If you read the reports, the prognosticators on Wall Street have already predicted Sears will be bankrupt in two years. That’s being optimistic.
The iconic brand joins Macy’s and Kmart as the latest retail icon closing massive number of stores in light of poor sales. I wrote about another retail giant, JC Penny’s problems back in 2013 and how the out of touch CEO was ousted for not understanding the JC Penny customer.
Why is this happening? If you think it’s because so called brick and mortar stores are going out of style you might want to speak to Amazon.
A new in-depth report from Business Insider looks into the fall of the mighty Sears brand and puts a spotlight on its controversial CEO Eddie Lampert.
Lampert made his money on Wall Street and later started his own hedge fund company ESL Investments when he was 26.
“ESL generated annualized returns of more than 20% a year for 20 years, marking one of the strongest long-term investment records in history, according to a 2013 Wall Street Journal article. In 2004, BusinessWeek (now Bloomberg Businessweek) asked if Lampert was the next Warren Buffett.”
He would later acquire Kmart and Sears to create a new company called Sears Holdings. At the time it was the biggest retail merger in history.
Lampert then made promises, calling Sears Holdings a the new “start up” company “…great…for generations to come”.
The BI pieces details (from former employees) the changes Lampert is making and how a Sears liquidation might fit into the “great” plans.
SEARS SELLS TOP BRANDS
Lampert says his plan is to take a page out of the Microsoft and Apple playbook and begin to use in store retail and online retail more efficiently. But he has a problem. Liquidity. The CEO is having problems raising money.
One solution is to begin selling brands.
A retail store has to be known for something. Like Amazon for Kindle or Costco for Kirkland. It takes years to build a brand known for quality.
It has taken Sears decades to build up brands like Kenmore kitchen appliance and Craftsman tool brands. They were known for quality. Sears stood behind Craftsman do much it famously held a lifetime unlimited warranty:
“Legend held that scavengers used to scour for old beat-up and broken Craftsman wrenches in the trash, and would bring the damaged tools manufactured half a century or more earlier to a local Sears (SHLD) store.
When they walked out, in hand would be a shiny new wrench—or sometimes a rebuilt one with someone else’s initials still scratched in. No receipts or proof of purchase were necessary to get a replacement or a free repair. They’d then go flip that cold steel for cold cash. In a way, Craftsman tools, enabled by their generous guarantee, were cash.
“We used to have people go looking for Craftsman tools at old garage sales,” one former employee posted on Reddit. “Or from little old ladies who still had some in storage and return them for brand new [tools], then turn around and sell them as new.”
Now news comes Sears will sell the brand to Black and Decker for cash. Many believe Kenmore and DieHard are not far behind.
Sears has already announced it is closing 150 Sears and Kmart stores. BI has already written about subpar condition of the stores.
Many see little or no money or attention paid to the up keep of the stores.
“He refuses to put a dime in updating stores,” one former vice president said. “You walk in and you are embarrassed as an employee when the ceilings are leaking and the floors are cracked.”
“No one believes in Eddie’s vision,” this person said. “He has just gone rogue.”
Business Insider spoke to several store-level employees who said the stores are severely understaffed, with some operating on fewer than half of the employees they need. That has led to widespread complaints among shoppers that they can’t find an employee to check them out, so they end up leaving the store empty-handed. Lampert continues to assert that the retailer is in the midst of a “transformation”…
TURN IT INTO A TECH COMPANY – YOUR WAY
So why do this? Why buy and build a retail company only to stop investing in its core asset – the stores?
“Lampert’s plan is for Sears to one day be a tech company, more like Apple or Facebook than a traditional retailer, according to three former executives.
“He’s got it all set out in his mind, how he wants things to run, regardless of any type of value proposition,” said one former employee. “If Eddie thinks it’s ‘cool’ and it will position us with Amazon or what the young people are buying, then you go marching toward it like a zombie.”
So the abandoning and slow liquidation of the stores is part of the plan, an attempt to make the company – “asset light”.
To move toward tech, Sears began the “Shop Your Way” program which is a member based program for Sears customers. Lampert chafes when employees call Sears visitors “customers” instead of “members”.
“The big plan he hoped would transform Sears was a rewards program called Shop Your Way, which the company introduced in 2009.
Through the program, frequent buyers accumulate points for their Sears and Kmart purchases and turn them into coupons and discounts. One primary goal of Shop Your Way was to acquire customers’ personal information and sell it to other companies, according to a former executive who worked on the program.
There’s also a social networking component on shopyourway.com, where members can see and comment on products their friends have liked or purchased.”
So there it is. The three step program to make Sears great again.
1. Sell iconic brands known for quality owned by Sears
2. Sell the primary assets, like the stores, all around the US
3. Turn a retail business into a member based social media company that sells user data instead of furniture and clothes.
THE SCAM TAKES SHAPE
But is the move to make Sears a tech company smoke and mirrors? Could the CEO of Sears purposefully be hurting his company? If so, why?
An interesting side note to all of this is ESL began a real estate company called Seritage Growth Properties.
“ESL, has loaned Sears more than $1.12 billion and promised an additional $679 million over the past two years to help keep the company afloat. In return, Sears pays origination fees and interest directly to ESL, and, by extension, Lampert. A recent shareholder complaint claims that Lampert and ESL made at least $19 million in fees and interest payments from a $400 million loan in 2014.
Lampert, in a purported attempt to provide liquidity, sold a bunch of Sears real estate and raised 2 billion. Guess who bought that space? SGP, the real estate company owned by ESL.
But Sears is not closing those stores, it needs those store and the retail space. So the retailer is paying to lease the space from SPG and the rent has gone from $4 to $20 a square foot.
And under the deal, Seritage (ESL) is able to take some or all of the retail space to rent to other companies. Perhaps even competitors. Plus, Sears can easily abandon those locations, turning them over to SGP hastening the liquidation.
“…in their lawsuit, shareholders accuse Lampert of stripping Sears Holdings of its core assets to benefit himself and his hedge fund. They say the Seritage deal unfairly enriches Lampert at the expense of other Sears investors, as the stores were sold well below market rates.
“Eddie Lampert used his position at Sears as its CEO and controlling shareholder to further his and his hedge fund’s interests rather than the best interests of the company [by spinning off its] crown-jewel assets to the REIT at an unfair price,” said Ned Weinberger, a partner at the law firm Labaton Sucharow LLP, which is representing the shareholders.
Many high level employees are abandoning ship.
“At least 67 executives — vice-president level or higher — have left the company just within the last two years, according to LinkedIn data. Fifteen of them left after less than two years of service, and seven left after less than 12 months, according to the employees’ profiles.
“They are going out of business,” said Van Conway, an expert in bankruptcy and debt restructuring and CEO of Van Conway & Partners. “This snowball is 90% of the way to the bottom of the hill.”
The Limited, a nationwide woman’s retail clothing store, has just announced on its website the closing all its stores nationwide, killing 4,000 jobs.
“We’re sad to say that all The Limited stores nationwide have officially closed their doors,” the statement reads. “But this isn’t goodbye. The styles you love are still available online — we’re just a quick click away 24 hours a day.”
Sun Capital, the private-equity firm that owns The Limited, attributed the decision in part to falling foot traffic at shopping malls.
“We have worked very hard and made significant investments over nine years to improve operations and create a sustainable business at The Limited,” Sun Capital told Reuters in an emailed statement. “In an increasingly challenging environment for mall-based retail and women’s apparel, we are very disappointed that the company has had to make the difficult decision to close its retail locations.”
I’ll have to do a story soon about America’s failing malls.