By Kit R. Roane, contributor
FORTUNE -- Eddie Lampert has long been known as a value-investing wizard. So why has he sucked the life out of Sears?
Things have been so bad for so long at Sears Holdings Corporation (shld), which includes the iconic brands Sears and Kmart, that shareholders could be forgiven for doing a double-take when The Wall Street Journal came out last week with Lampert’s
latest mea culpa, under the headline “Tears for Sears,” a line that has been recycled by the Journal and others almost as often as Lampert has delivered mea culpas.
Watching the company’s performance under Lampert is even more vexing considering how his laser focus and tough love have worked wonders at other holdings, such as AutoZone (azo). The management at Gap Inc. (gps) is probably shaking in their summer shoes wondering which Lampert will be visited upon them now that he’s acquired a 5.6% stake there.<!-- more -->
They better hope it’s not the dark lord laying waste to Sears, whose marketing tagline about the joys of shopping there -- “Life Well Spent” -- seems increasingly ironic. Investors have Sears’ earnings to look forward to next week. But they’ve already been given the wind-up: same-store domestic sales have declined 3.6% in stores open at least a year, and an expected profit for the April quarter is turning into a loss of between $1.35 and $1.81 a share. Although Lampert says that continuing unemployment and other macro issues hurt Sears’ performance, he admits, “In many of our businesses, even in a tougher environment, we ought to be doing a lot better.”
Few would disagree. Gary Balter, an analyst for Credit Suisse, was blunt in his response, telling clients that the results signal “increasingly dire prospects for Sears.”
Sears and Kmart were struggling well before Lampert took control of the chains. The rise of Wal-Mart (wmt), Target (tgt), Home Depot (hd), Lowe’s (low), Best Buy (bby), and most recently Amazon (amzn), were making them competitively irrelevant. The problem is that, under Lampert, retail performance at the combined companies appears to have gotten worse.
Last week, Sears’ new CEO, Lou D’Ambrosio, outlined what the company calls a “high-level plan” for improving performance. The former tech company executive, who has no retail experience, will be focused on leveraging Sears’ “underleveraged brands and assets,” according to Kimberly Freely, a Sears spokesperson who responded via email. And “[m]ost importantly, providing an extraordinary customer experience in store, online and at home!”
There’s no time like the present to get moving on improving that experience. But it’s hard to see the company’s latest promises as a eureka moment sure to pull Sears out of its retail tailspin.
While many things have been re-tooled in the past (CEOs and chief marketing officers, to name two) and other changes are being floated (most recently finding a new home state that might offer Illinois-based Sears a cheaper tax deal), Lampert still seems more interested in juicing per-share earnings through stock buybacks (another one was just announced) than he is in rebuilding his brands, particularly the once-storied Sears.
“There’s the occasional blip -- Eddie Bauer, Sears Blue Crew, new Kmart fashion brands -- but that's about it,” says Wendy Liebmann, CEO of the consultancy WSL/Strategic Retail. “If not for Kenmore, one wonders where the business would be at all.”
Steve Hoch, a marketing professor at the University of Pennsylvania’s Wharton School, is even less charitable. Asked about Sears Holdings, Hoch pauses for a second, then says, “What an atrocity that is, just unbelievable. The stores look like they are from the Eastern Bloc.”
In Hoch’s view, Lampert made a crucial miscalculation by treating Sears and Kmart, which were merged together in 2005, as distressed real-estate plays instead of extremely challenged retailers that would need to expand in order to survive. “He thought he could basically squeeze blood from a stone,” says Hoch, noting that Lampert has raised prices and reduced spending in order to increase current profits at the expense of future growth.
“The investment thesis for retail is very simple. It is one word and one word only: growth.” He adds, “The people who have made money in retailing all have a growth story.”
For example, when KKR (kkr) bought Dollar General (dg) in 2007, they spruced it up, gave the stores a new look, brought in retail veterans and invested in the company’s private label program. Then, after an ambitious expansion, they took it public in 2009. Growth remains the name of the game, and retailers being targeted by private equity players and hedge funds tend to have a good niche, a good story and room to expand.
There’s plenty of activity brewing in the retail space, it’s just passing Sears by. Tween Brands was bought by Apollo Capital Management (apo) for $157 million in 2009. Gymboree was taken private by Bain Capital in a $1.8 billion deal last October. This March, TPG Capital took J. Crew private for a second time (the private equity shop previously took over J. Crew in 1997, and made a killing when it later sold its shares to the public in 2009). Several retailers, including Limited Brands and Ross Stores, made it on UBS’s (ubs) buyout target list last month.
Lampert was reportedly interested in J. Crew as well, but investors have most recently focused on the February disclosure that he’s nibbling on the Gap, which includes brands such as Banana Republic and Old Navy. The retailer’s stock shot up more than 5% on the news, then quickly fell last week after the company reported disappointing February same-store sales.
The hedge fund guru hasn’t laid his icy finger on Gap yet, so it’s hard to blame him for that retailer’s problems. But Lampert’s interest may mean he still hasn’t learned much from the Sears’ disaster. Sure there might be value in Gap, but where’s the growth? As Hoch puts it succinctly, “there are too many Gaps already.”