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Lampert, Kmart's Aylwin Lewis, and Sears Roebuck's Alan Lacy in 2004 Cale Merege/Bloomberg
Non-mall outlets like this one in St. Petersburg, Fla., didn't pay off Dirk Shadd/St. Petersburg Times/Rapport Syndication
Illustration by Daniel Adel
(Removes an incorrect reference in the ninth paragraph to Eddie Lampert selling 4.6 million shares of Sears Holdings. The shares were distributed from Lampert's RBS Partners fund to various partners, including himself.)
Our story begins with a tale of two Buffetts: the real one, of course, and the financier who five years ago was being hailed (by this magazine, among others) as the Next Buffett.
For the real Buffett, business is good these days. Warren Buffett's annual letter to Berkshire Hathaway (BRK.A) shareholders, released in late February, celebrated a triumphant return to form. By seizing opportunities, he wrote, Berkshire had emerged from the Panic of '08 stronger and more profitable. "When it's raining gold," he crowed, "reach for a bucket, not a thimble."
For the Next Buffett—hedge fund guru Edward S. Lampert, 47, who had posted 29% average annual returns since founding his fund in 1988, then created Sears Holdings (SHLD) in 2005 by stitching a deeply wounded Kmart to Sears' once-venerated brand—business is not so good. Lampert's shareholder letter, released around the same time as Buffett's, came out swinging at the critics who now outnumber his fans. Lampert blamed journalists, analysts, and rating agencies for much of the trouble plaguing his retailing empire, arguing that they apply a double standard to Sears Holdings when they blame "our investment choices for our declining sales" while citing the economy for sales declines by rivals like Wal-Mart Stores (WMT) and J. C. Penney (JCP).
Still, Sears Holdings has performed 19 percentage points under the Standard & Poor's 500-stock index since its creation in 2005, and 29 percentage points under Wal-Mart during the same period. Contrast that with Buffett's Berkshire Hathaway. It has posted results that outperformed the S&P 500 in four of the past five years—27 percentage points better than the market in calamitous 2008.
Lampert can point to improvements recently at Kmart. Throughout 2009, Kmart had smaller declines in same-store sales than Target, and it beat Wal-Mart by this metric in the last two quarters, too. He has closed 66 moribund Sears stores, which he says raises cash in most cases, and he has a new effort afoot, applauded by some analysts, to make Sears' signature brands, Craftsman and DieHard, available through other retailers for the first time.
This will create a new revenue stream, but other analysts worry it will also mean there's less reason for customers to walk into a Sears, especially if Lampert begins selling Kenmore appliances outside. "Kenmore is Sears," says Credit Suisse (CS) analyst Gary Balter. "The moment they take that outside the store, they could lose a big, big part of their traffic."
As risky as they may seem, such moves are not likely to turn the tide Lampert's way, according to company watchers. "If he has a strategy other than cutting costs, I haven't seen it," says James E. Schrager, professor of entrepreneurship and strategy at the University of Chicago's Booth School of Business. "What is their concept?"
Tactical retailing decisions of this kind are no doubt necessary, but they're a long way from the bold financial stratagems analysts expected from Lampert when he burst onto the scene five years ago with the creation of Sears Holdings. The Buffett comparisons were based on his approach as much as on his gaudy results. Just as Buffett had turned a listless New England textile maker into one of the most successful investment vehicles in history, Lampert would use a rejuvenated Sears as a Buffett-like holding company with which to mount acquisitions, some to keep and grow, some to be flipped for cash. Sears Holdings would be both a dynamic investment vehicle and a brilliant retailer.
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