Eddie Lampert’s Sears Holdings (SHLD) reported its financial results for the first quarter this morning. For aficionados of the financial reporting arts, Sears Holdings press releases are special moments. While technically no different in purpose than the quarterly reports from other retailers, Sears is playing a whole different game than, say, Kohl’s (KSS) or Target (TGT).
Most retailers are trying to come out with predictable numbers that appeal to the largest possible audience, both in terms of shoppers and Wall Street. Dick’s Sporting Goods (DKS) does under $7 billion in sales per year and is followed by 27 different Wall Street analysts. When the company missed earnings estimates by $0.02 earlier this week executives spent more than an hour explaining precisely why.
Sears, with nearly five times the revenues of Dick’s is almost totally ignored by Wall Street. The two analysts bothering to publish estimates for Sears Holdings expected the company to lose $1.87. The company came in with a surreal $3.79 loss with the following commentary:
“Sears is undergoing a significant transformation, and we fundamentally are changing the way we do business," said Lampert. "Our performance in the first quarter highlights the challenges we are facing as well as the progress we are making in this transformation. We are moving away from a company that was heavily based on selling products solely through a store-based network to a member-centric business model focused on providing benefits to our members anytime and anyplace. We are seeing progress in our transformation to a member-centric, integrated retailer, as we continue to invest heavily in driving our Shop Your Way program. Member sales for the first quarter represented their highest level ever, representing 74% of eligible sales.”
To appreciate that statement you need to first accept that it has nothing to do with actual retail operations. As Mike Santoli and I discuss, the percentage of Shop Your Way program eligible sales hitting 74% isn’t really a retail metric. It’s a shiny object designed to distract the wee ones who insist on looking for a retailer at what is the greatest chop-shop in retail investing history.
The entire statement is gibberish until you get to liquidity and asset sales. On those topics Lampert’s genius is beyond question or even accurate measure.
“One of the best things you can say about (Lampert) and his stewardship of Sears Holdings is he doesn’t even really pretend to be a merchant,” says Santoli. Sears is a collection of assets Lampert has carefully, brilliantly chopped up, spun off and monetized to the benefit of himself and shareholders.
Sears has even worse returns than JC Penney (JCP) but none of the liquidity issues. Part of that is that Lampert started with a much better asset base.
Santoli detailed Lampert’s returns last year, prior to the Lands End (LE) spin-off and ahead of any potential Canadian asset sales being discussed. Lampert is waging a fighting retreat out of retail entirely. It’s the high-percentage play. While companies like Walmart (WMT) and Target have thrived through constant investment (at least until recently) many, if not most, of Sears one-time rivals have disappeared or were swallowed years ago.
Lampert's adventure in Sears Holdings started with buying Kmart out of bankruptcy for almost nothing then merging it with Sears the following year. The transactions since have been a series of stashing core assets in a separate holding company, spinning off assets and selectively dumping real estate.
Grading Lampert's performance as head of Sears Holding is a subjective exercise, the outcome of which depends entirely on whether or not you think he's actually been trying to perform an operational turnaround of the chains. If Lampert truly thought he could make Sears a bonafide competitor of Target and Walmart he's been a failure. If instead you think as I do that he's been starving the chain, stashing assets and quietly dismantling the company despite his repeated denials, then Lampert is truly an investing genius. Looking at the stores' physical condition and financial performance it's impossible to come to any conclusion other than that Lampert never even tried to run with the big dogs as a retailer.
Lampert and Sears Holding never stood a chance against Target or Walmart. Lampert would have lost billions trying. Instead, he made a fortune chopping up the entire chain right before our eyes. There's a dark but undeniable genius at work there.
One of the Greatest of All Time
There are those who take exception to the idea that Sears is being allowed to die. Most of those folks work for the company and they all lack actual numerical proof of performance. The company just lost $402 million in a single quarter. The burden of proof is on those who claim Sears Holdings is paying more than passing attention to selling product.
It’s irrelevant as to whether or not Lampert could be a retailer if he wanted to because he’s one of the best investors of all time. Whether by Forrest Gump-style luck or devious plot, Lampert's non-investments in retail infrastructure were worth billions in gains and sidestepped losses.
It’s time to stop mocking Sears for failing and debating Lampert as retail CEO misses the point. One of the greatest investors of all time is operating in our midst; the lesson to be learned isn’t how to lead a Kmart turnaround.
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