The Sears Holdings Corp. (Nasdaq: SHLD) story isn't just the story of what's happening to two American icons of retail, or what's happening to bricks-and-mortar retail in the age of online shopping.
It's also the story of the pensioners who will suffer from the company's demise; it's the story of another 140,000 jobs about to be lost. It's a story about asset-stripping.
In short, Sears' downfall is the story of how hubris and financial engineering failed retired workers, current employees, customers, and investors.
And it could be your story, with a happy ending, when you know how to profit from Sears' death.
Eddie Lampert's Destructive Debut
The backstory of this saga starts with Kmart.
Kmart, the original big-box retailing giant, was launched in 1962 as a discount division of S.S. Kresge, an early competitor of Woolworth's, which was founded in 1897 by S. S. Kresge himself.
At its peak in 2000, Kmart operated 2,171 stores.
But by January 2002, the company, known for its surprise in-store super-sale items illuminated by a mobile blue police light, ran into a serious cash shortage, a slump in holiday sales, and a failed price-cutting campaign. It sought bankruptcy protection to reorganize itself.
Enter the Dragon.
Edward Scott Lampert is the founder and owner of hedge fund ESL Investments. Lampert, the former Goldman Sachs protégé of Robert Rubin when the former U.S. Treasury Secretary ran Goldman's risk arbitrage desk, left Goldman in 1988.
With principal backing from famed Bass Brothers investing guru Richard Rainwater and $28 million in capital, Lampert launched ESL Investments.
ESL had a great track record. From 1988 through 2002, the fund boasted 29% annual returns.
In 2002, ESL began buying Kmart's distressed bonds (purportedly for the company's real estate), which Lampert recognized was an undervalued asset. By the time Kmart emerged from bankruptcy in 2003, Lampert had converted ESL's bonds into a 53% equity stake, giving Lampert control of Kmart.
In the summer of 2004, Kmart had pared down its huge inventory and sold 54 stores to Sears for $621 million. That was Lampert's introduction to Sears, the household-name retailer launched in 1886 as a catalog company by Richard Warren Sears and Alvah Curtis Roebuck, which was having its own difficulties but managing better than Kmart.
Lampert saw Sears' brands (Kenmore, Craftsman, and its Sears Auto Centers) as valuable property and dug deeper into the company's assets. There he found a treasure trove of real estate.
He wasn't the only one eyeing Sears. By November 2004, Vornado Realty Trust announced it had amassed a 4.3% stake in Sears. The announcement catapulted Sears' stock 18% higher.
Fearing Sears was about to be put into play, which would engender a potential bidding war, Lampert negotiated the sale of Sears to Kmart for $11 billion in the fall of 2004.
The deal closed in 2005, putting Sears, Ro…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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