If you’ve been following the saga of Sears Holdings (SHLD) and its chairman, Eddie Lampert, you may have heard two notions recently: 1) Lampert is wresting back control of the company; 2) Lampert has to rescue Kmart a second time.
A few weeks ago, Lampert named himself chief executive of Sears Holdings, which owns both Sears and Kmart, as Lou D’Ambrosio, who had been CEO for almost two years, stepped down because of what the company described as a family health issue.
Investors approved. Since Lampert declared he was taking charge—crowning himself the fifth CEO in seven years—Sears shares have jumped 18%, as this stock chart shows:
The Wall Street Journal wrote that Lampert now must “fix Kmart again.” But he never really fixed it before, only rescued it from insolvency by using his hedge fund, ESL Investments, to purchase the discount chain.
Kmart was driven into Chapter 11 in 2002 by the decisions of former CEO Chuck Conaway, whose leadership highlights included reinventing the “Blue Light Special” and, according to the SEC and a federal court, misleading investors about Kmart’s rapidly deteriorating finances. Compared to Conaway, Lampert represented something like adult supervision.
Initially, Lampert repaired Kmart’s balance sheet by closing stores and cutting inventory. But he never figured out how to revive the business. Kmart’s sales have fallen 22% since 2004, the year it emerged from bankruptcy-court protection.
Former executives who tried to work with Lampert complained that he hated to spend money, to the point of refusing to clean up dirty stores and repair potholed parking lots. Lampert, they said, figured customers wouldn’t notice, or care.
Which is why, on our recent visit to a Kmart in Chicago, listing shelves of Gatorade threatened to tumble, and pallets of laundry detergent blocked the aisles. The lighting was so dim it evoked an East German grocery store. In the housewares section, inexplicably, individual squares of toilet paper littered the broken tile floor. Employees lounged on a display of patio furniture. “Need anything?” the manager called, without getting up.
Lampert’s an inveterate cheapskate—but, of course, the image of the tight-fisted boss is a cliché. What matters to investors is not how much you spend, but the return you get on your investment. When Lampert orchestrated Kmart’s purchase of Sears in 2004, many shareholders hoped he would spend only the minimum necessary to keep the stores going. They expected him to sell assets and invest excess cash in other profitable businesses, which is where Bloomberg Businessweek got the idea that Lampert would be “the next Warren Buffett.”
As it turns out, Lampert is actually less successful at this strategy than the heads of other retailers -- who don’t fancy themselves the next Oracles of Omaha. Sears Holdings’ return on invested capital is far lower than Target’s (TGT), Kohl’s (KSS) or even mightily struggling JC Penney’s (JCP), as this chart shows:
Given the scope of its problems, Sears isn’t that cheap compared to its retail peers. After its recent rise, it trades at 1.3 times book value—less than Kohl’s, at nearly 1.8, and Target, at a relatively lofty 2.4, but above JC Penney, which trades at 1.2 times book value and is arguably less troubled than Sears:
At the end of February, Sears Holdings expects to report a loss for its fiscal year of $721 million to $801 million, or $6.80 to $7.56 a share. As the next fiscal year begins, Lampert isn’t taking back control of Sears and Kmart; he’s been in control all along. Investors might be cautious about confusing a new title with a new strategy.
Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at email@example.com.
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