Sears: FIRE In the Hole

[don]

Sears Holdings investors are too giddy about the money-losing retailer’s slow-motion breakup. Shares of Edward S. Lampert’s struggling store chain jumped 35 percent by early Friday afternoon on the news that it may create a real estate investment trust for many of its stores and lease them back. The move would raise significant cash, but shareholders, Mr. Lampert included, would finance the deal. And the prospects for the rump retailer remain pretty dim.

The hedge fund billionaire’s REIT proposal is the latest twist in what’s starting to look like a gradual divvying up of the company’s most attractive assets.

Earlier this year, Sears pocketed a $500 million dividend from spinning off its Lands’ End clothing division. More recently, it took out a $400 million loan from Mr. Lampert, its chief executive and biggest shareholder, secured against 25 stores. Selling 51 percent of Sears Canada raised at least $300 million, too. Sears is also trying to raise $625 million through a separate unsecured loan and equity offering.

If the REIT sale and lease-back plan goes ahead, it would involve up to 300 stores. Granted, that would increase Sears’ cash buffer. But shareholders would have to finance the deal. If they end up paying close to market price for the stores, they’ll be no better off than before.

Meanwhile, it’s far from clear that Sears would put the extra cash to good use. On Friday the company said it might lose between $590 million and $630 million for the three months to Nov. 1. That would be the 10th consecutive quarter of red ink the retailer has spilled.

It may well be that much of the spike in Sears stock on Friday came from hedge funds having to buy stock to cover their shorts. After all, some 33 percent of the company’s outstanding shares were out on loan as of Oct. 15, according to the latest available Thomson Reuters data.

If, however, shareholders really are feeling exuberant thanks to Mr. Lampert’s latest plan, they may want to reconsider.

Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

[charliebrown]

Re: Sears: FIRE In the Hole

The only thing exciting about sears is they have nice selection of appliances and tools. I also like the jewelry selection. I think they are being hurt being in a lot of regional malls. I just have no incentive to go there. Its a long way to drive, and usually in heavy traffic. A lot of their other lines are available at target and walmart which has the cash and carry model. I can see the inventory and be in and out a lot faster than at Sears. Sears also does not sell sundaries like toothpaste, toilet paper, pens etc. So I have to make two trips if I want to buy these things and something more substantial. I never see the store very busy. I think it is dead.

[santafe2]

Re: Sears: FIRE In the Hole

The only thing exciting about sears is they have nice selection of appliances and tools.

So my Craftsman tools may not have a lifetime warranty...

[LorenS]

Re: Sears: FIRE In the Hole

Ever since KMart bought out Sears their business has suffered. I quit buying their tools when they started changing battery pack styles every few years and left me with a cordless drill with dead batteries. We quit buying appliances at Sears as well. Their Kenmore brand used to be top notch, now it's a Whirlpool with cheaper plastic fittings. Our dishwasher lost a little plastic flap, but the replacement assembly is over $100, you can't buy just the little flap.

[don]

Re: Sears: FIRE In the Hole

doing what he does best . . .

Sears Holdings is dying a slow, sad death led by its chief executive, Edward S. Lampert, and his hedge fund, ESL Investments, yet Wall Street is going mad over its stock.

On Friday, shares in Sears gained 31 percent — more than $1 billion in value — on the announcement that the company might engage in a bit of financial engineering by selling 200 to 300 stores to a real estate investment trust. The company’s stockholders would be entitled to buy shares in the REIT, and Sears would lease back the stores. The stock gain came despite the fact that the company is on track to lose more than $3 billion in two years.

Investors seem to prefer financial tricks at Sears over real results as they struggle to divine Mr. Lampert’s endgame for Sears and whether he will keep the company alive or liquidate it. Mr. Lampert’s hedge fund took control of Sears Roebuck & Company in 2005, merging it with Kmart, a company he acquired out of bankruptcy. At the time, Mr. Lampert was a golden child of Wall Street, at one point the richest person in Connecticut, though he has since moved to the tax-friendlier environs of Florida. ESL’s investment initially performed well as the combined company rode the credit bubble before the financial crisis.

But retailing is a graveyard for bricks-and-mortar shops that cannot adapt to the Internet or find their niche. Sears, like another dying retailer, RadioShack, is firmly in this category. It has never found a way to leverage its historic brand, losing ground to Target, Walmart and other retailers, not to mention Amazon.com. Even J.C. Penney is doing better.

Part of the problem appears to be Mr. Lampert. With the supreme confidence that only a billionaire hedge fund manager can bring, he has run Sears into the ground. From his perch in Florida, Mr. Lampert has failed to find a strategy to turn Sears around. He has adopted an almost Ayn Rand-like view of the business, like having more than 30 divisions compete among themselves and breaking apart and putting together brands.

