Edward Lampert, the star of hedge funds who bet on Sears, is unrepentant

Mr. Lampert has earned billions of dollars for investors and for himself as a financier known for his contrarian leaning, taking risks despite a chorus of defeatists. This time, his instinct has plunged into the ruthless economy of modern retail.

Marked down

Edward Lampert, President of Sears Holdings since 2005 and Managing Director since 2013, oversaw the continuing decline of the renowned retail brand.

Market Capitalization of Sears Holdings Corp.

April 4, 2014: Sears passes from Lands & End to its shareholders, including Lampert; receives $ 500 million dividend

October 2, 2014: Sale of 51% of Sears Canada's capital to existing investors, including Lampert; amass 380 million dollars

July 7, 2015: $ 2.7 billion raised through the sale of stores at Seritage REIT that Sears and Lampert created

Jan 2017: Lampert fund lends $ 500 million to Sears, Sears sells Craftsman for $ 525 million initially, plus future payments

June 22, 2017: Sears Canada seeks creditor protection

April 23, 2018: the Lampert fund offers to buy Kenmore

October 15, 2018: Sears seeks bankruptcy protection

Market Capitalization of Sears Holdings Corp.

April 4, 2014: Sears passes from Lands & End to its shareholders, including Lampert; receives $ 500 million dividend

October 2, 2014: Sale of 51% of Sears Canada's capital to existing investors, including Lampert; amass 380 million dollars

July 7, 2015: $ 2.7 billion raised through the sale of stores at Seritage REIT that Sears and Lampert created

Jan 2017: Lampert fund lends $ 500 million to Sears, Sears sells Craftsman for $ 525 million initially, plus future payments

June 22, 2017: Sears Canada seeks creditor protection

April 23, 2018: the Lampert fund offers to buy Kenmore

October 15, 2018: Sears seeks bankruptcy protection

Market Capitalization of Sears Holdings Corp.

April 4, 2014: Sears passes from Lands & End to its shareholders, including Lampert; receives $ 500 million dividend

October 2, 2014: Sale of 51% of Sears Canada's capital to existing investors, including Lampert; amass 380 million dollars

July 7, 2015: $ 2.7 billion raised through the sale of stores at Seritage REIT that Sears and Lampert created

Jan 2017: Lampert fund lends $ 500 million to Sears, Sears sells Craftsman for $ 525 million initially, plus future payments

June 22, 2017: Sears Canada seeks creditor protection

April 23, 2018: the Lampert fund offers to buy Kenmore

October 15, 2018: Sears seeks bankruptcy protection

Market Capitalization of Sears Holdings Corp.

April 4, 2014: Sears passes from Lands & End to its shareholders, including Lampert; receives $ 500 million dividend

October 2, 2014: Sale of 51% of Sears Canada's capital to existing investors, including Lampert; amass 380 million dollars

July 7, 2015: $ 2.7 billion raised through the sale of stores at Seritage REIT that Sears and Lampert created

Jan 2017: Lampert fund lends $ 500 million to Sears, Sears sells Craftsman for $ 525 million initially, plus future payments

June 22, 2017: Sears Canada seeks creditor protection

April 23, 2018: the Lampert fund offers to buy Kenmore

October 15, 2018: Sears seeks bankruptcy protection

Instead of stuffing the merchandise stores, he reduced his inventory to avoid markdowns. Rather than offering big discounts, it has slightly raised prices. He abandoned newspaper flyers and TV commercials for email marketing. And rather than repairing the shops, some former executives said, he let many be demolished.

Sales dropped and empty shelves sometimes gave consumers the impression that Sears was shutting down.

Last year, Sears recorded a seventh consecutive year of losses. Total sales fell to $ 16.7 billion from $ 53 billion in 2006, the first full year after Lampert was appointed president.

Sears will now be one of the worst wagers of the hedge fund manager, shattering Mr. Lampert's reputation after risking billions of dollars through his fund, ESL Investments, and more than a decade ago. of his life.

Lampert, 56, said in an interview last month that the collapse of Sears left him a professional and personal failure. "People tried to understand why I did not give up or what I could win," he said. "I really thought it could be something special."

His biggest disappointment, he said, is that Sears was not able to capitalize on its initial perception that e-commerce would change the game: "If we could play this game and do it well we would have a chance. "

Mr. Lampert still thinks he is right about the direction of the retail business and what Sears should do. In the interview, he said that he had done everything in his power to keep the company afloat, even though some of his ideas turned against him. He took risks by lending money to the company while others would not, he said. Injured by years of costly pension losses and obligations, he simply stated that Sears simply lacked funds to compete.

