Sears Hires Advisers to Prepare Bankruptcy Filing
wsj.com
wsj.com
Sears Credit could have spawned something like Paypal. They were successful with their Discover card, and the Sears card was often young people's first credit card.
They were kings of catalog shopping, and had the logistics and product data to have had a decent online business.
And, they had brand strength in several areas like Kenmore, Craftsman, Land's End and DieHard Batteries. I know they licensed all that out, but way after the brand had peaked.
https://www.metafilter.com/62394/The-Record-Industrys-Declin...
"By my estimates, Sears could have spent about $200 million in 1994-1996 to develop and promote retailing and financial services online, and they'd be reaping billions.
Sears could still be a huge American company today, instead of a historical footnote."
Sure, Sears would have lost some ground to online retail at the start, but with a massive warehouse and distribution network already in place they could have made up the lost ground very very quickly.
It's something I've been trying to develop myself. Any idiot can look back and say, gee, they could've done this, that, and the other thing, with benefit of hindsight.
How do you become the sort of person who sees where things are going, years/decades in advance?
The book can be found on Amazon here: https://www.amazon.co.uk/Innovators-Dilemma-Technologies-Man...
With zero knowledge, I'd bet that they got their $2b and then some. Acquisitions are /were probably their only asset, since real estate was mortgaged by their hedge fund owner.
https://www.forbes.com/sites/markcohen/2016/09/27/landsend-a...
Company failing and he doesn't even show up.
Lampert came in and started running the financial engineering playbook, most crucially the various spinoffs, of which the most important one was the spinoff of Seritage, which is the embodiment of the "RE asset value backstop" strategy. What Seritage does is to partner with the mall landlords (operators like Simon Property Group) to redevelop the former Sears footprint into something more in line with current market preferences (think subdividing into Dave & Buster's, Pandora, etc.) and re-rent the space at a big markup. This is the shell that holds the pea.
None of this benefits from the decline of Sears' core retail operations. Plan A was always to return Sears to profitability, which would have made a killing for ESL. He has struggled mightily to do so, and failed just as mightily. A large amount of effort, capital, brain damage, and reputational has been incurred without a commensurate reward.
But again, Lampert's a very sharp guy; downside protection is in place. Besides the spinoffs (which ring-fenced a bunch of capital), he's migrated a bunch of ESL's investment up the ladder to a creditor position, including big holdings of "fulcrum" securities (unsecured bonds) that will give him a big voice in BK.
A+ for financial engineering; F for business ops. Overall grade: C-.
Not a zero-sum conspiracy working as designed, just desperate wriggling off the hook of a failing workout. Turns out you can't cost-cut Sears to profitability, and competing with Amazon is harder than one might think (?)
One thing I'll add--with how much malls are struggling, Lampert's play for real estate isn't going to work out anywhere near as well as he might have hoped. Sears's, as an anchor for many malls, used to have extremely valuable real estate. Now, with the so-called "retail apocalypse" happening, the market for that space isn't what it used to be.
I think the desirability of the former Sears stores varies dramatically by location; some of them are hopeless ghost towns, but many of them apparently have bright hopes for non-department store tenants. Check it out.
There's a reason Warren Buffett bought into SRG. This part of the strategy is working well.
These investment firms saw the huge amount of expensive real estate that these retail stored owned and figured that's where the money is. Unfortunately for them, the reason the real estate was expensive was because of the store and when they slowly ran them into the ground they dramatically decreased the value of the property.
McDonald's has a similar issue; they are both a fast food franchise company and a real estate company that owns and rents out a lot of the property the restaurants sit on. There is a strong group of investors that want to split the company across these lines because the real estate part is much more profitable. But running one without the other is probably a huge mistake.
Pensions in the US are only allowed to invest in the absolute worst returns options, which is why companies rarely have them and are getting rid of them. However you cannot get out from under your previous promises made 30 years ago when it was possible to have get a good return - unless your company goes bankrupt.
The pension thing is a tricky problem, the reason pensions can't just invest in anything is when they could they invested in their own stocks - which means a company going bankrupt just took retirement away form long term employees. I knew someone as a kid who put in 30 years for a company that went under a year after he retired taking away his retirement.
Not that simple. The PBGC (https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...) has had a lien on several of Sear's properties for a few years now, to cover Sears's unfunded pension liabilities.
Here's an example: https://www.reuters.com/article/us-sears-pensions/in-kenmore...
Now a worrisome note: the PBCG falls under the control of the treasury secretary, Steve Mnuchin, who just happened to be Lampert's college roommate. I can't see any evidence of wrongdoing here yet, but it's something to keep an eye on. The whole deal with Lampert and Sears is a tangled mess that might make for interesting reading when more of this ends up in a courtroom.
Investopedia reports : ERISA does not regulate a pension plan’s specific investments. ERISA does require plan sponsors to operate as fiduciaries. No conflicts of interest between plans and any people or entities related to the fiduciaries are allowed. Investments are to be both prudent and diversified in a manner that is intended to prevent significant losses. ( https://www.investopedia.com/articles/investing-strategy/090... )
Especially when you, umm, shut down the anchor store in said mall. I'm thinking of the Overlake Mall in Bellevue, WA that I pass every day, with its now-closed Sears store: "well, who the hell would want to rent retail space in there now?" Even when the Sears was open, I'd be hard-pressed to tell you the last time I was in that mall.