Mr. Lampert has landed on some innovations, like integrating the Internet better into the retailer’s delivery operations and working to build “Shop Your Way,” a membership rewards program and buying system. The latter idea is the chief pillar of Mr. Lampert’s turnaround strategy — to convert Sears into a buying club where customers can either have their online purchases delivered or pick them up at stores without ever having to leave their cars.

Becoming a membership club is not a bad idea, but it is not gaining enough traction to save Sears. Even Mr. Lampert has said that Sears’s latest performance figures are “unacceptable.”

To compound the problem, stores are not as important in the buying-club model, and Mr. Lampert has starved them of capital. The net result is not pretty. Brian Sozzi of Belus Capital Advisors posted to Twitter pictures of the deteriorated state of Sears stores, which were described as “pathetic” on TheStreet.com.

Sears has been left reeling, hemorrhaging cash at a rate one analyst put at up to $1.5 billion this year. Over the last year, Sears lost $1.4 billion and is on track to lose a similar sum this year. Creditors have grown wary as they refuse to take Sears credit, an irony for the company that started the Discover card.

But with Sears’s downfall, Mr. Lampert has stepped into an area he is familiar with: financial engineering. Sears is being broken up to cash in.

Sears Canada was sold to raise $300 million in a rights offering that left Mr. Lampert’s fund with a 46.7 percent stake. Lands’ End was spun off, with Mr. Lampert retaining a 48.6 percent stake. Meanwhile, Sears has refinanced its debt and closed more than 100 stores. Other more valuable stores are being sold, with one in Cupertino, Calif., recently going for $102.5 million.

In the dash to raise cash from Sears’s real estate, the company is also setting up co-tenant operations with companies like Western Athletic Clubs and Gonzalez grocery stores. Sears also borrowed $400 million from Mr. Lampert, giving him a personal lien on 25 stores. The company may also consider selling other businesses, like its Sears Auto Center brand.

In short, Mr. Lampert is busy dismantling Sears while the business declines — voraciously eating all of the cash he raises. But he is positioning himself and his fund well for a bankruptcy or liquidation by taking positions on the other side.

ESL and Mr. Lampert did not respond to a request for a comment. In an emailed statement, a spokesman for Sears, Howard Riefs, defended the REIT proposal. “We believe there are sound business reasons for pursuing this structure, and all shareholders have the ability to participate on a pro rata basis, as it could allow Sears Holdings to focus on the business of integrated retailing in a more asset light portfolio,” Mr. Riefs said.

Mr. Lampert is making Sears an “asset light” membership retail operation. In a complex graphic only a management consultant could love that was posted on the Sears website, the company lays it out as “optimizing store network” and “transforming select business models” all in the name of the Shop Your Way model.

It sounds nice, but the market considers Sears’s retail business worthless and sees value only in its real estate.

This is a zero-sum game for Sears shareholders. In the proposed sale-leaseback of up to 300 stores, they will have to pay market value because of the requirements of the laws against fraudulent conveyances. They will also effectively be paying yet again to finance the company. Not only that, but this takes away yet more assets from Sears at a time when it is burning through billions of dollars in cash. Mr. Lampert’s fund would presumably jump in and once again own a big stake in an orphaned Sears asset.

If you look at it this way, the transaction is a bit of a fool’s errand. It pours even more money into the Sears maw, yet does nothing to fix the business.

So what explains the market reaction after the announcement?

Part of it is that there is not much stock to buy — Mr. Lampert controls just less than 50 percent, and Fairholme Capital, another hedge fund, owns 24 percent. But this is all about the market trying to predict what Mr. Lampert will do. The market had been pushing for almost a decade for a REIT to unlock the real estate value, which one hedge fund, Baker Street Capital, estimated at more than $7 billion.

The REIT announcement may have incited delight among investors that Mr. Lampert had finally acknowledged that Sears may be worth more if it is liquidated. But that assumption may be mistaken. On his blog, Mr. Lampert seems ever more committed to Sears. In May, Mr. Lampert talked about how he was leading a “transformation” of Sears, invoking the comeback of Apple.

But he leaves a mystery of how value will be created if shareholders pay full price for these stores and the money is burned up, fueling the loss-churning engine that is Sears. Instead, the deal seems to be only positioning Mr. Lampert to salvage his investment in a retailer that he does not yet seem prepared to dissolve.

Instead, perhaps this is a sad lesson in the limits of financial engineering. Mr. Lampert seems adept at slicing and dicing Sears, but he has failed miserably at turning this business around. It all brings to mind William A. Ackman’s failures at J.C. Penney and Target, where his hedge fund, Pershing Square Capital Management, thought that because it had smart people, it could solve a “retail” problem and make a business relevant.

