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Sears Hires Advisers to Prepare Bankruptcy Filing (wsj.com)
71 points by Vaslo 6 days ago | hide | past | web | favorite | 84 comments





It is interesting how many fronts they failed on.

Sears Credit could have spawned something like Paypal. They were successful with their Discover card, and the Sears card was often young people's first credit card.

They were kings of catalog shopping, and had the logistics and product data to have had a decent online business.

And, they had brand strength in several areas like Kenmore, Craftsman, Land's End and DieHard Batteries. I know they licensed all that out, but way after the brand had peaked.


This is the canonical eulogy for Sears, courtesy of Pastabagel@Metafilter:

https://www.metafilter.com/62394/The-Record-Industrys-Declin...

"By my estimates, Sears could have spent about $200 million in 1994-1996 to develop and promote retailing and financial services online, and they'd be reaping billions.

Sears could still be a huge American company today, instead of a historical footnote."


But then again, where are all the early search engine companies now? Alta Vista, Yahoo, Ask Jeeves, Inktomi, Lycos... Just because you are early in a market doesn't mean you will succeed.

Yeah, but if you are early and you have capital, you've got a major market advantage. You'd have to seriously stumble somewhere in your execution, and having capital makes that easier to fix more quickly while being early means you're better able to drive and read the market. For a company like Sears whose name was largely built on their mail order catalog business, the fact that they'd die to competition from online retailers is pretty ironic.

They gave away this market by killing the mail order business in the late 90s. That's the entire thesis of the link I posted.

Sure, Sears would have lost some ground to online retail at the start, but with a massive warehouse and distribution network already in place they could have made up the lost ground very very quickly.


I feel the real missing ingredient here was the foresight required to anticipate a lot of these changes looking forward.

It's something I've been trying to develop myself. Any idiot can look back and say, gee, they could've done this, that, and the other thing, with benefit of hindsight.

How do you become the sort of person who sees where things are going, years/decades in advance?


The Innovator’s Dilemma is a good read for more information on this topic. In fact one of the examples/case studies focuses on Sears and how the were nearly taken down by discount retailing.

The book can be found on Amazon here: https://www.amazon.co.uk/Innovators-Dilemma-Technologies-Man...


again? Sears was already mayor investor in Prodigy since 1984, finally getting rid of it in 1996. Cant find it right now, but there is a clip on YT from some breakfast/morning TV show where presenters shop around dialed into Prodigy system presenting variety of Sears catalog items.

And don’t forget their joint venture with IBM — Prodigy. Given their logistics and catalog, they could have owned online shopping.

I can find references to Prodigy having an online shopping portal, but I have had trouble finding any anecdotes of people actually buying things thru it. It was probably too early for it's time (early 90s graphics, internet speed and all) and it's failure probably soured Sears from future attempts by the time Amazon showed up.

The graphics were ahead of its time. RIP was a major step up from ascii.

Well, they spun IN Land's End before they spun it out. It was not created at Sears.

Bought by Sears in 2002 for $2B cash. Current market cap is ~$468M. Ouch.

bad way to do market math. What if they already made $10 Billion from Land's End since 2002?

With zero knowledge, I'd bet that they got their $2b and then some. Acquisitions are /were probably their only asset, since real estate was mortgaged by their hedge fund owner.


Forbes seems to think they overpaid, then ruined it. The market cap was also ~3x higher a few years ago, so it sounds like post spinoff didn't go well either.

https://www.forbes.com/sites/markcohen/2016/09/27/landsend-a...


One of the hidden problems with Sears going under is that by and large they had some really good auto repair shops. They charged a fair price and really didn't try any funny stuff. They were the good "I don't know a mechanic in this town" place to go.

When did they stop having good auto repair shops? My experience in the past 5 years has been that the people who worked there seemed to be picking up a wrench for the first time the day I rolled in.

Took a car in two years ago and they did a good job. I get the feeling its been a bit of a slow decline depending on where you are.

