Sears likely headed for liquidation

Discussion
Jan 08, 2019
George Anderson

In the end, one person — Eddie Lampert — would determine if Sears and Kmart continued to stay in business. As so many of his efforts have proven since he combined the two retailers in 2014 under Sears Holdings, Mr. Lampert’s bid to save some of what remains of the company failed. As a result, Reuters and CNBC are reporting that the company is planning to ask a bankruptcy court judge today for permission to liquidate its business.

Reuters’ reporting does leave room open for the possibility that Sears Holdings will at least postpone plans to close down its operations. This would mean the court has ruled to give Mr. Lampert and his ESL Holdings, controlling shareholder in Sears Holdings, more time to adjust the bid for the retailer.

If a request for more time fails to materialize and Sears Holdings pursues liquidation, it is possible that parts of the company may survive through a sale. CNBC mentions Sears’ home services as a business that may attract bidders.

Over the years, Mr. Lampert, current chairman and former CEO of Sears Holdings, has railed against critics who have challenged his lack of investment in stores and the dilution of retailer-owned brands such as Craftsman, DieHard and Kenmore by selling them or making them available in competitive outlets.

Sears Holdings last turned a profit in 2010.

DISCUSSION QUESTIONS: What is your postmortem for Sears Holdings? What lessons should other retailers and their investors learn from the experience?

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32 Comments on "Sears likely headed for liquidation"


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Cathy Hotka
BrainTrust

Sears didn’t die. It was murdered. While there are a lot of smart people in Hoffman Estates and in stores, they were no match for dumb and self-serving business moves on the part of the chairman. There will undoubtedly be a Harvard Business Review discussion about this, and how not to run a business.

Gene Detroyer
BrainTrust

Lampert got what he wanted. I am not sure it was so dumb at all. The results are probably not far from his original expectations.

Paula Rosenblum
BrainTrust

I don’t think he’s going to get out of this as easily as he thought. He’s going to spend a LOT of money defending himself from lawsuits from other lenders who recognize only one person made money on this tragedy,,.him.

By the way, I am not sure Sears would have ultimately survived anyway, but no way was this a “mercy killing.” This was a murder with vulture pecking away at the carcass for years.

Neil Saunders
BrainTrust

At this stage, the death of Sears is little more than a formality. Arguably, the company has been dead for years, kept alive by only the continuous financial machinations of Lampert. However time has now run out, as has Lampert’s credibility.

There are so many lessons from Sears. I suspect it will be a business school case study for many years to come. However, the key ones are: don’t starve business of investment, aim to create financial stability not play financial games, create a sound internal organization with common and not competing goals, have a clear point of differentiation and reason for existence, and evolve with the times.

Lampert followed none of those principles, which is how Sears has ended up in this position.

Gene Detroyer
BrainTrust
  1. Sears (and Kmart) were done before Lampert got involved.
  2. Lampert’s interest was never in retail, but in real estate.
  3. All of his moves enriched him and his only regret may be that he will lose the remaining real estate in liquidation.

What should others learn from the experience? When a retail chain’s life cycle is on a downward slope, suck all the assets out of it and close it up. Don’t throw good money after bad.

Jeff Sward
Guest

Customers don’t shop for balance sheet entries (shorthand for all financial metrics). They shop product, pricing, presentation and path-to-purchase. They seek fulfillment of a brand promise, not a price/earnings ratio and not a debt/equity ratio. Financial metrics must support and enable merchandising metrics. Financial engineering can buy a troubled retailer time to fix their merchandising metrics, but Sears proves yet again that so-called financial brilliance in the absence of basic merchandising doesn’t work. I’ll accept that Mr. Lampert may be a financial genius, and yet he utterly failed with Sears. It’s hard to believe just how completely broken and NOT saveable Sears is at this point.

Gene Detroyer
BrainTrust

Jeff, don’t you think Sears was “completely broken and NOT saveable” long before Lampert got involved? Sears has been on a downward trend for more than 50 years.

