Many years ago I had the pleasure of meeting Mr. Edward Lampert at an investment conference. At the time he was the brilliant head of ESL Investments, his own hedge fund shop. He had spent time at Goldman Sachs and moved on to making his own bets. He was so good that major financier Richard Rainwater, who was the head of the Bass Family fortune, was one of the first investors into the fold. Lampert was great at picking undervalued companies or those who needed more seasoning. He was said to be the next Warren Buffett.
Fast-forward a couple of years and Lampert had come up with what he thought was the greatest trade of all time. He purchased the unsecured debt of Kmart and started to turn the troubled retailer around negotiating its exit from bankruptcy but then he decided to merge it with Sears. Lambert has doubled down so much on the strategy to save these ailing businesses that he forgot the money manager’s motto. “Don’t fall in love with a trade”. Get in, get out and don’t take any prisoners. Everyone else on the street was hoping for a good ending to the story, but was secretly afraid the Lampert, once the king of all he surveyed had taken on the Titanic right before it hit the iceberg.
I remember thinking at the time that making such a large bet on one deal was such a gamble for any fund manager. Why would someone so successful, so brilliant make such a wager? ESL was a very successful fund that once ran as much as $15 billion in assets which is down to a bit over $1 billion today. I remember telling my team at the time that this deal will wind up being the best trade ever or the largest failure of all time. Because no one should go “all in” on an investment such as this right? Not even private equity firms, who know they have just met the next Google, go all in. Risk is something that is measured and you spread your investment capital around so that you can make sure you can live another day to tell about it.
Year after year Lampert has shored up the company’s finances with extraordinary financial maneuvering but in the end nothing can stop the inevitable. The company will be filing for bankruptcy protection at 12 pm tonight according to people close to the situation.
You see what happened here is the fact that a business, which is 125 years old, got left behind. For much of its history, Sears did business through mail order catalogues. You know, if you are old enough to remember, the Sears Catalogue. There was a time when people could not wait to get the newest version of the catalogue. Prior to the Internet even being invented, Sears did direct to consumer marketing through its catalogue business and was the largest retailer in the US.
Sears then moved on to retail stores and was once the largest of its kind. The store was once the cornerstone to most suburban shopping malls. During the 1960s/70s Sears expanded greatly and continued to add different pieces to its business. It introduced its own credit card at one point and was one of the first stores to utilize POS systems. The company ventured into the automotive servicing and parts business as well as home appliances. Then Sears entered the financial services business expanding through what is known today as Allstate Insurance. Sears went on to purchase Coldwell Banker the real estate broker and then Dean Witter the brokerage firm. But the main cornerstone of the financial strategy that some forget, was Sears was the company that launched the Discover Card.
But over the years Sears shuttered its once mighty catalogue business and attempted to move forward with other ventures. It tried to expand by buying Lands End, which never really worked out in its department stores. Consumers had changed over the years and Sears’ main clientele was blue collar in nature. The preppy clothing from Lands End did not translate well to Sears’ customer base.
Unfortunately, what happened to retail in general happened to Sears the hardest. Hit by new comers who built superstores featuring food to auto parts, clothing to tools, Sears had to now compete with the likes of Wal-Mart. Then the dreaded Internet almost did everyone in retail in as to where even Wal-Mart had to push its online strategy as superstores and retail sales are not what they used to be. Sears, while it has attempted to push its viable Die Hard Batteries and Kenmore appliances just to name a few products online, has somewhat missed the boat.
Think of all of the businesses that no longer exist today due to the viability of Internet sales or the fact that those companies were too stuck in their old models. From financial firms that were the victims of the Global Financial Crisis, to stores we all grew up with, all of whom are dead and gone. (Can you say, Toys R Us?) Why? Because they did not change fast enough to be able to compete with changing customer needs and desires as well as how one sells to consumers. Remember, the only constant in business is change. If you do not change and adapt you are finished eventually.
While Sears still has some valuable real estate and maybe that was the actual play Lampert was looking for; one thing is for certain. This is certainly a prime example of doubling down, or in this case quintupling down.