The worst kept secret in retailing is that Sears is going under and will eventually be relegated to the history books. Earlier this week, Sears Holdings Corp. provided a list of 46 unprofitable stores, across 28 states, that it will close in November. The number includes 33 Sears stores and 13 Kmart stores. The struggling department store chain said liquidation sales at the closing stores will begin as early as Aug. 30. Earlier this summer, Sears provided an updated list of 78 Sears and Kmart stores that it said would close in September.
Sears Holding stock has plummeted to $1.10 from a high of $133.04 in 2007 and despite years of maneuvers and machinations to keep the storied retailer afloat, it is becoming increasingly clear that it’s only hope is a bankruptcy filing. But Eddie Lampert, the company’s chief executive and its main shareholder is unlikely to lose any money on his holdings. Huh?
Here is how it works. Lampert recently proposed that his hedge fund buy out the only remaining assets deemed to hold much value, namely the Kenmore brand for $400 million, and in the process provide the company with much-needed liquidity. And Lampert has structured the deals so that the most valuable properties and assets are protected if Sears Holdings fails.
But, why invest in a failing company? The not so subtle reason is that Lampert’s hedge fund, which both owns Sears and is also its largest creditor, is earning a fat 8% to 11% on a pile of $3 billion of Sears debt. And so, the longer he can keep this charade at Sears going, the better for Eddie, and Eddie only and no one else.
Future Wealth’s View
It is yet another totally normal moment for a totally normal company. While it is clear to everyone that Sears’s demise is mostly the result of Lampert’s failure to understand the fast-changing retail sector over the last 10 years and his neglect of the actual stores, the tangled structure he has created through years of transactions to benefit himself is appalling. If Lampert is so concerned about shareholders as he often explains to the press, why not it take it private like the “genius” Elon Musk of Tesla?
Instead, he is lending money to the very company where he is the CEO, gets all the valuable assets of the company in return, gets paid a fat interest rate on the money he is lending on top of that and once he has stripped the company of all the assets, he will put the company into bankruptcy. Other shareholders get nothing and the largest debt holder – himself, gets first dibs on the remaining assets. This is so ridiculous that it should be made illegal by the SEC.
If Sears’ board accepts the Lampert’s offer, Lampert will take direct control of the most valuable pieces of Sears and could walk away having made money off the slow demise of a once-robust operation that stocked just about everything America needed. Sears’ shareholders have lost millions of dollars and hunderds and thousands of jobs are gone forever but, who is counting?
Nonetheless, Eddie Lampert will be the first to echo the words we heard earlier this week from a well known former mayor of New York and now, the attorney to the President – “The truth isn’t the truth”.