Jeff Sward
Guest

I would have said “broken but saveable” as recently as 10 years ago, but it would have taken a herculean effort. Sears had real strength in appliances and automotive. Strengths that are arguably the last vestige of any remaining value. I was a department store and specialty store guy at one point and always thought Sears apparel was an oxymoron. But Lands’ End made sense in a pragmatic sort of way. Sears could have been a “workwear” headquarters, but was wasting its time in the dress shirt and dress business. At this point we are beyond coulda/shoulda. Shareholders and employees deserved way better. Lots of merchandising solutions were never even tested that I saw.

Paula Rosenblum
BrainTrust

Amen, Jeff.

Gene Detroyer
BrainTrust

I have used Sears as a case study for my strategy classes, going back. The students are given the history of the company and are asked what should Sears have done. As you have, they recognized the real assets of Sears. The most common and interesting strategies were: started Home Depot, started Best Buy, started Amazon (remember the Sears catalog?).

Jeff Sward
Guest

I was suggesting 2 years ago that Amazon buy Sears. NOT to rescue or resurrect Sears, but to simply re-rationalize the Sears end of the mall. The mall needed and still needs a re-boot. An Amazon re-thinking of that space would still be fun to watch. “Go” and “4 Star” are tiny pieces of the puzzle. Amazon would have a blank slate. How would they re-invent the “department store” of the future? How would that “store” look and behave?

Gene Detroyer
BrainTrust
Rich Kizer
BrainTrust

The first and most important lesson for retailers (and any other business) from this Sears fiasco is: When you see your entire world moving and changing faster than you are moving — either get moving or delete yourself. I wonder how much more money Mr. Lampert is willing to throw out in this nearly impossible mission.

David Weinand
BrainTrust

Rich, Lampert made plenty of money from Sears since he took over. His financial hijinx of paying himself (ESL) interest on loans to Sears as well as his real estate gains have netted him plenty. As Paula pointed out, maybe the lawsuits that come from this will put a dent in his portfolio but he’s sitting pretty no matter how you slice it.

Mohamed Amer
BrainTrust

Once you identify and organize around a strategy wherein financial levers and short-term outcomes reign supreme over delivering long-term value to your customers, you’ve guaranteed yourself a path of defeat.

Being exceptional in financial juggling and extracting value from real estate holdings, while appropriate in some industries, is out of place in retailing where everyday you must demonstrate your value to your customers in every interaction.

Establishing TRUST with your customers and employees and investing in richer engagements with them is essential to your future success and in earning a right to compete and win.

Ricardo Belmar
BrainTrust

The death spiral has been going on for years, this is simply the last turn before the complete collapse. Lampert got what he wanted from all of his financial manipulations — extracting money for himself from any remaining valuable assets Sears had, primarily Craftsman, Lands’ End, Kenmore, and of course the real estate. That’s all he ever wanted and he fooled no one into thinking he intended otherwise. Yes, Sears made MANY missteps along the way that can’t all be blamed on Lampert but, in business, it all comes from the top. As Chairman and CEO, he led the sinking ship and must take the blame. Certainly, this will be a textbook case study for business schools everywhere on how not run a business, and specifically how not to survive in retail. The fundamental lesson is that no matter how successful you were in retail’s past if you can’t quickly adapt to where retail is headed you cannot survive. No amount of financial trickery can change that in this industry.

Dick Seesel
BrainTrust

Combining two struggling retailers doesn’t create economies of scale, corporate synergy or any other buzzword. It created in this case a gigantic dinosaur unable to respond to nimbler competition and newer technology. It didn’t help matters that Eddie Lampert was more interested in draining the assets than in a meaningful turnaround strategy.

Richard J. George, Ph.D.
BrainTrust

Unfortunately, long before Lampert arrived, Sears was where “America used to shop.” However, that does not excuse Lampert from failing to make appropriate investments versus selling off or diluting its flagship brands.

Lessons learned: 1.) When there is a paradigm shift everyone goes back to zero. 2.) Investments in technology, retailing and marketing are the necessary “ante” to stay competitive in today’s rapidly changing environment.

