
CEO’s Plan to Save Sears Would Hand His Hedge Fund $1B - petethomas
https://www.bloomberg.com/news/articles/2018-09-27/lampert-s-sears-plan-would-hand-lampert-s-hedge-fund-1-billion
======
cepth
Eddie Lampert's mismanagement of Sears is the _reducto ad absurdum_ of
financial "wizards" attempting to succeed as business operators.

I will never forget reading this article (from 2011):
[https://www.wsj.com/articles/SB10001424052970204517204577042...](https://www.wsj.com/articles/SB10001424052970204517204577042442598865710).

'While retail experts estimate that store chains traditionally spend $6 to $8
per square foot on annual maintenance, Sears is spending a fraction of that
amount, said Matthew McGinley, managing director of International Strategy &
Investment Group, an investor research firm.

"With roughly 250 million square feet domestically, [Sears] is spending about
$1.90 a foot, which is a quarter of what you need to maintain share and keep
it as an acceptable place to shop," Mr. McGinley said.'

\---

Nor will I forget reading about his management philosophy where different
Sears departments have to compete for money in the budget. Money to advertise,
to purchase inventory, etc.
([https://www.bloomberg.com/news/articles/2013-07-11/at-
sears-...](https://www.bloomberg.com/news/articles/2013-07-11/at-sears-eddie-
lamperts-warring-divisions-model-adds-to-the-troubles))

To the average "person on the street", it may be patently obvious that when
your stores are filthy and understaffed, no one will want to shop there. To
Eddie Lampert, the way to juice EBITDA for a few years is to slash that
maintenance money.

Pour one out for the death of multiple iconic American brands (Craftsman,
Kenmore, and eventually Sears itself). Don't shed a tear for Lampert, since
he's set himself up for a "heads, investors, customers, and employees lose"
and "tails, I win" situation.

~~~
chadash
There's a kmart (which is owned by Sears and therefore in the same situation)
near my old office and it's downright depressing to go in there. The lighting
isn't bright enough, the store is run with a skeleton staff and everything
looks a bit old or dirty. For example, the floor tiles are overdue for a
replacement. Want to buy a watch? Good luck finding an employee to help you at
the watch counter. But the most eerie part is that the store is so devoid of
customers.

When I go to a nearby Target, you can hardly move around all the shopping
carts in there. The Kmart, which is a similar size, might only have a few
customers in the store at a time. Maybe Target is slightly more upscale, but
even the Walmart nearby looks much nicer, plus has a better selection and
similar if not lower prices.

Unlike many other retail stores, it doesn't even feel like Kmart is _trying_
to adapt. Bestbuy has it's superior customer service (not exactly world class,
but better than competitors). T.J.Maxx/Homegoods has an ever-changing
selection of bargains and the feeling of being in a treasure hunt. Even J.C.
Penney tried a new transparent pricing scheme (which failed). But I haven't
seen Kmart/Sears try to do something similar.

Edit: changed _the store is run on a skeleton staff_ to _the store is run with
a skeleton staff_

~~~
MrMember
I had a similar experience the last time I was in a Kmart. No employees, no
other customers, empty shelves. Go to the electronics department and you'll
find games for systems that were obsolete a decade ago. I don't understand how
they've managed to stay open so long.

~~~
dabockster
In some neighborhoods, the local KMart was the only local clothing store for
miles. This was the case in the neighborhood a few miles away from me until
the mid 2000s and the rise of Amazon.

------
kevin_b_er
Standard practice. The retailer's assets are converted to profit for some
financial firm and the retailer dies. Hedge funds gain enough control to
saddle them with debt, then cash out.

These major retailers failing? They're engineered to fail by the parasite that
is the financial industry that vacuums up money into its control.

It is no surprise that the CEO, who owns the hedge fund that will give him a
pretty penny of a 1 Billion with B cashout, wants to axe the company his
somehow CEO of, for his own profit. It would not surprise me if the hedge fund
got to install him though owning enough of the company.

This is nothing but the modern reincarnation of Gordon Gekko. Greed is good.
Only they've evolved their methods of extracting and consolidating wealth from
the public since then.

~~~
hinkley
In the 80's this was called Corporate Raiding. There's even a movie with a
young(ish) Danny Devito called Other People's Money.

The execution has changed (pun intended), but it's an old trick.

~~~
shoo
Also worth watching: "The Crimson Permanent Assurance"

------
Aloha
The CEO of Sears is why Sears is going out of business, near as I can tell -
he's purposefully running the company into the ground.

