Posted On 06 Feb 2019
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By Martha C. White
A diverse group of players is engaged in a tug-of-war for the beleaguered Sears brand. Analysts are skeptical that the retail icon can stage a rebound, even if its board and controversial chairman manages to stave off liquidation this week. The chance for long-term viability, they say, might already be in the rear-view mirror.
In a bankruptcy court hearing this week, Sears chairman Eddie Lampert is fighting to get the bid of approximately $5.2 billion he made for the company last month to be approved. Supporters, including Sears’ board, say the move would save the jobs of 45,000 workers. In exchange, Sears would sell its assets to Lampert’s ESL Investments hedge fund, including the remaining 425 stores.
The department store’s unsecured creditors have pushed back on the plan, arguing that they would be better able to recoup some of their losses if the company is liquidated now — before any more value is transferred to Lampert or entities controlled by him. Those creditors have labeled the $5.2 billion lifeline as “nothing but the final fulfillment of a years-long scheme to deprive Sears and its creditors of assets and its employees of jobs while lining Lampert’s and ESL’s own pockets.”
An additional wrinkle is Sears’ underfunded retirement plan, which covers roughly 90,000 former workers and is backstopped by the federal Pension Benefit Guaranty Corp., to which Sears gave some intellectual property rights to the Kenmore and DieHard brands as collateral. Under Lampert’s proposed rescue plan, which the PBGC also is fighting in court, ESL would gain control of those brands, potentially undercutting any claim the agency might have on them.
Lampert has a long, and rocky, history with the retailer. In 2005, he spearheaded a merger of Sears and Kmart. At the time, the two brands combined had approximately 3,500 stores and were expected to generate $55 billion in annual sales. Lampert is Sears Holding Corporation’s chairman as well as former CEO and largest shareholder. At the time of its bankruptcy filing, Lampert and ESL also were the company’s largest creditor.
Retail analysts tend to agree that Lampert is the only one with the means — or the desire — to save the storied brand in the short term, but suggest he oversold his ability to turn around the struggling retailer. “Lampert’s always been the savior of Sears in his own eyes… [He] is really the one responsible for Sears’ demise,” said Neil Saunders, managing director of GlobalData Retail.
Saunders said Lampert’s strategy was flawed from the start. “Really, the start of the serious problems was the merger with Kmart,” he said. “Two under-performing companies were put together on the idea that there could be economies of scale… That never proves to be the case.”
Analysts blame Lampert for compounding the problem by under-investing in Sears while aggressively pursuing cost cuts that limited its ability to be competitive. “In our view the company will continue to be hobbled by the same untenable problems,” Moody’s Investors Service Vice President Christina Boni wrote in a recent research note. Even if the bankruptcy court agrees to Lampert’s $5.2 billion deal — which Lampert acknowledged could see the closure of hundreds more stores — shrinking the way back to profitability is an exercise in futility, Boni said, given the squeeze from Amazon and other online as well as brick-and-mortar competitors.
“Today in retail you’ll see that scale definitely matters,” Boni said. “We’re seeing that larger retailers are having a better time making and leveraging those investments.”
Other analysts and retail experts also expressed skepticism that any leadership team helmed by Lampert could accomplish a last-ditch turnaround. Even Democratic presidential hopeful for 2020 Elizabeth Warren weighed in: The Massachusetts senator accused Lampert in a letter last week of enriching himself at the expense of workers. Sears, she wrote, “appears to be suffering from a unique set of problems as a result of your leadership.”
Warren acknowledges that Lampert’s proposal would save jobs in the immediate future, but cast doubt on his willingness or ability to stabilize the company in the long term.
“I am concerned that under your leadership, Sears may continue to struggle and employees will continue to face uncertainty and anxiety over their future employment, and ongoing risks to their benefits and economic security,” she wrote.
“There are business ethics questions on both sides of that debate,” said Greg Portell, lead partner in the global consumer and retail practice at consulting firm A.T. Kearney. Abandoning the pension fund could give the retailer a fresh start that might keep employees at their jobs, but at the expense of retirees. If the deal falls through, creditors and retirees will stand a better chance of cutting their losses, but workers will be out of luck.
Some experts suggested that financial maneuvers over the years — cutting costs, closing stores, selling real estate holdings to a trust controlled by Lampert, spinning off brand assets like Lands’ End and Craftsman — were intended by design to extract value on behalf of Lampert’s various business interests and at the expense of other stakeholders.
Theresa Williams, clinical associate professor of marketing at Indiana University’s Kelley School of Business, pointed to the brand’s recent history and previous promises of a turnaround that never materialized. “We just came off the best retail year we’ve had in eight years and there was zero evidence that they made any headway,” she said.
“This latest effort is no different than any of the other strategies Lampert has employed since the beginning. It’s been a money grab from the start,” Williams said. “[He] leveraged every single asset to the max to his financial benefit or to ESL’s benefit.”