(Eddie) Lampert rarely visits Sears Holdings headquarters, outside of Chicago—some say only once a year, for the annual board meeting. https://www.vanityfair.com/news/2018/03/the-strange-odyssey-...

Company failing and he doesn't even show up.


I don't think this is unintentional. His own hedge fund has bought several of Sears' most valuable brands. But even more important, Sears has sold a lot of its real estate to ESL or Seritage or whatever Lampert's holding company is. I've read suggestions that he'll make out better in the long run by reselling that valuable real estate than lifting a finger to save Sears' retail operations. I'm not quite sure I see how buying large spaces in dying shopping malls is a huge value proposition for buyers, but that's the explanation I've read for why he's seemingly knowingly running Sears into the ground. He gets valuable assets for pennies on the dollar.

You've pretty much got the gist. Pre-Lampert, the SHLD bull thesis centered on its real estate assets... huge quantity of long-term leases way below current market prices. Other hidden assets included intangibles such as brands.

Lampert came in and started running the financial engineering playbook, most crucially the various spinoffs, of which the most important one was the spinoff of Seritage, which is the embodiment of the "RE asset value backstop" strategy. What Seritage does is to partner with the mall landlords (operators like Simon Property Group) to redevelop the former Sears footprint into something more in line with current market preferences (think subdividing into Dave & Buster's, Pandora, etc.) and re-rent the space at a big markup. This is the shell that holds the pea.

None of this benefits from the decline of Sears' core retail operations. Plan A was always to return Sears to profitability, which would have made a killing for ESL. He has struggled mightily to do so, and failed just as mightily. A large amount of effort, capital, brain damage, and reputational has been incurred without a commensurate reward.

But again, Lampert's a very sharp guy; downside protection is in place. Besides the spinoffs (which ring-fenced a bunch of capital), he's migrated a bunch of ESL's investment up the ladder to a creditor position, including big holdings of "fulcrum" securities (unsecured bonds) that will give him a big voice in BK.

A+ for financial engineering; F for business ops. Overall grade: C-.

Not a zero-sum conspiracy working as designed, just desperate wriggling off the hook of a failing workout. Turns out you can't cost-cut Sears to profitability, and competing with Amazon is harder than one might think (?)


I think that's as good an explanation of Lampert's plans for Sears as anything I've read.

One thing I'll add--with how much malls are struggling, Lampert's play for real estate isn't going to work out anywhere near as well as he might have hoped. Sears's, as an anchor for many malls, used to have extremely valuable real estate. Now, with the so-called "retail apocalypse" happening, the market for that space isn't what it used to be.


You might be surprised. Seritage is a public company (stock ticker is SRG); check out their SEC filings and investor presentations. They list several names of new tenants who've been taking up their redeveloped floor space.

I think the desirability of the former Sears stores varies dramatically by location; some of them are hopeless ghost towns, but many of them apparently have bright hopes for non-department store tenants. Check it out.

There's a reason Warren Buffett bought into SRG. This part of the strategy is working well.


> I've read suggestions that he'll make out better in the long run by reselling that valuable real estate than lifting a finger to save Sears' retail operations.

These investment firms saw the huge amount of expensive real estate that these retail stored owned and figured that's where the money is. Unfortunately for them, the reason the real estate was expensive was because of the store and when they slowly ran them into the ground they dramatically decreased the value of the property.

McDonald's has a similar issue; they are both a fast food franchise company and a real estate company that owns and rents out a lot of the property the restaurants sit on. There is a strong group of investors that want to split the company across these lines because the real estate part is much more profitable. But running one without the other is probably a huge mistake.


Sears has a large pension liability. If they go bankrupt the pension obligations disappear. His hedge fund can open a new "I can't believe it isn't Sears", except because the pension is gone it can make money where Sears cannot doing otherwise the same thing.