~~~
aczerepinski
I doubt it's purposeful - more just that retail in the Amazon era is difficult
and he has demonstrated no particular talent or qualifications for running
such a business. He used to get talked up as the next Warren Buffett, but I
don't really think his skills as an investor have held up to scrutiny either.

~~~
nradov
The irony is that Sears could have been Amazon themselves. They already had
all the necessary pieces. But they didn't even bother to try.

~~~
lacker
In a sense Sears was the Amazon of 100 years ago. They started life in the
1800's as a mail-order catalog, when the communication and distribution
technology of the time had just become advanced enough to make mail-order a
possibility. Like Amazon, they only opened physical stores decades after they
started as a company.

It's pretty hard to ride all the business trends correctly for over 100 years
so I forgive Sears for missing out on the internet.

~~~
phlakaton
It still blows my mind that you could buy an entire house from Sears through
their catalog, and many people did. And not just a mobile home or shed either
– we're talking full-on bungalows and multi-story residences.

[https://en.wikipedia.org/wiki/Sears_Catalog_Home](https://en.wikipedia.org/wiki/Sears_Catalog_Home)

~~~
mywittyname
Kit homes are still around. I think they are not so common in the US because
the big builders have streamlined home construction so much that there's no
savings in pre-fab.

The Sears homes are pretty neat though. I live in a region where they were
very popular.

~~~
wahern
I keep seeing pre-fab articles pop up on HN, but I think it's having
difficulty gaining traction because construction requires a different process
--design, sourcing, code approval, labor. Supposedly it can be substantially
cheaper, both single family homes and apartment buildings.

My uninformed guess is that it won't be widely adopted until the various pre-
fab companies with competing strategies and designs work toward some sort of
standardization such that knowledge and skills can readily transfer. I bet
it's also a patent minefield, precluding standardization and commoditization.

Perhaps some large homebuilder will acquire one of the pre-fab companies and
then we'll start to see some volume. Maybe San Francisco should acquire one
and just begin building a ton of cheap apartment buildings....

~~~
phlakaton
Did you see the link that just went up on HN a couple of days ago about land
use regulations in San Francisco? I chuckle to think of the prospects of a
pre-fab developer making headway against all of the forces SF has arrayed
against them...

[https://www.collectorsweekly.com/articles/demolishing-the-
ca...](https://www.collectorsweekly.com/articles/demolishing-the-california-
dream/)

In particular, the article mentions Richmond Specials, which are "generic boxy
buildings" that are designed to "maximize the size limits on each lot." Sounds
kind of like what pre-fabbed apartments might turn out like, right?
Unfortunately, they appear to be widely loathed.

~~~
wahern
I did read it. :)

I think the so-called Richmond Specials (there are at least 2 on my block--I
didn't know the name until reading that article but recognize them everywhere)
have aged enough that they've become part of the accepted architectural
landscape.

Anything new will be hated by people. But why spend a fortune to be hated when
you could spend much less and be hated all the same. San Francisco requires
almost every building to prominently incorporate bay windows as part of the
facade. (Richmond Specials lack this, which is why they stand out.) Every era
of housing does this differently. As long as the pre-fab does it at least as
well (very low bar), they'd fit right in. Plus, stucco is an extremely common
street-facing exterior finish, and all the pre-fab stuff seems to have
similarly textured exteriors.

I'm no architect, but I think if you can mimic the Edwardian or Spanish
Revival styles (which are already quite simplified and boxy) which dominate
much of the city you can grease the wheels. I don't understand why architects
expend so much effort trying to do anything else; all it does is invite more
attention.

------
nemothekid
There's a great reddit post that absolutely goes into Lampert and the
mismangement of Sears.
[https://np.reddit.com/r/investing/comments/5sqsed/sears_is_c...](https://np.reddit.com/r/investing/comments/5sqsed/sears_is_crumbling_fun_fact_since_2007_shld_is/ddhe6ci/)

------
mrguyorama
I think my favorite part of the whole "Sears flushed itself down the toilet"
story is that crappy management can play the "We got outplayed by Amazon" card
to shrug off responsibility, meaning no stingy management at other companies
and corporations will learn from this mistake

~~~
Apocryphon
I couldn’t help but think of Barnes and Noble as a case of bad management
using Amazon as their excuse to fail.

~~~
debacle
One could walk into nearly any Barnes and Noble and see that that is far from
the case.

