“And you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure. You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw.” – Other People’s Money
It’s no (new) news that Eddie Lampert – key shareholder (approximately 22%) and hedge fund trader extraordinaire – is now, officially, CEO of Sears. Despite the business press’ questioning (yet remarkably uncritical attitude toward) of Lampert’s new job title, make no mistake: this move is a massively, unmitigated disaster set in motion. By naming himself CEO, Lampert has sealed Sears’ fate as the next big retail failure.
First, let’s look at the basics. Since Lampert stitched “deeply wounded Kmart to Sears’ once-venerated brand in 2005,” the retailer has lost more than $10B in revenue, not to mention a drop in market cap down to $4.4B this past year. And, despite Lampert’s habit of blaming “journalists, analysts, and rating agencies for much of the trouble plaguing his retailing empire,” the market has, essentially, been reading the writing on the retail wall when analysing and pricing shares of the retailer: Sears is a dying brand in a declining marketplace – one that’s now plagued with a misguided CEO devoid of operational abilities who’s put himself in charge of operating a $40+B retailer in a declining marketplace.
What makes Lampert’s latest move so deadly for Sears?
Up until this point, Lampert’s essential strategy, post-AutoZone’s success of reallocating capital assets (which worked in part because “the strategy to scrutinize capex so tightly worked well for an auto parts retailer because you don’t eat in the stores, and women don’t buy apparel there”), has been to drastically cut back on capex for Sears, reducing it to less than 1% of sales (compared with 2-5% in the traditional department store space). In turn, the Sears shopping experience – once a hallmark and characteristic of the retailer’s legacy – has devolved from bad to worse during the very years when department stores with limited web exposure were being left in the retail dust by retailers dominating the online shopping revolution. And while Lampert has blamed a multitude of imagined enemies for Sears’ decline, his assumption that a pure capex (as opposed to multi-tiered) strategy would turn around the retailer has turned out to be patently and provably wrong.
So what now?
Lampert’s move to CEO indicates a new nadir in Sears’ increasingly depressing status. While insiders report it nearly impossible to work within Lampert’s territorial and ugly system, the CEO has more to worry about than just a disenfranchised group of employees. His obvious next move will most likely involve selling off Sears’ real estate holdings (does he, as a hedge fund trader, have more than this one trump move in managing a company?), a desperate attempt to boost cash reserves and re-establish some stability, all without actually implementing a significant shift of in-store or online strategy. One problem, however: with JCP rumoured to be considering a liquidation of some of its assets, Lampert will be faced with assets immediately devalued in the marketplace. And, given what employees and senior leaders have revealed about their time at Sears, Lampert’s hardly a competent leader – more-often a divisive and ineffectual one – one whose skills will be severely tested by the market and consumers in the next 12 months.
Is this the death-knell for Sears? No, of course not. It’s important to remember that this is, after all, a $40B company – one that will not simply disappear into the department store graveyard. Tragically, however, given JCP’s recent decent into retail nothingness, Lampert’s missing a real opportunity to change Sears. And the department store experience in and of itself.
In short, short Sears. Nothing good will come from this.
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]
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