Peter Charness
BrainTrust

There was enough time, cash flow, and brand to have reinvented Sears and have a going concern, or several concerns. I’m not saying it would have been easy, but it certainly could have been done. But the goal was real estate harvesting, not satisfying customers and sustaining employment.

Richard Layman
Guest
7 days 17 hours ago

I think this is the key point. 1.) Sears had tremendous brand equity and sub-brands/product lines with great strength. 2.) Could they have repositioned/pivoted? Maybe. 3.) But ESL wasn’t the person or approach to do it.

Like Nokia, Blackberry, Motorola and others, Sears did some experiments along the way that did show a way forward. But like those companies, they couldn’t or wouldn’t commit out of a fear of cannibalizing a business model that had been working. E.g., I think one called Sears Grand, moving away from the mall, and having more fast moving categories (a mix of Sears and KMart) predating ESL, could have helped.

The various hardware and appliance initiatives could have worked because of the equity in Kenmore, Craftsman, the Auto Centers and the home repair businesses.

But we’ll never know. Because those initiatives didn’t move forward in the way they needed to and merchandising was never part of the ESL business model.

Bob Phibbs
BrainTrust

As I said in this article, “The last thing a retailer needs is an activist investor”; the last thing a retailer needs is an activist investor. JCP and Sears are the poster boys for the damage they can do. Sears should have been Amazon and a lot of people are to blame but this ongoing saga of will they be gone or won’t they seems to thankfully be coming to an end. I only worry what Lampert did to Sears will be duplicated with other weak retailers – burdening the operation with debt so they can’t pivot and stay competitive. I agree with Cathy, Sears didn’t die, it was murdered.

Richard Layman
Guest
7 days 15 hours ago

The Washington Post had an article about the impact of private equity purchases of retail businesses on pension funds when the business goes under. They used the Sun Capital acquisition of Marsh Supermarkets as the prime example. But yes, this isn’t a particularly new process. Plenty of regional department stores died this way already (e.g., Wieboldts and many others) over the past few decades, let alone supermarkets, and other retailers like Toys “R” Us.

But I’d say it’s not so much “activist investor” as it is private equity/hedge funds with limited motivation to run the companies as going concerns.

James Tenser
BrainTrust
The cruel joke on Fast Eddie Lampert is that the remaining big box and mall real estate locations in the Sears/Kmart portfolio were plummeting in value while he pursued his machinations. Few were fooled about his agenda to squeeze milk – and blood – out of an aging cash cow. It’s astonishing, in retrospect, that the combination of two formerly-number-one retailers resulted in such a pathetic entity. But building a healthy retail company was never the objective. I have commented previously that the Sears Holdings real estate play was not even an original idea. On Christmas eve in 1980, the entire E.J. Korvette discount chain was shuttered by its owners who had determined they could earn more by leasing its real estate than it could by selling products. When I became a retail reporter two years later, Sears and Kmart were #1 and #2 in the world. Walmart was #12 in the U.S. It remains to be seen how much of Mr. Lampert’s gains will be clawed back by law suits from shareholders and employees… Read more »
David Biernbaum
BrainTrust
Sears lost its brand and store identity on the day Eddie Lampert stepped in. Kmart lost its brand and store identity the day that Walmart decided not to be just rural, anymore. Both retail chains did little more than to “exist” during the entire Lampert era. Both chains became “all things to no people.” Sears lost all its former strengths, including its exclusive brands, primary services, in-store atmosphere, and failed miserably to convert the best and most established catalog in the world, to an effective e-commerce operation. Kmart was treading water for many years while repeatedly drifting back and forth from one poorly executed strategy to another. What Kmart became best known for were empty parking lots, empty shelves, and a burned-out blue light. Oh wait, Eddie Lampert even tried turning the blue light back on for a month or two. It’s all very sad for those of us old enough to remember when both Sears and Kmart ruled the world. Hmm, maybe Kmart should have skipped the rebirth of the blue light and reverted… Read more »
Ed Rosenbaum
BrainTrust

Sears has not been a major or even minor player in the market for many years. I wonder how many of us have thought “Let me go to Sears and see if they have (fill in the blank). While I do think Mr. Lambert and friends are the major culprits in Sears demise; I also think there are those in the corporate hierarchy just as responsible. I have no doubt that Mr. Lambert will have plenty of cash in his pockets after the doors shutter. I am not shedding any tears for them. They surely had enough time to do what would have been necessary to save the company.

