three straight quarters, the retailer has reported negative net income, losing over $400 million in earnings and $824 million in operating cash flow in its last quarter. Fitch recently downgraded its credit rating to CCC, and the company will record up to a $2.4 billion charge this quarter for its store closings.”  Even more worrisome, “Cash had dwindled to $624 million at the end of the third quarter, compared with $790 million a year earlier.”  Most importantly, “Lampert took an investor’s approach to running the chain, scrimping on necessities like store maintenance and ignoring traditional metrics like same-store sales. Meanwhile, he spent $1.5 billion on share buybacks from 2008 to 2010.”  In short, Lampert’s managed Sears as an investor, not a turnaround professional.

•   Style Drift: Once a venerable brand of all things Americana and, essentially, masculine, Sears has completely lost its style-and-offerings way.  What does Sears really offer anymore (at least that can’t be purchased less expensively and more conveniently somewhere else?).  The recent addition of the Kardashian line perfectly illustrates this point.

•    Lack Of Direction:  Sears appears to be fumbling along in its efforts of just trying to survive.  Most importantly, “Sears is turning upside down a strategy that has prevailed for most of its 118-year history. It’s accelerating franchising efforts — including Sears Hometown and Sears Auto stores. It’s leasing space to such retailers as Forever 21. And it’s allowing other retailers to sell the popular DieHard, Craftsman and Kenmore products and licensing those brands.” Furthermore, the appointment of former tech executive Lou D’Ambrosio is yet one example of how Sears clearly shows no coherent vision for its future.  

If yes, can Sears be turned around?   What does the executive team need to do?

Obviously, working in the restructuring and distressed advisory and investment space, we ALWAYS believe something can be turned around and/or fixed.  Sears is no exception.

Here are a few things Sears can do to “save” itself:

•    Minimize Costs: While “closing the Kmart and Sears stores will generate $140 million to $170 million of cash from inventory sales and leasing or sales of the locations” and “the chain plans to reduce fixed costs by $100 million to $200 million,” Sears must both tighten operations and enact strong cost-cutting actions across the board.  Lampert must take a turnaround approach to the inevitable restructuring that’s coming down the pike.

•   Create And Maintain A Coherent Vision: What, exactly, is Sears about?  Ask different consumers and you’ll get a million or more different answers.  Sears core brands are Kenmore and Craftsman, meaning the retailer must narrow its focus by returning to its roots: a specialised retailer catering to both men and families. While the retailer risks losing market share to more specialised retailers in this space, it corrects the current issue Sears has right now: attempting to be a jack-of-all-trades, master of none, in a retail world where customers can always easily go somewhere else.

•   Go Private: “With a market cap of only $3.45 billion, it wouldn’t be tough to get the financing for a going-private transaction.”  After all, “based on its latest balance sheet, Sears has a net book value of $7.7 billion,” which most likely understates the retailer’s true market value.  A private equity firm could be the failing retailer’s financial saviour , should revenues fall much further.

 Tomorrow, we take a look at whether or not Kmart can be saved.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis  management and distressed investing firm serving companies and municipalities in  financial distress.  She can be reached at [email protected]