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Comment by hotsauceror | Hacker News Reader

I don't think this is unintentional. His own hedge fund has bought several of Sears' most valuable brands. But even more important, Sears has sold a lot of its real estate to ESL or Seritage or whatever Lampert's holding company is. I've read suggestions that he'll make out better in the long run by reselling that valuable real estate than lifting a finger to save Sears' retail operations. I'm not quite sure I see how buying large spaces in dying shopping malls is a huge value proposition for buyers, but that's the explanation I've read for why he's seemingly knowingly running Sears into the ground. He gets valuable assets for pennies on the dollar.

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You've pretty much got the gist. Pre-Lampert, the SHLD bull thesis centered on its real estate assets... huge quantity of long-term leases way below current market prices. Other hidden assets included intangibles such as brands.

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 (?)

I think that's as good an explanation of Lampert's plans for Sears as anything I've read.

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.

You might be surprised. Seritage is a public company (stock ticker is SRG); check out their SEC filings and investor presentations. They list several names of new tenants who've been taking up their redeveloped floor space.

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.

> I've read suggestions that he'll make out better in the long run by reselling that valuable real estate than lifting a finger to save Sears' retail operations.

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.

Sears has a large pension liability. If they go bankrupt the pension obligations disappear. His hedge fund can open a new "I can't believe it isn't Sears", except because the pension is gone it can make money where Sears cannot doing otherwise the same thing.

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.

fact check: Pensions in the US are only allowed to invest in the absolute worst returns options

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... )

>If they go bankrupt the pension obligations disappear.

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.

It does feel like a sort of loophole for something very similar to insider trading. And, he gets to work both sides of the deal.

That's the main thing, for me. Somewhere in here I feel like he's going to get burned by self-dealing. I don't know enough about these things but if the behavior seems obvious enough to boobs like you and me with no knowledge of finance, I'm pretty sure some of the other investors who stand to lose out are giving him the side-eye and scheduling lunch with their attorneys. OTOH, anyone who's still invested in Sears at this point, I feel like has to be a vulture. There can't possibly be value investors left in this turd.

I'm not quite sure I see how buying large spaces in dying shopping malls is a huge value proposition for buyers

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.

I'll see if I can find a link to an article that made a pretty convincing case for it. I think it was either Bloomberg or Barry Ritholtz's blog.

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.

This search also reminded me of the other shady thing he's done. Since he bought Sears's real estate out from under them, he saddled Sears with millions in additional rent payments. That's money going directly from retail into his pocket, while he's acting as both landlord and tenant.

https://www.usatoday.com/story/money/2017/03/22/sears-holdin...

Overlake is an interesting area. Redmond to the east, and the Bellevue Collection to the west. Right along 520, which now needs a toll to cross from Seattle. The store probably had a lot more Seattle traffic before the tolls started. And before Costco and Target opened stores in Seattle. Also the perceived cost of being in Bellevue - I used to prefer shopping in Northgate to Bellevue.

Setting up the H&R Block(head) office inside that Overlake Sears was my first job in IT.

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