~~~
Apocryphon
Specifically this story: [http://audreyii-
fic.tumblr.com/post/170886347853/the-entirel...](http://audreyii-
fic.tumblr.com/post/170886347853/the-entirely-unnecessary-demise-of-barnes-
noble)

[https://news.ycombinator.com/item?id=16389342](https://news.ycombinator.com/item?id=16389342)

~~~
acjohnson55
Daaamn. How do you prevent monopoly when the underdogs are utterly destroying
themselves?

------
TuringNYC
Anyone know what (if any) haircut the pension-recipients would need to take if
he actually runs the company into the ground? Does the Pension Benefit
Guaranty Corporation (aka PBGC aka USA aks "us") have to pay pensioners 100
cents on the dollar? Does the defined benefits plan get turned into a defined-
contribution plan as of current value?

I feel bad for the employees of Sears...but i'm also selfishly worried that
the US Government ("we") ends up having to pay out absurd pension schemes with
absurd 7% annual return assumptions.

~~~
Retric
7% annual return is high, but not really absurd when including dividends, if
managed for the long term and accepting some risk.

~~~
lotsofpulp
It is absurd, and that's why the IFRS and US government forced corporation
pension funds to use discount rates that match high grade corporate bond yield
curves (which are no where near 7%).

See Pension Protection Act of 2006:

[https://www.treasury.gov/resource-center/economic-
policy/cor...](https://www.treasury.gov/resource-center/economic-policy/corp-
bond-yield/Documents/hqm_pres.pdf)

~~~
stale2002
I mean, the comparison should be against the stock market, not high grade
corporate bonds.

Stick the money in the s&p 500 and it will easily get 7%. (The real number
over the last 100 years is 9.7%). Having the number br 2.7% lower then that is
a fair compromise to take into account risk.

~~~
lotsofpulp
What is your source for 9.7%? I suspect it’s subject to survivorship bias.

There’s plenty of research on choosing discount rates for defined benefit
pensions and annuities, and many papers to read. And there are myriad reasons
you can’t just stick the money for a pension in the s&p 500, but suffice to
say, everhone in finance sticks to the IFRS numbers and knows US GAAP is
garbage.

~~~
stale2002
My source is the S&P 500, which has been around for a hundred years.

You can pick the DOW if you like, as it has similar returns over the last
hundred years.

Although, FYI, the 9.7% number I was using was not inflation adjusted. Perhaps
that 7% number was inflation adjusted? That would make sense as the s&p
inflation adjusted number comes out to be 7% almost exactly.

This is not survivorship bias, as the way investing in the s&p 500 works is
that it is a moving list of the top 500 companies market cap.

IE, if a company goes down in price, and drops out of the top 500 companies,
then so would your investment in it. And total returns take this into account.

It is perfectly possible to simply invest in the market, and recieve market
returns, if you are also willing to accept market risks.

The stuff you are talking about, regarding risks, only matters to people who
care about short term returns, not people who care about long term returns.

And a pension fund, which has a time horizon of decades, seems like the very
best example of a fund that would not care the slightly about short term risk,
and can instead optimize for long term returns.

~~~
lotsofpulp
Pension funds need to pay out all the time, in good times and bad, so they
also have a short term component to worry about it. And they do invest in
index funds, but going all in into sp500 isn’t the same as diversifying. Here
are some good responses:

[https://www.quora.com/Why-dont-pension-funds-university-
endo...](https://www.quora.com/Why-dont-pension-funds-university-endowments-
etc-use-index-funds-Shouldnt-they-do-so)

~~~
Retric
Pension funds also have money flowing in. They invest more money in down
markets than good ones because they need to ‘catch up’ in bad markets and can
scale back in good ones. The risk is the company failing to keep up in a bad
year.

Diversification is also a relative term. Compared to owning a single stock the
sp500 is more diversified.

------
zelon88
Apparently I can't read the article in my RSS reader because it's a TOS
violation for Bloomberg.

That's ok though. If it's a TOS violation to read the article without giving
my info to their 23 trackers and 6 intrusive advertisements I'm all set
anyway.

~~~
greglindahl
I've been getting that apparently due to the VPN that I use -- if I
temporarily switch it off, I have no problem reading their articles despite my
adblocker.

~~~
samstave
What VPN do you use? Are you going through VPN as a matter-of-coarse to browse
the web?

~~~
greglindahl
I happen to be using SurfEasy VPN, not that I recommend them other than that
they're cheap, and this is on a phone where I keep it on as much as possible.
So far only Bloomberg's website and one app are allergic to the VPN.

------
markbnj
Used to do business with Sears years ago and visited the Hoffman Estates
headquarters. I'll never forget the impression of truly massive bureaucracy
that the place conveyed. I'll also never forget how they dismantled their
whole catalog operation just a couple of years before internet shopping took
off.

------
nickelcitymario
The really big irony in all of this is that, if I'm not mistaken, it was the
old Sears Roebuck catalogs that used to say something like "it's folly to
purchase items on credit". Then the next generation took advantage of consumer
folly, making financing a core part of the business. And now debt is killing
this originally-anti-debt company.