But at least Pershing Square had a plan. Here, the plan seems to have come to nothing more than financial engineering. It may work out for Mr. Lampert, who according to Forbes is still worth $3.6 billion, but how it helps Sears seems beside the point.

[metalman]

Re: Sears: FIRE In the Hole

Sears Holdings investors are too giddy about the money-losing retailer’s slow-motion breakup. Shares of Edward S. Lampert’s struggling store chain jumped 35 percent by early Friday afternoon on the news that it may create a real estate investment trust for many of its stores and lease them back. The move would raise significant cash, but shareholders, Mr. Lampert included, would finance the deal. And the prospects for the rump retailer remain pretty dim.

The hedge fund billionaire’s REIT proposal is the latest twist in what’s starting to look like a gradual divvying up of the company’s most attractive assets.

Earlier this year, Sears pocketed a $500 million dividend from spinning off its Lands’ End clothing division. More recently, it took out a $400 million loan from Mr. Lampert, its chief executive and biggest shareholder, secured against 25 stores. Selling 51 percent of Sears Canada raised at least $300 million, too. Sears is also trying to raise $625 million through a separate unsecured loan and equity offering.

If the REIT sale and lease-back plan goes ahead, it would involve up to 300 stores. Granted, that would increase Sears’ cash buffer. But shareholders would have to finance the deal. If they end up paying close to market price for the stores, they’ll be no better off than before.

Meanwhile, it’s far from clear that Sears would put the extra cash to good use. On Friday the company said it might lose between $590 million and $630 million for the three months to Nov. 1. That would be the 10th consecutive quarter of red ink the retailer has spilled.

It may well be that much of the spike in Sears stock on Friday came from hedge funds having to buy stock to cover their shorts. After all, some 33 percent of the company’s outstanding shares were out on loan as of Oct. 15, according to the latest available Thomson Reuters data.

If, however, shareholders really are feeling exuberant thanks to Mr. Lampert’s latest plan, they may want to reconsider.

Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

sears is like the monopoly game player who rolled the dice & got lousy properties & not enough complete sets to build houses & hotels vs his opponent. as he lands on his opponent's expensive properties & pays the rents he runs out of cash. to keep the game going he mortgages properties but each time he does he adds to his opponent's rental income advantage. he fights on but he knows how it ends. same deal with sears as it sells off assets & cheapens the service & product offerings to try to improve cash flow. competitors move in to take up the disaffected customers. death spiral...

[don]

Re: Sears: FIRE In the Hole

"with Sears’s downfall, Mr. Lampert has stepped into an area he is familiar with: financial engineering. Sears is being broken up to cash in."

[gwynedd1]

Re: Sears: FIRE In the Hole

Sears Holdings investors are too giddy about the money-losing retailer’s slow-motion breakup. Shares of Edward S. Lampert’s struggling store chain jumped 35 percent by early Friday afternoon on the news that it may create a real estate investment trust for many of its stores and lease them back. The move would raise significant cash, but shareholders, Mr. Lampert included, would finance the deal. And the prospects for the rump retailer remain pretty dim.

The hedge fund billionaire’s REIT proposal is the latest twist in what’s starting to look like a gradual divvying up of the company’s most attractive assets.

Earlier this year, Sears pocketed a $500 million dividend from spinning off its Lands’ End clothing division. More recently, it took out a $400 million loan from Mr. Lampert, its chief executive and biggest shareholder, secured against 25 stores. Selling 51 percent of Sears Canada raised at least $300 million, too. Sears is also trying to raise $625 million through a separate unsecured loan and equity offering.

Pocketed?

http://money.cnn.com/2002/05/13/news/deals/sears/

NEW YORK (CNN/Money) - Sears, Roebuck & Co. returned to its roots Monday, buying catalog retailer Lands' End Inc. for $1.9 billion in cash, nearly a decade after it abandoned the century-old catalog business that made it famous.

I'd say recovering pennies on the dollar. Lets not even get into the Sears Hispanic strategy during this period as if low riders and Land's End fit together like hands and driving gloves.

http://www.businessinsider.com/sears-shares-are-getting-incinerated-2014-4

"Sears is getting rid of all the good stuff and leaving bondholders with the underperforming assets," Mary Gilbert, an analyst with Imperial Capital LLC, a boutique investment bank, told WSJ's Suzanne Kapner.

Lampert is quite the scam artist too. First he acquires K-mart as the bond holder, getting the company's equity and assets for dimes and nickels. Now as the controlling interest he leaves the bond holders with boat anchors using his equity for a dividend.