CEO fund thrives as Sears decay drags on
Retailer spends less on renovation than rivals
When he became CEO of Sears Holdings, Eddie Lampert declared he was on a mission to restore the iconic retailer to its former glory. Since then, he’s extended billions of dollars in loans from his hedge fund to Sears and Kmart.
The difference between what Sears has invested in its stores – affecting what customers experience when they shop – and what many of its peers have is stark, a USA TODAY review of public filings and analyst research shows. If the Sears chain ever sinks into bankruptcy, the records show, Lampert’s hedge fund will be positioned at the front of the line when loans are repaid.
Sears has spent less to spruce up stores than competitors such as Best Buy have. Best Buy was left for dead five years ago. Since then, CEO Hubert Joly has plunged hundreds of millions of dollars into store upgrades and critical information technology systems. The electronics retailer is back on its feet, having remade itself as a vibrant physical retailer immersed in the digital age.
Sears stores, on the other hand, have fallen into disrepair. Stained carpeting, broken fixtures and dim lighting are commonplace. Analysts, industry watchers and even shoppers predict the iconic retailer doesn’t have much time left.
“If you go into any Sears, physically they look like 1982,” said Stacey Wid-
litz, president of SW Retail Advisors. “So as a customer you’re thinking, ‘This is not a place I’m coming back to.’ ”
USA TODAY’s examination of public capital spending data and research compiled by Susquehanna International Group found Sears and Kmart spent 91 cents in capital expenditures per square foot in the fiscal year that ended in February. In contrast, Best Buy invested $15.36 per square foot in its most recent fiscal year.
Lampert declined to be interviewed, and a representative for Lampert’s hedge fund, ESL Investments, declined to comment or to make him available.
In an emailed response to questions, Sears told USA TODAY, “We strongly disagree with your assertion” that the company has not used a sufficient percentage of its resources to reinvest in stores. The company pointed out that its investments included several new smaller-format locations, including Sears Appliance & Mattress locations in Texas, Pennsylvania and Hawaii.
Loading up on loans
While Sears has steadily lowered its investment in store upgrades over the past five years, the company has loaded up on loans from Lampert himself.
By extending almost exclusively secured loans to the company, Lampert’s hedge fund has racked up more than
$2.4 billion in Sears debt, according to a USA TODAY review of public filings and research by Debtwire, which provides news and analysis of corporate and municipal debt.
Lampert-owned investment funds, including ESL and a related fund called JPP, get roughly $200 million to
$220 million per year in interest payments from Sears, according to separate estimates from Susquehanna and Debtwire.
As the company bleeds cash and puts prized brands up for sale, some industry watchers questioned whether a greater focus on its stores – or even a declaration of bankruptcy years ago – could have put the business on the path to profitability. Instead, the company’s demise may be inevitable.
“Two or three years ago, in a bank- ruptcy ... you probably had a chance to execute reorganization,” said Van Conway, CEO of Van Conway & Partners, a financial advisory firm specializing in distressed situations. Now, “I’ve got to believe when they head into a bankruptcy ... you’re going to see a Toys R Us outcome, which will be just a liquidation.”
If that happens, Lampert has put the hedge fund in position to snap up some of the company’s prime assets, analysts said. The CEO orchestrated a series of complex financial deals in which he effectively has played the role of both seller and buyer or lender and borrower.
Lampert has said he does not believe in pouring money into stores that would not provide sufficient return on the investment. Instead, he has pursued partnerships, including deals with Amazon.com and Citi that earned praise from investors, and he made loans to the company that have been personally lucrative.
“My conclusion is he’s trying to take the whole thing for himself,” said Susquehanna International Group analyst Bill Dreher, a retail stock analyst who has tracked Sears for two decades and estimated that the retailer needs $1.4 billion in fresh capital to make it through the year. Dreher recommended that investors sell the stock. Susquehanna is a market maker in the stock, meaning it buys and sells shares to help investors execute trades.
Under Lampert’s reign, Sears has implemented a relentless cost-cutting campaign – $1.25 billion in 2017, includ- ing hundreds of store closures – while making priority payments to Lampert the lender.
Cost cuts and loans extended the retailer’s lifespan and kept 89,000 employees at work. The loans were authorized by the board of the company, which might have faced difficulty securing financing without Lampert’s help.
Most of Lampert’s loans probably would be paid in full if Sears went bankrupt, since it’s nearly all secured debt, which typically takes precedent in court over unsecured creditors such as vendors and landlords.
To be sure, Lampert has a lot to lose if he can’t turn Sears around. That includes his 49% equity stake, which was valued at $115 million as of June 4.
A challenging sector
Many of the retail sector’s challenges, including declining mall traffic and Amazon’s rise, were already intense by the time Lampert became CEO.
Lampert signaled his reluctance to heavily invest in stores in a letter to shareholders in 2006 – roughly a year after he engineered the merger of Sears and Kmart to create the parent company, Sears Holdings.
The business would not invest money in “stores simply because we have the capital available to invest or because everyone else does it,” Lampert wrote. “Rather we are investing in our stores where the investment makes sense – in other words, where it improves the ex- perience for our customers and associates and leads to attractive returns.”
Company actions since Lampert came on board include:
❚ Selling the Craftsman brand in 2017 to Stanley Black & Decker for roughly $900 million.
❚ Transferring 235 of the most valuable Sears store properties in 2015 to a new real estate investment trust, Seritage Growth Properties, of which Lampert is the largest shareholder and chairman, for $2.7 billion. Sears paid Seritage $109 million in rent in 2017, $43 million in expenses such as property taxes, insurance and utilities, and $35 million in lease termination fees, according to a public filing.
❚ Spinning off retailer Lands’ End in 2014. Lampert’s ESL owned roughly
67% as of Jan. 24, according to a filing, a stake worth nearly $430 million as of May 17, and roughly $578 million as of Friday afternoon.
Lampert is taking his strategy a step further.
In his role as hedge fund manager, he wrote a letter in April to the Sears board – which he chairs – asking that the company consider selling ESL its Kenmore appliance brand and other assets. A month later, Sears set up a special committee to explore the possibility.
On May 25, Lampert’s hedge fund wrote to the committee saying it had “received numerous ... inquiries from potential partners” and asking for the go-ahead to talk to them and others in preparation for offering Sears “a definitive proposal.”
Sears said Lampert will not be involved in the decision process, “except to the extent specifically requested by that committee.” The special committee has put limits on ESL working with partners as it aims to buy key Sears assets.
The five Sears board members other than Lampert either declined to comment through their representatives or did not respond to requests.
Sears said in a statement: “Sears Holdings prides itself on having a strong board of independent and experienced business leaders who put the best interests of our members, associates and shareholders at the forefront. Any suggestion to the contrary is unjustified.”