Brandon Rael
BrainTrust

Sears was killed and will go down in history as one of the most tragic and unfortunate liquidation fire sales. Having gone through an intensive MBA program, and reviewed many a Harvard Business Case, it’s clear that the demise of Sears will be studied for years to come, as a cautionary tale of what not to do as an organization.

Sears and Kmart were already on a downward spiral well before Eddie Lampert and crew took the reins. Sadly all of this was accelerated with all the financial and operational mismanagement of a once iconic company.

The one major area you never stop investing in is the continuous innovation cycle, which includes changing your strategies, assortments, and operations, supported by the right technologies to meet the needs of a rapidly changing consumer base. Sears became a curiosity of what it was historically, and the brand lost its sense of purpose and reason for existence.

Rich Kizer
BrainTrust

David Weinand, you’re right. But my point was the lesson retailers should take away from this downfall, which is to be aware of the world of change we are in and take action, or be left behind. BTW, I am watching further actions of Lambert; do you think he will sweeten his $4.4 billion dollar offer (which I think the judge refused), and try to buy a number of stores (properties) as well as intellectual properties? I’m staying in a holding pattern.

Richard Layman
Guest
7 days 15 hours ago

Maybe he can join with the group that is selectively reopening stores of various Bon Ton banners. A Carsons opened up in a Chicago suburb in November. It’s open Thursday, Friday and Saturday, and sells other stuff, too. (Insurance? Art?)

Gene Detroyer
BrainTrust

Let’s simplify the answer to “What lessons should other retailers and their investors learn from the experience?” When the company is worth more dead than alive, you don’t spend a dollar trying to revive it. Sears is an excellent example, the enterprise value of Sears when Lampert bought was negative if you subtracted the value of the real estate.

Harley Feldman
BrainTrust

The biggest problem for Sears is they lost their identity. At one time Sears was known as the appliance, home repair and basic clothing store with the best catalog for ordering. Most people today have no idea of what the Sears brand is as there is not one. They were the Amazon of their time with the Sears Catalog but ceded that way of ordering to Amazon and others. The Craftsman label was for the best tools, and they sold the name. They were the standard for appliances and ceded that to Home Depot, Lowes and many others. Sears completely lost its way and brand over the past 20 years.

Other retailers should take the lesson that they cannot ever stop reinventing themselves yet must retain their brand image and relevance. Walmart, for example, has remained dominate while the retail world is shifting around them because they remain relevant to their customers yet provide better services at the same time.

Rich Duprey
Guest
The takeaway for individuals from this tale is not to confuse your investment goals with those of a hedge fund manager. Back when Sears was trading for $150 a share, any critique of Lampert’s stewardship was met with gainsaying that the “real value” of Sears laid in its real estate. That was very true, but only for Lampert who milked it dry, not for the individual investor buying Sears stock who somehow thought that would translate into an even higher share price for them. Lampert stripped Sears of anything of value, but always himself profiting at the expense of the shareholders. Lampert and his ESL Investments own or are large shareholders in Seritage Growth Properties, the REIT he created to calve off some of Sears best properties; Sears Hometown & Outlet Stores, a separate business Lampert spun off from Sears; Sears Canada, which eventually went under; and Land’s End. Any loans he made to the company were backed by prime properties if Sears didn’t pay and profitable interest rates if it did. His attempt to… Read more »
Craig Sundstrom
Guest

As I wright this, there is “breaking news” that the bid will go thru, so this post is seemingly premature, but doesn’t everyone really think it’s just a question of HOW premature? Months … weeks? Sears was already in trouble … that’s why he ended up with it. No one can say for sure that he killed it, but any and everyone can say with certainty that (beyond some self-serving financial manipulations) he did nothing to keep it alive.

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