Pensions in the US are only allowed to invest in the absolute worst returns options, which is why companies rarely have them and are getting rid of them. However you cannot get out from under your previous promises made 30 years ago when it was possible to have get a good return - unless your company goes bankrupt.

The pension thing is a tricky problem, the reason pensions can't just invest in anything is when they could they invested in their own stocks - which means a company going bankrupt just took retirement away form long term employees. I knew someone as a kid who put in 30 years for a company that went under a year after he retired taking away his retirement.


>If they go bankrupt the pension obligations disappear.

Not that simple. The PBGC (https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...) has had a lien on several of Sear's properties for a few years now, to cover Sears's unfunded pension liabilities.

Here's an example: https://www.reuters.com/article/us-sears-pensions/in-kenmore...

Now a worrisome note: the PBCG falls under the control of the treasury secretary, Steve Mnuchin, who just happened to be Lampert's college roommate. I can't see any evidence of wrongdoing here yet, but it's something to keep an eye on. The whole deal with Lampert and Sears is a tangled mess that might make for interesting reading when more of this ends up in a courtroom.


fact check: Pensions in the US are only allowed to invest in the absolute worst returns options

Investopedia reports : ERISA does not regulate a pension plan’s specific investments. ERISA does require plan sponsors to operate as fiduciaries. No conflicts of interest between plans and any people or entities related to the fiduciaries are allowed. Investments are to be both prudent and diversified in a manner that is intended to prevent significant losses. ( https://www.investopedia.com/articles/investing-strategy/090... )


It does feel like a sort of loophole for something very similar to insider trading. And, he gets to work both sides of the deal.

That's the main thing, for me. Somewhere in here I feel like he's going to get burned by self-dealing. I don't know enough about these things but if the behavior seems obvious enough to boobs like you and me with no knowledge of finance, I'm pretty sure some of the other investors who stand to lose out are giving him the side-eye and scheduling lunch with their attorneys. OTOH, anyone who's still invested in Sears at this point, I feel like has to be a vulture. There can't possibly be value investors left in this turd.

I'm not quite sure I see how buying large spaces in dying shopping malls is a huge value proposition for buyers

Especially when you, umm, shut down the anchor store in said mall. I'm thinking of the Overlake Mall in Bellevue, WA that I pass every day, with its now-closed Sears store: "well, who the hell would want to rent retail space in there now?" Even when the Sears was open, I'd be hard-pressed to tell you the last time I was in that mall.

I'm sure there's some weaselly real estate one weird trick that us commoners are missing, but it sure doesn't make a lot of sense from where I'm sitting.


Overlake is an interesting area. Redmond to the east, and the Bellevue Collection to the west. Right along 520, which now needs a toll to cross from Seattle. The store probably had a lot more Seattle traffic before the tolls started. And before Costco and Target opened stores in Seattle. Also the perceived cost of being in Bellevue - I used to prefer shopping in Northgate to Bellevue.

Setting up the H&R Block(head) office inside that Overlake Sears was my first job in IT.


I'll see if I can find a link to an article that made a pretty convincing case for it. I think it was either Bloomberg or Barry Ritholtz's blog.

I wonder if, as the last major tenant in a dying mall, maybe they get a cut of the sales when the mall itself gets sold by the developers? You've gotta be right, there's some sleight of hand that we're not privy to that acts as a license to print money.


This search also reminded me of the other shady thing he's done. Since he bought Sears's real estate out from under them, he saddled Sears with millions in additional rent payments. That's money going directly from retail into his pocket, while he's acting as both landlord and tenant.

https://www.usatoday.com/story/money/2017/03/22/sears-holdin...


It gets even weirder than that. For example, he sold the Kenmore brand to his own hedge fund (ESL). https://searsholdings.com/press-releases/pr/2091

They died years ago. This is just the funeral.

It’s like one of those Garcia-Marquez stories. The facade is maintained long after the thing died —the facade was no longer necessary but it continued due to momentum.

