Updated: Sep 11
Sears didn't jump. It was pushed.
I’ve had a strange obsession over the last decade or so and that following the story of the downfall of Sears and Kmart.
What’s that, you say? You already know the story? Let me guess, you think Amazon ate Sears’ lunch because it failed to keep up with the times, right?
Now you wouldn’t be totally wrong in believing that is the reason that Sears is nearly defunct. But that’s the public story-the one people hear from the media. There is another reason that Sears is going down the tubes and it’s hidden from plain sight.
Do you remember what happened to Toys R Us? A private equity firm bought the chain and piled on tremendous debt. The investors and shareholders made money and didn’t lose a cent. The employees of Toys R Us lost their jobs in some cases without any severance.
Something similar is happening to Sears and Kmart. Over the last 15 years, the owner of a hedge fund and the shareholders have stripped the company of value, selling off valuable brands and closing stores. All the while those shareholders haven’t really lost anything in the process.
What’s happening to Sears is something that has happened throughout retail and not just retail but in other sectors of the American economy. It has affected millions of jobs and yours could very well be next. Below is the transcript of Part One of a two-part podcast from my En Route podcast on the downfall of Sears and how its former CEO Eddie Lampert will be able to walk away from what was once America’s great retailer without losing a cent of his own money.
The transcript of Part One and the links to the podcast episode are below.
Part One: It Didn’t Have to End This Way
The following was edited for length and clarity.
Dennis Sanders: Well, the final thing that I wanted to talk to you about was the story of, and kind of the downfall of Sears. Um, you know, the memory that I have, I I grew up in the 70s and 80's is especially going to which kind of sold everything from clothing for school to lawnmowers. Usually, the story that we hear about its downfall has been about Amazon -that it wasn't keeping up with the times and that's why they are basically not existing anymore. But that doesn't seem to be the whole story. It seems like this started in 2005 with the merger with Kmart and with their CEO. Would you be willing kind of to share a little bit about that story? And how did that happen?
Warren Shoulberg: Sure. So I am a bit obsessed with the Sears and Kmart stories. So, um, been following it , since I've been following it forever, I've been, I've been covering retail for a long time. So, first a little context. As recently as the 1980s, Sears was the biggest retailer in America. And as you said, they sold everything and, and you know, it's t unfair to say that they were the Amazon of, of the era if you wanted something you went to Sears either they're big catalog or their stores.
In earlier days, Sears sold houses. They sold cars. Um And even in the 1980s, they had a real estate brokerage company and they had a credit card which is the Discover Card. They had car insurance and know, they were the place to go. Similarly, K mart in the 1990s biggest retailer in America. And Kmart was a great story. They were almost like Target in terms of having some terrific fashion, some interesting home stuff, and just having a little bit of an edge compared to some other retailers.
These were both good retailers. And through a variety of reasons they started to decline. Some people say that both Sears and Kmart took their eyes off their core businesses as they bought other companies. And I mentioned all the other things that Sears did and some people criticized them for focusing more on financial services and real estate than on retail maybe, but I think if they had successfully executed that strategy, that was a brilliant plan. Kmart either bought or started a lot of other retail chains. They owned a home improvement store. They owned a warehouse club, they owned two bookstore chains. So they also had a strategy of, of, we're going to have multiple nameplates under one brand. And you know, again, people criticized and said that they then stopped paying attention to Kmart. To me, it's not so clear cut, but clearly, both Kmart and Sears declined as core retail businesses. And I'm going to say um Sears made the fatal flaw in its retail business. You can trace it back to the 1940s when Sears started to expand into the suburbs. Um uh as the baby boom era started, and people moved to the suburbs, Sears made a strategic decision to put its stores in shopping malls. Um Had they put those stores as in strip centers. I think they would have had a very different outcome. This has been my theory, I'm not sure anybody else shares it, but you think about it. The shopping mall customer is not buying lawnmowers and power tools and work clothes and things like that. Those are being bought uh you know today in Home Depot and Lowe's which are in strip malls and or freestanding. So Sears made a big A big mistake that took 40 years to catch up with them. But it did and, Kmart I think just stopped investing in their stores.
So when Eddie Lampert bought Sears in 2000 and then he bought Kmart in 2005, they were both declining, but both were still pretty good businesses. They had about 3500 stores between the two of them. There were a lot of opportunities there, they had loyal customers.
Eddie Lampert came along and he had a great press agent who said that he was the next Warren Buffett and he was going to be investing in the businesses and was going to be a hands-off owner. And all of that turned out to be untrue. His strategy from the very beginning was to pull cash out of that business. It was not to run the business because if it had been to run the businesses, we would have seen very different activities, but instead, they kept selling real estate. It wasn't just real estate they sold, they sold brand names, they stopped investing in their stores. I don't have the numbers in front of me, but you look at Sears, Kmart capital expenditure budget versus Target. It was a fraction of it, they just weren't spending any money to keep the stores modern and to keep the stores up to date. Both Kmart and Sears had a lot of old stores that needed a lot of work and they weren't spending it. This was just a real estate play to sell off real estate assets. It was to keep spending to a minimum and keep drawing cash out of those businesses that went back to the shareholders of which Lampert was the biggest shareholder, he had 50% of the company.
The example I've used several times is that Sears owned a regional hardware store called Orchard Hardware on the west coast and it was a nice little business. They probably should have never bought it but they did. Somewhere along the line, they sold it to investors for a modest amount of money and they took the proceeds from the sale and paid out a dividend to Sears shareholders of which Lampert got half of it. Then the new owners and Sears which was still a minority owner of it., 49% I think. They then um took out a line of credit of about $600 million. They took those $ 600 million dollars and issued another special dividend to their shareholders of which Lampert and E. S. L. Holdings, which is his company, got $300 million of it. Old Orchard now had $600 million in debt that they didn't have the day before. Within 18 months old Orchard filed for bankruptcy and was out of business.
It was a plan to take cash out of it (Sears and Kmart) to send that cash back to shareholders and not to invest in the business. You know if they had taken out a $600 million dollar credit line and invested it in the stores, that would have been one thing, but that's not what they did. So this is what Lampert kept doing; he sold the big brand names and the store count kept diminishing. He took their best stores, their best performing stores and sold those first because those were the most valuable assets. Those stores are now Targets and Home Depots. When Sears Holdings filed for bankruptcy in 2019, they had they still had 1800 stores you know, which is pretty significant.
Lampert convinced the bankruptcy court that he was the best choice for keeping the company going. And they came out of bankruptcy in Mid 2019 with 400 stores. Within a year they were down to 197. And now in 2021 and see Transformco, which is the company that owns Sears and Kmart no longer answers questions and talks to anybody about what they're doing. They are a private company obviously. As best as I can tell, and I talked to some other folks who are following it, even more closely than I do, there are about 50 stores left between Sears and Kmart. There may be, I don't know, 30, 30 Sears stores left and 20 K. Marts. That’s it.
They’re just not a player anymore. So it's a real tragedy, you know, these stores might not have made it under the best of management, based on the competition from Amazon and Walmart. It didn't have to turn out this way, they could have played a role, you know.