Sears endgame and Lampert's may diverge

The sign on a door to a Sears store is seen in Denver February 26, 2009. REUTERS/Rick Wilking

NEW YORK (Reuters Breakingviews) - The last chapter for Sears looks to be at hand. The troubled U.S. retailer warned it could be headed for bankruptcy if it can’t reverse a brutal decline in annual sales and rising losses. Chief Executive Eddie Lampert’s long quest to turn Sears around seems destined to fail. The fate of the hedge-fund boss’s investments over the years may be different.

Once famed for a mail-order catalog hawking everything from curtains to washing machines and even, back in the day, opium, Sears is struggling mightily. As of Wednesday morning, its shares have lost some 90 percent of their worth over five years and the company’s market value is now under $1 billion. Revenue has tumbled more than 40 percent over the same span to about $22 billion. The last time it reported an annual profit was in its 2010 fiscal year.

In its annual report, filed on Tuesday, Sears admitted there was a chance it may not be able to continue as a going concern. If its operating environment continues to deteriorate – and there are few signs of improvement – it may have trouble borrowing more money. The liabilities on its balance sheet top $13 billion, including over $4 billion of debt or debt-like obligations and nearly $2 billion more earmarked for pensions.

As well as owning 48 percent of Sears, Lampert and his hedge fund ESL Investments have provided a drip feed of debt funding, keeping the cash-burning business afloat. That means that while the CEO’s equity holdings – which date back more than a decade – could end up worthless, he has collected interest on the debt and he’ll be near the front of the line of creditors if the company does eventually go under.

Meanwhile, Lampert has deconstructed the company, spinning off the Lands’ End clothing business and a portfolio of property, among other things. Lampert and ESL own 59 percent of the $630 million publicly traded Lands’ End and slugs of the $1.3 billion listed real-estate vehicle Seritage Growth Properties and related entities. Another hedge fund, Bruce Berkowitz’s Fairholme Capital Management, also holds hefty stakes.

That means there are paths by which Lampert can recoup some of what he has sunk into Sears. Barring a miracle, the retailer’s own stock may only go one way, but its boss’s financial bets are at least partially hedged.


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