Chairman’s efforts fail to turn around Sears

01/01/2012 5:00 AM

01/02/2012 9:03 AM

When Kmart acquired Sears in 2005, Chairman Edward Lampert said the new company would have the geographic reach and scale to compete with Wal-Mart.

The billionaire hedge fund manager has since presided over 18 consecutive quarters of declining sales. He’s on his fourth chief executive. While Sears Holdings Corp. shares soared in the first few months after the merger, they’ve fallen 55 percent in 2011 alone.

Sears “has been a mismanaged asset,” Gregory Melich, an analyst at International Strategy & Investment, said in a Bloomberg Television interview. “A lot of traditional department stores have reinvigorated themselves through merchandising, through changing their locations; you think of Macy’s. You haven’t seen that from Sears.”

Tuesday, the nation’s largest department store chain reported that it would close as many as 120 locations after same-store sales fell 5.2 percent in the eight weeks ended Dec. 25. By contrast, such sales in the department-store sector will climb an estimated 4 percent in November and December, compared with the same period a year ago, according to the International Council of Shopping Centers, a New York-based trade group.

Since becoming chairman in 2005, Lampert, 49, has reduced costs, closing 171 large U.S. stores and cutting the headcount by about 12 percent. Sears employed 312,000 people as of January, down from 355,000 in June 2006, according to data compiled by Bloomberg. Meanwhile, his hedge funds have made money on the original investment.

He has tried one strategy after another. An initial push involved converting 400 Kmart stores to a format called Sears Essentials with grocery and convenience items. Sears Grand, another concept, hewed to a superstore model. All have failed to reverse falling sales and ceded customers to the likes of Wal-Mart and Macy’s.

“At Sears, a lot of what we sell is tied to housing,” Chris Brathwaite, a Sears Holdings spokesman, said in a telephone interview. “The recession has had an impact on our company, like most retailers.” The closings will allow the Hoffman Estates, Ill.-based company to focus on “better-performing stores,” he said.

Steve Lipin, a spokesman for Lampert, didn’t return a call seeking comment.

Lampert founded his hedge fund ESL Partners in 1989, taking inspiration for his approach to finding undervalued stocks from the shareholder letters of Warren Buffett, the billionaire chairman of Berkshire Hathaway. Lampert has specialized in buying stakes in beaten-down retailers, some of which he helped turn around by either collaborating with or shaking up management.

Lampert’s hedge funds bought Kmart Corp. bonds and bank loans and then swapped the debt for stock in a bankruptcy reorganization in 2003. At the same time, Lampert’s funds were also building a 15 percent stake in Sears, Roebuck & Co. by purchasing shares on the open market.

When Kmart acquired Sears in 2005 to form Sears Holdings Corp., Lampert and his funds initially held a 39.4 percent stake, comprising about 64.6 million shares. Based on what the funds paid for their Kmart stake, as well as the average trading price during the quarters that they bought Sears stock, the funds spent an estimated $1 billion on the investment.

Even after this year’s slump in the stock, Sears has been a profitable investment for Lampert. His hedge funds paid about $16 a share for the stake in the chain, based on regulatory filings and Bloomberg calculations.

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