I'm sure there's some weaselly real estate one weird trick that us commoners are missing, but it sure doesn't make a lot of sense from where I'm sitting.
Setting up the H&R Block(head) office inside that Overlake Sears was my first job in IT.
I wonder if, as the last major tenant in a dying mall, maybe they get a cut of the sales when the mall itself gets sold by the developers? You've gotta be right, there's some sleight of hand that we're not privy to that acts as a license to print money.
https://www.usatoday.com/story/money/2017/03/22/sears-holdin...
So, you want a lesson kids? If you aren’t freelancing, building your own company, seeking ways to be part of the financial engineering games, then you are really just one paycheque away from being out on the street. I’d like to think that with enough recessions, with enough pump-and-dump, with enough scheming, that eventually enough people will decide to create their own businesses, and maybe we’ll see small businesses, small towns, and real capitalism reborn.
"shenanigans and financial engineering, to the benefit of the few in power, where executives are replaced when they fall out of favor, rather than their obvious incompetence"
Right on the money!
https://www.forbes.com/sites/georgeschultze/2018/10/08/sad-s...
CEO Lampert is a conman, and would be the only person to benefit from this move. Sears shouldn't be given any more breaks, and should just die already.
Although they potentially could go the way of Kmart or Toys R Us if the bondholders hold the company hostage.
cites: https://www.usatoday.com/story/money/2017/03/22/sears-holdin..., https://www.cnbc.com/2018/04/23/eddie-lamperts-hedge-fund-es...
Unfortunately, reading some of the comments to a story gives me headache. Especially the "corporations are evil" type comments. Sears was killed by two factors: 1) Lampert's self-dealing and attempt to extract personally enrich himself, and 2) optimizing everything to extract as much cash as possible, from every facet of the business.
When I was younger, there was a classic business case presented in an MBA program regarding frozen pizzas. A food company sold frozen pizzas that was great and had a very strong customer loyalty. In search of more revenue, an MBA calculated the cost savings if they reduced the number of pepperoni. Unsurprisingly, they made more money and no one complained. Bonuses were handed out. Year after year, they started to "optimize" the pizza. After several years of this, sales tanked. Customers stopped buying. They hired consultants who performed focus groups and they found out that customers didn't want a cheese pizza with a few toppings. They never fully recovered revenue back to the original levels even after trying to win back customers. Once they broke the customer's inertia, customers started exploring other options and found better ones. The key take away is: don't be myopic and only focus exclusively on short term gain because you may run your customers off.
I have seen this pattern repeated over and over. Amazon is the now biggest example. Every interaction I have with Amazon is getting more onerous. It used to be I would go online, search amazon and order. Now the product search results are festooned with ads, sponsored products, and the product that I want at higher prices, while the lower priced products are hidden. They arbitrage postage. New ads on prime video. I can go on and on. Eventually people aren't going to take it anymore, and when they do they will find better, cheaper options. I know I have.
This happened at Sears. Every time I interacted with sears it was less enjoyable. The products became cheaper and lower quality. Recently, I wanted to purchase an olympic weight set. Heavy cast iron weights. Sears used to have home a large selection gym equipment. It is one of places where someone will go in to buy a barbell, and will return for more products like a curl bar, more weights, and pick up a few other items while you were there. Nope, they had determined it was more profitable to become a market place and take a commission and not hold inventory. They optimized the inventory to only hold items that sell well or have high mark-ups.
Being a cynic, I really don't think Lampert cares. Although I don't think BK was the plan all along, he is obviously using it as a financial engineering tactic to shed obligations while he owns all the real estate. His self-dealing was so bad a number of investors were threatening lawsuits a few years ago. Ultimately, he will kill the company and still walk away with a dump truck full of money.
To answer your question more directly, I think a more abstract case could be made that this is a failure of vision endemic to the way we currently implement capitalism: the whole value of running a company long-term -- to shareholders, employees, and customers -- may be greater, on a sufficient time scale, than the value of stripping the company for parts, but you can get a higher short-term return on investment by stripping and re-investing the income somewhere else, letting the full economic costs of the company's collapse (which, again, go beyond the cost to the shareholders) fall on others. I don't think this is good for society in the long run. I also don't think it's somehow required by merciless capitalist logic.
However, I'm not sure how one can craft regulation to "solve" this without a high risk of creating more problems than one avoids. Sears may not deserve what's happened to it, but that doesn't mean it deserves to be saved, either, especially in its current state. It's easy to imagine well-intentioned laws creating zombie businesses rather than shielding salvageable ones.
The little people whose pensions and funds are either wholly or partially dependent on Sears are hurt by such malfeasance. That's not what the CEO of a company is supposed to do. It's unethical (for what little that means anymore). You might as well question how an IVF doctor implanting his own sperm in unsuspecting patients is harmful-- they wanted to get pregnant, right?
I haven't read it, but I doubt that plan was enumerated in the Sears prospectus when Lampert took the helm. Letting such behavior go unchecked undermines faith in the economy-- the growth of which is fueled by peoples' ignorance of everything being out to fleece them.