By Pete Gallo
| Pete Gallo |
Edward Lampert’s big hedge fund bet on Sears Holdings Corp. has proven to be a volatile ride more notable for its steep falls in share prices than its upward climbs. And if anyone doubts it has been a tough time for brick-and-mortar retailers in recent years, it’s worth noting that shares of Sears Holdings, worth $174 in early July 2007, dwindled to a recent low of $52 on September 22. That’s surely been a heavy blow to Lampert’s ESL Investments (as general partner of RBS Partners), which owns 48.1 million shares in Sears Holdings, the parent company of retailers Sears and Kmart.
Still, rumors of a Sears retailing demise may prove to be exaggerated. Since its September low, the stock has gained a stunning $20.55 per share, hitting a recent high of $72.55 on October 17. That’s big news for Lampert, whose fund’s stake in the company swelled in value to nearly $3.5 billion, a gain of some $988.5 million in a few weeks.
Lampert has been working for years to turn around the storied retailer, once known for exclusively selling proprietary brands like Kenmore, Craftsman and DieHard. But the era of the once-ubiquitous Sears, Roebuck catalogue is long gone, and the department store has found itself in an arguably losing competition with big-box stores such as Wal-Mart and Costco, where low cost rather than brand names sways shoppers most.
But is the recent bounce in stock price indicative of a turnaround for Lampert’s hedge fund via its majority stake in a troubled Sears? In August the company reported its fifth, although small, quarterly loss. That’s concerning, given that Fitch Ratings had downgraded Sears Holdings’ debt rating to B in June, citing a sustained weakening of earnings. Monthly earnings aren’t reported, yet it is worth noting that share prices jumped more than 10 percent in a single session on October 12.
That same day, filings with the Securities and Exchange Commission show that Sears Holdings requested confidentiality from regulators regarding exhibits from its most recent 10-Q filings. What does that mean? The regulatory tease of temporary omission aside, the Street floated its own interpretation of what was afoot at Sears Holdings.
Last year Sears began leveraging its proprietary brands by selling Craftsman tools for the first time through a third party, Ace Hardware Corp. And in September Sears announced plans to license the sale of its DieHard batteries to a number of independent resellers. Shares spiked in October under the assumption that Sears would soon be unlocking value to shareholders by hiring or creating an agency that would license Sears brands to third-party party resellers like Costco, rumors later bolstered by reports from Bloomberg and the Associated Press.
Such a strategy would be a bold and risky move, though not an unexpected one. From the beginning, Lampert’s hands-on investment in Sears has recognized the value of the company’s well-known brands as assets distinct from the actual retail business. Soon after ESL’s investment in Sears, the company in 2006 created a separate entity called KCD (for the brands Kenmore, Craftsman and DieHard) in order to create an investment vehicle that would be insulated from the larger company and, presumably, creditors. Today, Sears effectively pays royalty fees to use its own brand names, and it seems the company intends to aggressively expand that model so that third-party resellers could pay royalties to distribute what were once Sears-only brands.
Might Sears kill the golden goose by licensing once-proprietary brands? Probably not. Licensing agreements may harken back to the idea that once made the Sears catalogue such a mainstay — maximizing distribution.
Elsewhere, management seems to be trying to modernize the mechanics of retail operations to remain competitive. Sears in October announced that customer service reps at some 450 stores would be outfitted with Apple iPads to help shoppers check product availability and even order items not in stock. The company also recently announced the creation of a boutique store-within-a-store called Scrubology at some Kmart and Sears locations to sell uniforms and trade items to health care professionals. (The insurance company Allstate was incubated as a boutique at Sears locations.)
Lampert’s hedge fund may not be in a position to ask for more from management. Given the size of ESL’s stake and the challenging retail environment, there can be no easy solution or exit. Sears and Kmart simply must become more competitive.
Barring a wider economic recovery no one expects anytime soon, thinking outside the box and innovating are perhaps department stores’ only hope in an age of retailing now dominated by big-box stores and warehouse clubs. AR
