Sears chairman will be remembered as professional investor who didn’t want to invest | Investment

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Lincoln’s lone Sears store — along with dozens more — is now headed for closure as liquidators, as well as longtime Sears Holdings Chairman Edward Lampert, jockey in bankruptcy court to get what’s left of the company.

When Sears Holdings is finally dead, Lampert should be remembered as the professional investor who didn’t want to invest.

Sears peaked long before Lampert got there, yet he’s always going to be known for its decline. His investment funds took control of Kmart more than 15 years ago, and he then engineered a 2005 merger with the even more storied American retailer Sears, Roebuck and Co., emerging as chairman of the new Sears Holdings.

What happened next is not much. Maybe day-to-day operations improved, but there was no bold new strategy, no transformation, no winning new concept. Those things would have cost money, and Lampert didn’t want to invest.

We now might think we all saw this coming years ago, but it’s well worth going back to the period just after the merger. That was the last best chance for a rebirth of the company, before the Great Recession, when the consumer was still spending and before Amazon.com became the new American everything store.

It’s a harsh world for retailers and maybe nothing would have worked, but Lampert gave away the company’s best chance.

Lampert had come onto the scene a few years before as a fund manager investing in the debt of Kmart, a company with its own rich history going back more than 100 years. When Kmart emerged from bankruptcy, investment partnerships that Lampert ran ended up with most of the ownership in a smaller, reconstituted Kmart.

In late 2004, the two retailers announced that Kmart would be taking over Sears in a deal valued at roughly $11 billion. Both companies had seen better days, and both were looking uphill at that era’s strongest players, Walmart and Target.

Yet on paper the deal seemed to make some sense. The company would have well-known brands and about 3,500 stores, mostly in regional malls and other suburban locations.

Lampert became the board chairman and kept his investment firm, and there’s not nearly enough space to even summarize the dealings, both proposed and consummated, between the company and Lampert the investor.

The new company did fine at first, nicely profitable in its first full year in fiscal 2006 with more than $53 billion in total revenue. That year, the company invested $508 million in capital items, meaning store renovations, computers and software and other assets that would be productive for a long time.

At the time, Target was about the same size, although Sears Holdings had many more stores. Target reported about $57.9 billion in revenue but with a higher operating profit margin than Sears. That year, Target invested not quite $4 billion in capital items, meaning that for every dollar Lampert approved at Sears, Target was investing almost $8.

The story was the same a year later. In fiscal 2007, Sears invested $570 million, while Target invested almost $4.4 billion.

What was Target doing with its money? While a lot of it went to technology and distribution centers, about 70 cents of every dollar in capital spending that year went into new Target stores. That may not look as wise in retrospect, as Amazon.com was already coming on strong by then, but at least Target was playing offense.

In Target’s DNA is an approach to business that’s all about careful allocation of capital to ideas that generate a return. Investors in Target have been able to read all about that approach for years. It might not always work, and it’s not easy to manage, but capital spending discipline is one thing that makes a company like Target as successful as it has been.

Lampert put a lot of his thinking about what to do with Sears’ money into chairman’s letters, and one he sent just as the Great Recession began was both triumphant and defensive in tone.

He pointed out that a recent slip in the stock price had brought Sears Holdings stock down to an increase of only 10 times investors’ money since Kmart emerged from bankruptcy, down from nearly 20 times their money.

He explained what the company had done with its money since the merger deal, including the cash flow generated from operations. About $1.7 billion went into store renovations and other capital items, at a rate of about half a billion dollars a year. But far more, about $4.3 billion, went to repurchase Sears Holdings shares at an average cost of $132 per share.

Those were bad trades. Lampert had no way of knowing this, but Sears Holdings shares had already peaked in value.

Financial writers and analysts for years puzzled over why Lampert didn’t invest more in operations, and in that early 2008 chairman’s letter Lampert did call it “a legitimate question.”

His answer? The company would have invested more if it could expect an acceptable rate of return. Just investing a lot more money wouldn’t guarantee success.

As he explained, if Sears Holdings invested $200 million to remodel 100 stores, the return would be precisely zero if the stores didn’t make any more money after the renovation than they did before. A savings account would have earned the shareholders more.

And besides, Lampert tried to explain, there were lots of good things to do besides invest in top-to-bottom store remodels, like offering a smarter assortment of products, installing nicer merchandise displays and so on.

In a way it’s not a bad point he was making. Sales at stores operating for at least a year, a key indicator for retailers, had only declined since the merger. If sales are slipping at the stores we already have, why build more?

And that led to maybe another mistake of Lampert, the professional investor. When investors don’t see anything good lying ahead of them, they usually sell the asset to somebody who does.



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