Quite the contrary. The facade was required until the clock ran out on Title 11's two year fraudulent conveyance presumption.

Telecom industry person here: About four years ago I was contacted by a real estate industry person, purporting to represent Sears, that was looking to get revenue from putting cellular carrier sites (other other monthly rental from telecom-related things) on the roofs of Sears' big box retail stores. They had a website marketing it and everything. I don't believe it ever went anywhere, because the nationwide big-4 cellular carriers would much rather pay a mall owner for a 15'x15' plot of land to put in a cabinet and monopole, than sublease a rooftop from Sears.

What do you mean by monopole?

Google "steel monopole", a type of free standing, low square footage footprint cellular tower.


not really, no, that's for a type of antenna. I was referring to the structure which supports the antennas, which is something like this: https://www.pinterest.com.au/pin/562950022151065454/

Moments like this actually give me some hope. Perhaps younger generations will use this as an example of how corporate America is no ones friend. They don’t care about you as an employee, they don’t care about their customers, and they don’t care about politics unless it gives them an unbridled revenue stream. So much of what’s taught in B-schools is such a lot of malarky compared to real-world capitalism, which has nothing to do with the simple ideas of building a good product, containing your costs, etc. It’s all shenanigans and financial engineering, to the benefit of the few in power, where executives are replaced when they fall out of favor, rather than their obvious incompetence. As pointed out here, Sears could have been something akin to the juggernaut that is Amazon today - maybe even bigger. But that would have involved work, and greed always opts for cheap and fast.

So, you want a lesson kids? If you aren’t freelancing, building your own company, seeking ways to be part of the financial engineering games, then you are really just one paycheque away from being out on the street. I’d like to think that with enough recessions, with enough pump-and-dump, with enough scheming, that eventually enough people will decide to create their own businesses, and maybe we’ll see small businesses, small towns, and real capitalism reborn.


why is this comment grayed out?

"shenanigans and financial engineering, to the benefit of the few in power, where executives are replaced when they fall out of favor, rather than their obvious incompetence"

Right on the money!


It's ok, I've learned to just throw karma to the wind and speak my mind. Some will upvote, many with downvote. I find it fascinating from a sociological perspective which way the HN crowd will go on any given day. There are some really insightful folks here with amazing backgrounds and a lot to share, but there are also a lot of perspectives I can't quite put a finger on.

What does this mean for their pension payouts? Too bad the retirees are too old for a revolution. Liquidate all their holdings and payout to the pensioners.

If only :/

Sears was Amazon before Amazon. He started by selling watches from mail order catalogs and then selling more stuff, and then opening stores.

So, does this have knockon effects for mall stores? Lots of malls with one less anchor, after the ripple effects go through. I realize bankruptcy does not always mean everything closes, but in this case I think a lot of it does pretty soon. Many malls are already on the edge, I think this could be a problem.

Better article from Forbes, that isn't behind a paywall

https://www.forbes.com/sites/georgeschultze/2018/10/08/sad-s...

CEO Lampert is a conman, and would be the only person to benefit from this move. Sears shouldn't be given any more breaks, and should just die already.


What is "vulture investing?"

A vulture investor buys up assets and financial instruments below cost from distressed entities.


a Sears fail anecdote: Tried to buy a vacuum once with a printed out Sears gift card (card # only) and cashier refused, manager told me they should call loss prevention just for me trying to use that. Brought up Sears website on my phone, typed in the card #, and selected store pickup. Walked over to the pickup area and left with the vacuum.

What do they usually do with all the assets of these companies when they go bankrupt? Would stuff like all their appliance stock get put up in a fire-sale for cheap? I need a new washing machine...

They will typically just restructure and continue without even closing down. They will probably end up closing a number of the low performing stores.

Although they potentially could go the way of Kmart or Toys R Us if the bondholders hold the company hostage.


A liquidation company buys the assets and sells them - down to the shelves and signs. That's why all the "Store Closing" signs are the same, because the same liquidation company shuts down many companies.