Walmart
Inc.

and

Amazon.com
Inc.

"The world of retail has gone as planned," said Lampert. "If you had predicted the future relatively well and still did not produce the desired result, it's different from not predicting correctly."

He knew that some of the things he was trying to do would not work and warned his management team, "If we want to be a leader, we do things that others do not do. There is a feeling of loneliness. He said he was investing in high-performing stores but wanted the company to focus on its most loyal customers and sells online. "I was thinking of a future where the demand was much greater."

Mr. Lampert, who resigned Monday as CEO and will remain Chairman, is the largest shareholder of Sears and one of its largest lenders.

Although he was criticized for selling Sears assets, spent on stock repurchases and recovered interest on loans to Sears, he said it was unlikely he's getting a cash advance on his long-time bet with Sears. "I have never sold a share," he said.

A spokesman for Mr Lampert said on Tuesday that he was not available for further comments. After filing for bankruptcy, Sears and Lampert said the restructuring would allow Sears to reduce its debt and make it a smaller and stronger retailer. It plans to close 142 of its approximately 700 stores and sell other assets. Mr. Lampert's fund is considering an offer to purchase 400 stores, said Sears.

Hebrew money funds & # 39;

"He bet his entire career on one title. What does he know about the management of a retailer? Said Whitney Tilson, a former hedge fund manager who closed his own fund in 2017 after mediocre returns. "It's piece A of the hybris of hedge funds. This is a case study that I will teach in my seminars for years. "

Near his peak, before the financial crisis, Mr. Lampert managed more than $ 15 billion in addition to billions of his personal wealth invested in his fund.

At the end of 2017, ESL was managing $ 1.3 billion, according to a recent filing with the Securities and Exchange Commission.

As his Sears bet got worse, the investors gave him up. Most of what's left is Mr. Lampert's money.

Mr. Lampert went through

Goldman Sachs

Risk-arbitrage in the 1980s before leaving to manage the hedge fund he had created in April 1988. He quickly earned hundreds of millions of dollars for himself and his first supporters.

He started his hedge fund with about $ 29 million and posted a 31.4% return in the first year, according to a customer letter and marketing materials reviewed by the Wall Street Journal.

Mixed results

Edward Lampert's annual net investment performance

2005: Lampert takes control of Sears after Kmart merger; ESL is the largest shareholder

He made a winning bet on an ATM company, to the surprise of investors who had questioned the bet, said people familiar with the subject. In 1989, a year after influential fund manager Richard Rainwater and others had invested the money to launch ESL, MM. Lampert and Rainwater launch a proxy fight against a defense contractor

Honeywell

International Inc.

Other bets have followed on companies including

International Business Machines
Corp.

,

AutoZone
Inc.

and

AutoNation
Inc.

Before and after the investments, Mr. Lampert and his team went to the stores, talked with the managers, checked the stocks in the warehouses and, before the Internet, asked for hard copies of 10-K. "They would work with everyone," said someone familiar with ESL.

In 2007, according to the marketing documents, ESL had generated an annualized annualized return of 23.7%.

The big bet

Mr. Lampert had taken control of Kmart in bankruptcy and had acquired Sears shares. In 2005, he merged the two for a $ 11.5 billion contract, establishing himself as president and playing an active role in management. Two years later, the new company,

Sears Holdings
Corp.

SHLD 45.60%

, represented the largest investment of its ESL Investments fund.

ESL had a long list of reasons for the big bet on Sears. The retailer was a "ubiquitous brand" with "valuable real estate" and "a loyal clientele," said the hedge fund in marketing materials. ESL has earned money by reducing "corporate overhead" by limiting capital expenditure "primarily to projects that can generate attractive returns", and by focusing on "Management responsibility and shareholder return".

The reason for the agreement was to sell Sears brands in locations outside the Kmart shopping centers and to a combined online clientele.

At that time, a wealthy investor in Mr. Lampert's fund had warned him that he might be over his head. "Just because you're a smart investor does not mean you've told Mr. Lampert that you'll be a good big-box operator," the investor recalls.

The recession was a big test. Sales of home appliances, which contributed significantly to Sears' profits, fell during the collapse of homebuilding. Amazon.com,

Home Depot
Inc.

and

Best buy
Co.

in Sears market share.