~~~
rohitb91
I love financial irony

------
brogrammernot
Can’t go into too much detail but had a meeting with some of their top tech
peeps (title wise) and it was really, really clear they have no clue how to
run an effective eCommerce business.

It was also incredibly hard for me to sit there and watch a company I fondly
remembered visiting with my father to pick up some tools (back when it was run
much, much better) have such minimal vision for their eCommerce + little
leverage at the table.

Feels really bad for the employees.

~~~
anoncoward111
I don't want to turn this into a "laissez-faire capitalism vs state-planned
economy" debate, but I'm noticing this is the rule rather than the exception.

With so many incredibly gifted and hungry tech rockstars just searching for
_just one lucky break_ out there, how on Earth is it that all these clueless
individuals continuously get to run major tech initiatives at major companies?

~~~
brogrammernot
Well, honestly I’m not entirely sure but overall the feeling was they had
impressive resumes (big tech backgrounds) but really just seemed like they
skated along as I just curiously asked what they did/worked on and it was
really like a mile wide, inch deep responses.

I dunno, it was also really weird to have tech people show up to a large tech
company’s office in full suits during the summer. Felt really out of touch
honestly.

~~~
anoncoward111
Either Eddie is not so smart in peering through paper qualifications, or he
deliberately put idiots in charge so he could continue to siphon off Sears'
assets under the cover of falling revenue and "crisis" :) .... what a world.

------
protomyth
It is just so sad that a company that was built on the catalog business
couldn't transition into putting their catalog on the web. The Xmas catalog
was an event each year for a lot of kids.

------
mherdeg
I was really hoping to see some follow-up from this amazing Reddit post from
2017:[https://www.reddit.com/r/legaladvice/comments/5m90gv/im_17_2...](https://www.reddit.com/r/legaladvice/comments/5m90gv/im_17_2_years_ago_i_inherited_100k_from_my/)

The poster inherited about $100,000 and their parent, controlling the money,
invested it in SHLD in March 2015 (circa $40/share). I've always wondered
whether that person managed to get the money out (in 2017 at $8/share) or
whether it's still there now (at $1/share).

~~~
anoncoward111
Good Lord. If there was ever a better way to say "cash is king".

I would be dejected.

------
throwaway456321
No conflict of interest there!

~~~
bitL
Who cares about such pesky things nowadays? "Morality is for losers" is the
current Zeitgeist. Phew

~~~
throwaway456321
I live in an affluent area and the Sears by us closed. If Sears can't survive
there, it's done. I feel bad for the people who worked there. Whenever I went
in, they were always helpful. Now they are looking for something else.

------
phlakaton
If I'm reading the article correctly, Lampert's fund has put $2.5B into Sears,
so the kickback would mean they "only" lose $1.5B instead. That's a very
different story than how I thought the title read, which was: "CEO's hedge
fund walks away $1B richer."

I hope investors are taking ESL's management of Sears into account when
deciding if it's a hedge fund they will continue to support. There's risk, and
then there's incompetence...

------
kevmo
Involuntary bankruptcy is pretty rare in the USA, but Sears sounds like a good
candidate for it. Kmart and Sears are obviously cruising towards Chapter 7 or
11. If I were a sizable creditor, I would rather get the company into
bankruptcy court early, before the CEO was able to pillage all the cash
holdings.

(Source: I'm a former bankruptcy lawyer)

~~~
anoncoward111
Does he just straight up bonus it to himself in this scenario or does he like
funnel Sears contracts (for example like employee toilet paper or something)
to businesses that he owns 100% privately, like "EDDIE'S PAYPA FUHFILFMENT CO.
INC."?

------
cde-v
Eat the rich.

~~~
marnett
they taste like chicken!

~~~
mywittyname
More like veal.

------
bluev
Sears needs to go back to the drawing board or just hit on crazy ideas, it's a
perfect time to revitalize their now historic, prefabricated homes.

------
blairanderson
amp article has less tracking junk on it
[https://www.bloomberg.com/amp/news/articles/2018-09-27/lampe...](https://www.bloomberg.com/amp/news/articles/2018-09-27/lampert-
s-sears-plan-would-hand-lampert-s-hedge-fund-1-billion)

------
ocdtrekkie
Sounds like he's trying to get his money out from a business he knows isn't
being saved.

With a share price that low, they should announce a pivot to cryptocurrency
and drop an ICO, lol.

