Reality Sets In at Lampert's Sears, With Another $1 Billion Due

(Bloomberg) -- Few people on Wall Street believe in Eddie Lampert like Eddie Lampert.

Thirteen years after merging Sears, one of America’s most iconic retailers, with the budget Kmart chain, the hedge-fund billionaire is moving -- again -- to salvage what he can.

His latest plan, announced Monday, would have his ESL Investments Inc. buy Kenmore, Sears’s well-known appliance brand, as well as several other businesses. In other words, Lampert, also chief executive officer of Sears Holdings Corp., wants to sell what is perhaps Sears’s last jewel to his own hedge fund -- at least if other bidders don’t emerge.

The news gave Sears’s long-suffering stock a bump, but for Lampert and his investors, the respite masks a harsh reality: The department-store chain confronts a wall of debt and pension obligations that would be difficult to surmount even if its business weren’t as bad as it is -- and business, by all accounts, is very bad indeed.

The numbers tell the story. About $1 billion of Sears debt will come due within the year, according to the company’s latest results. It has promised pensions to about 100,000 retirees, but its plan was underfunded by $1.47 billion as of Feb. 28. Its bonds are trading well below face value, with some selling for less than 50 cents on the dollar -- a sign many investors doubt Sears will pay its debts in full. In the last eight years, Sears stock has plummeted about 95 percent.

Extracting Cash

“This is a slow-motion liquidation that has gone on for several years, trying to extract cash out of it,” said Craig Johnson, head of research firm Customer Growth Partners. “If you keep going, Sears the retailer will end up with more liquidity that maybe buys it a few more quarters. But to what end, if all Sears is going to end up as is four walls, a roof and a parking lot?”

A spokesman for Sears declined to comment Monday beyond the earlier statement about ESL Investments.

Monday’s plan was Lampert’s latest attempt to put off what some analysts warn may be inevitable: a bankruptcy for the 125-year-old company, whose “Dream Book” catalog was once a fixture in many U.S. homes.

Lampert has previously called for going to an “asset-light” operation. He wants to manage a retailer with fewer stores and a robust online business. That makes sense, given the accepted fact that the U.S. has too much retail space. He’s put in a plan to cut costs by $1.25 billion a year and raise cash with some success -- the U.S. tax overhaul helped the ailing retailer post a rare quarterly profit last month.

In addition, Lampert’s offloaded real estate and other units, including its Lands’ End clothing division and Craftsman tool brand. Sears Canada had suffered similar losses and shrinking revenue to the U.S. business, and the partially spun-off chain filed for protection from creditors in Canadian court last June. And at the end of last quarter, Sears had just $182 million in cash and equivalents, down from $286 million a year earlier.

Creating an ‘Illusion’

Monday’s announcement that ESL is interested as a buyer is an effort to make Sears’s remaining assets seem healthy and worthy of a high sales price, said Noel Hebert, an analyst at Bloomberg Intelligence.

“Sears has been really good at creating the illusion that something is happening that can turn the business around,” he said.

Some question how realistic that plan is. According to ESL’s latest SEC filing, the firm had just $1.3 billion as of Dec. 31, and about $433 million of that was in AutoNation, Lands’ End and Sears-related stocks. The firm didn’t indicate what price Kenmore could sell for, or what Lampert’s other holdings are.

The biggest chunk of Lampert’s net worth is made up of cash, so he’s been fairly insulated from Sears’s performance. Since June 2013 when Bloomberg Billionaires Index began tracking Lampert, his net worth has dropped by 20 percent to $3.7 billion from $4.6 billion. Meanwhile, shares of Sears have plummeted more than 90 percent in the same period.

In the meantime, the true value of Monday’s announcement remains unclear. While there is worth in Sears’s real estate, much of that lies with Seritage, the real-estate investment trust, which did a previous deal with Sears, Customer Growth Partners’s Johnson said. And a new owner is no guarantee that potential buyers find Kenmore more attractive. They could still wait for its value to decline further, he said.

“Sears, the retailer, unless things change, looks like it’s going to be left holding the bag,” Johnson said. “This allows it to hold the bag a little bit longer.”

©2018 Bloomberg L.P.

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