Many of his ideas at Sears were put into practice for the first time at Kmart, which he saved from bankruptcy. Although Kmart's sales have declined, profits have increased, said Alan Lacy, CEO of Sears, from 2000 to 2005. "This has encouraged him to think that he could do things differently," said Mr. Lacy. "If he thought something was going well, he did not really care if it would not work."

At Sears, Lampert has cut television ads and newspaper flyers in favor of email marketing, which was cheaper, said former executives. But the emails did not generate as much store traffic, they said. Although other retailers have also done the same, it's the degree of change at Sears that has made it extreme, they added.

During last year's holiday season, Sears stopped buying national TV commercials. Sales, excluding closed stores, fell 18.1% at Sears and 12.2% at Kmart during the vacation quarter.

Lampert also restricted the amount of products Sears bought in the hopes of not having to stock up as many items at the end of the season, former executives said. Many departments ended up with empty shelves, giving consumers the impression that Sears was pulling out of business, they said.

The chairman of the board of directors has also been parsimonious about investing in the stores. Shortly after the merger, it converts about 100 Kmarts into a format called Sears Essentials, which competes more directly with big box chains like Walmart. The converted stores did not generate the expected increase in sales and the renovations were halted, said a person familiar with the situation.

It was a lesson that Mr. Lampert had at heart. Sears has sometimes updated the lighting and carpeting, but has avoided large-scale store renovations. "People say we have not invested in our stores, we have invested a lot but have not seen a return," he said in an interview. "You can blame us for not having better ideas. But it makes no sense to invest more when you have not seen a return. "

Facing repression

Mr Lampert said he was facing opposition from the leaders attached to a more traditional view of the retail business. "People said," This guy did not understand it. He is concentrated online. He does not care about the shops, "he said. "The idea of ​​the importance of online connection and the knowledge of your customers, not just your products, was somehow a foreign concept."

In early 2013, after passing through three CEOs, Mr. Lampert assumed the position. "Serving as a CEO will not require significant extra time, but it will allow some savings in terms of decision-making and action," he wrote in a letter to a client dated January 8, 2013. "I believe that this direction will be profitable for ESL. "He was only going to stay a few months, said a person familiar with his thought.

He insisted that Sears become the next Amazon by adopting dynamic pricing (in which algorithms frequently adjust prices online based on demand) and by collecting data on buyer preferences. This led to some success, including an increase in snowblower sales in 2013, after the lawnmower team used the data to reach customers who had moved to the northern United States, the report said. one of the old leaders.

Efforts failed to overcome the sharp declines in customer traffic. Sears lost $ 1.4 billion that year, with revenues down $ 3.7 billion from a year earlier.

According to FactSet, the company spent $ 6.7 billion to buy shares from 2005 to 2013, leaving it a war chest to survive during the difficult years that followed the recession.

Mr. Lampert's management style did not help, some former executives said. He visited the Hoffman Estates, Illinois, headquarters several times a year, preferring to connect via conference calls from ESL's Florida offices, they said. While most store managers visit stores every week, Lampert urged Sears executives to hold a video conversation with store managers, saying they could collect more data faster.

Some former executives said Lampert was out of touch with Sears middle class buyers. During a meeting, the billionaire talked at length about the French luxury home Hermes, where he had bought shoes, to show how Sears could provide better service, said a meeting attendee.

Mr Lampert declined to comment on the example of Hermes, but said he had tried to give a "deeper idea of ​​what it is to serve people".

Proponents say Mr. Lampert has kept the brand alive and employed thousands of people. They point to a reduction in suppliers' commitments and billions of investments in pensions.

"In many areas, Eddie was well ahead of the competition," said Tarun Koshy, an investor in Mr. Lampert's chief of staff in 2013. "He predicted the rapid growth of electronic commerce before almost everyone else."

Others are wondering if he has just taken too much. ESL employed perhaps 35 people at its peak, said a former employee. Shortly after the merger, Sears and Kmart employed approximately 300,000 people.

Five years after the appointment of Mr. Lampert as CEO, Sears is a tarnished brand that has closed hundreds of stores and consumes $ 125 million a month. "He could have gone out at any time," said Kunal Kamlani, president of ESL. "But he had and still believes that there is a chance to create incredible value."

Mr. Lampert is still betting on Sears. At the Sears Employee Meeting this week, Mr. Lampert told employees, "I do not consider funerals today as a funeral, but as a new beginning."

"He was very successful in basically seeing what others do not see," said a long-time friend. With Sears, "it probably made him think that he had a better chance of reversing the situation than others."

Write to Suzanne Kapner at [email protected], Rachael Levy at [email protected] and Juliet Chung at [email protected]