A local bon-ton had just done something similar. i'm not sure if they were bankrupt, but the store went out of business at the mall and EVERYTHING was being sold for cheap. We got a $90 coffee table (reduced already) for $6 after they took off like 90% and some other discount for that day.

Did they use the same Store Closing signs as your local Toys R Us?

Took longer than I expected, but unsurprising otherwise.

Next up ... JCP.

Hardly. JCP's book value is actually positive and double the share price, versus SHLD's $-40 per share of $0,40; and JCP has no major debt due until 2022.

Please no, my favorite clothing store in the US

Not being snarky, but why? I'm curious why you shop there.

It's amazing, Sears CEO Lampert has done so much self-dealing -- turning Sears assets into Sears cash + Sears debt, with the debt owned by Lampert's own companies -- that he'd be the only beneficiary in a bankruptcy. There's so little equity, other shareholders would be wiped out. It's hard to see how this doesn't end in a massive lawsuit, and, hopefully, some kind of consequences for rapacious capitalists.

cites: https://www.usatoday.com/story/money/2017/03/22/sears-holdin..., https://www.cnbc.com/2018/04/23/eddie-lamperts-hedge-fund-es...


I used to love to go to sears. As a kid I would spend hours thumbing through the Sears catalog, and circle Christmas gifts to give hints to my parents. At one point most of the appliances and tools in my house were Sears brands.

Unfortunately, reading some of the comments to a story gives me headache. Especially the "corporations are evil" type comments. Sears was killed by two factors: 1) Lampert's self-dealing and attempt to extract personally enrich himself, and 2) optimizing everything to extract as much cash as possible, from every facet of the business.

When I was younger, there was a classic business case presented in an MBA program regarding frozen pizzas. A food company sold frozen pizzas that was great and had a very strong customer loyalty. In search of more revenue, an MBA calculated the cost savings if they reduced the number of pepperoni. Unsurprisingly, they made more money and no one complained. Bonuses were handed out. Year after year, they started to "optimize" the pizza. After several years of this, sales tanked. Customers stopped buying. They hired consultants who performed focus groups and they found out that customers didn't want a cheese pizza with a few toppings. They never fully recovered revenue back to the original levels even after trying to win back customers. Once they broke the customer's inertia, customers started exploring other options and found better ones. The key take away is: don't be myopic and only focus exclusively on short term gain because you may run your customers off.

I have seen this pattern repeated over and over. Amazon is the now biggest example. Every interaction I have with Amazon is getting more onerous. It used to be I would go online, search amazon and order. Now the product search results are festooned with ads, sponsored products, and the product that I want at higher prices, while the lower priced products are hidden. They arbitrage postage. New ads on prime video. I can go on and on. Eventually people aren't going to take it anymore, and when they do they will find better, cheaper options. I know I have.

This happened at Sears. Every time I interacted with sears it was less enjoyable. The products became cheaper and lower quality. Recently, I wanted to purchase an olympic weight set. Heavy cast iron weights. Sears used to have home a large selection gym equipment. It is one of places where someone will go in to buy a barbell, and will return for more products like a curl bar, more weights, and pick up a few other items while you were there. Nope, they had determined it was more profitable to become a market place and take a commission and not hold inventory. They optimized the inventory to only hold items that sell well or have high mark-ups.

Being a cynic, I really don't think Lampert cares. Although I don't think BK was the plan all along, he is obviously using it as a financial engineering tactic to shed obligations while he owns all the real estate. His self-dealing was so bad a number of investors were threatening lawsuits a few years ago. Ultimately, he will kill the company and still walk away with a dump truck full of money.


What kinds of regulation can the government pass to make it illegal for vulture capitalists to raid companies like this?

Dollar-for-dollar clawbacks by the Fed pension guarantee fund of the vultures' bounty + tripling the fraudulent conveyance lookback period, for starters.

Allow the Pension Guarantee Corp to put distressed concerns into receivership as if they were a first priority debt owners (secured creditors essentially). Pensions get paid out first, whatever is left can go to debt holders (with equity being wiped out).

Why should it be illegal? If Sears has more value being shut down than kept running, why shouldn't it be shut down?

Except it didn't -- the raid makes one very small group of investors a lot of money at the expense of literally everyone else.

While this doesn't answer your question directly, there's a good case to be made that Sears lost a lot of its value due to the way its current owners have run the company. Brick-and-mortar retail is obviously a tough business to be in these days even under the best of circumstances, but Lampert arguably made Sears's circumstances much, much worse than they needed to be. I won't rehash all the arguments about that here -- you can look them up yourself if you're interested -- but he did a lot of things that seem to be shortsighted and stupid.

To answer your question more directly, I think a more abstract case could be made that this is a failure of vision endemic to the way we currently implement capitalism: the whole value of running a company long-term -- to shareholders, employees, and customers -- may be greater, on a sufficient time scale, than the value of stripping the company for parts, but you can get a higher short-term return on investment by stripping and re-investing the income somewhere else, letting the full economic costs of the company's collapse (which, again, go beyond the cost to the shareholders) fall on others. I don't think this is good for society in the long run. I also don't think it's somehow required by merciless capitalist logic.

However, I'm not sure how one can craft regulation to "solve" this without a high risk of creating more problems than one avoids. Sears may not deserve what's happened to it, but that doesn't mean it deserves to be saved, either, especially in its current state. It's easy to imagine well-intentioned laws creating zombie businesses rather than shielding salvageable ones.


Because this kind of raiding is harmful to society.

How is it harmful? Sears was an empty shell long before the raiders showed up. They'd pissed away brand goodwill for years. 1993, they shut down their catalog operation. A year later, Amazon is founded. That long air-horn sound? Yeah, that's the boat you just missed, Sears. I could go on, but for all his faults Lampert is an unpleasant symptom of an untreated disease Sears has had for a while, not the disease itself.

You're not wrong about its protracted demise, but people still paid money to get on the Sears boat based on good faith that the previous captains may have sucked, but the current one wasn't hellbent on ramming it into an iceberg, collecting the insurance money and leaving the passengers and crew to drown in his wake.

The little people whose pensions and funds are either wholly or partially dependent on Sears are hurt by such malfeasance. That's not what the CEO of a company is supposed to do. It's unethical (for what little that means anymore). You might as well question how an IVF doctor implanting his own sperm in unsuspecting patients is harmful-- they wanted to get pregnant, right?

I haven't read it, but I doubt that plan was enumerated in the Sears prospectus when Lampert took the helm. Letting such behavior go unchecked undermines faith in the economy-- the growth of which is fueled by peoples' ignorance of everything being out to fleece them.


Because it allows you to get out of paying things like pension liabilities, or suppliers.

Sears was headed toward bankruptcy with or without private equity. My question is specifically addressed at the harm of private equity picking the bones of what is already some pretty sorry looking roadkill. Those pensions and suppliers weren't going to get paid no matter who owned Sears, not at the rate they were going before Lampert showed up.

Self-dealing? It pretty much looks like asset laundering to get the assets free of the debt.

If Sears sold some assets to Lampert's holding company for less than they were worth, there are probably laws against that (though proving it in court may be a different matter). But if Lampert's holding company was the high bidder, why shouldn't they buy the assets?

You’d like to make poor business decisions a crime?

I have many friends who work for Sears corporate. Listening to them, it seemed like Lampert bet his company on his libertarian ideology. Turned out Ayn Randian ideology doesn't work in real life.

Your friends shouldn't shed any tears for him, his proprietary entities will make out just fine. Better than just fine.

They are shedding tears for themselves. Most of them left a while back, bit some are still sticking back.

For what little it's worth I send good vibes their way and I hope what they've lost comes back to them 3x.



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