by James Brumley | March 6, 2014 12:39 pm
Gotta give credit where it’s due…. Sears Holdings (SHLD) CEO and Chairman Eddie Lampert writes a pretty good shareholder letter. His 2013 letter offers the kind of detailed analysis and pep talk that, on the surface, makes it clear he knows exactly why Sears is where it is, and what needs to happen in 2014 to bring the company and SHLD stock back to their former glory.
There’s just one problem with the written wrap-up of 2013 for SHLD stock owners — it’s a little too much like the one talking about 2012’s results and 2013’s plans.
It’s also amazingly similar to the one he wrote at the end of 2011, discussing that year’s lessons, and 2012’s agenda.
Oh, the letters from 2010, 2009, and 2008 also seem a little familiar.
Indeed, when one reviews all of the grand plans of those past letters, then cross references them with the company’s actual results, you have to wonder how long shareholders are going to remain on the hook.
There are a handful of ideas from past shareholder letters, in fact, that might force holders of SHLD stock to rethink much of what Eddie Lampert believes are the keys to success in 2014.
In Eddie Lampert’s defense, nobody can predict the future. On the other hand, those who are absolutely certain they know how things are can be dangerous to themselves and those around them.
Lampert falls into the latter category.
With that as the backdrop, check out these snippets from prior investor letters that seemed perfectly on-target at the time, but have since blown up in his face:
March 1, 2007: “As we look ahead, I want there to be no doubt about one thing: It is certainly our intention to grow Sears Holdings. Some commentators have asserted that we want to shrink the Company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not.”
Eddie Lampert has closed more than 300 stores since 2010, and yes, some of them were highly profitable units.
Feb. 23, 2010: “Despite perceptions, we have not hesitated to open new stores when the economics make sense, including opening new Sears Outlet and Sears Hometown stores in 2009. With roughly 100 Outlet stores and almost 1,000 Hometown stores, these alternative formats represent both sources of profit and sources of growth for Sears Holdings. While both are small relative to the Kmart and Sears Full Line store formats, they serve their customers well and provide a Sears presence in smaller spaces and less populated communities.”
Two years later, the company spun off its Hometown and Outlet stores by issuing shares of Sears Hometown and Outlet Stores (SHOS) to SHLD stock owners … charging them for the right to receive what they technically already owned.
Feb. 24, 2012: “In my opinion, Sears Holdings has a profit problem, not a liquidity nor an asset problem. In fact, Sears Holdings has over $20 billion of assets on our balance sheet. In some cases, the fair market values of our assets are not reflected on the balance sheet due to GAAP convention, such as the value of our owned real estate and many of our below market leases.”
No liquidity problem?
While it’s true that Sears has a profit problem, yeah, it also has a liquidity problem. The ongoing liquidation of stores says so.
The proposed liquidation of Lands’ End — one of the company’s few bright spots — says so.
Moody’s is also worried about an uncontrolled cash burn, while Fitch has downgraded the company’s existing debt to “speculative” levels. ISI Group also said just a few days ago there’s a liquidity problem.
That’s an awful lot of disinterested brainpower seeing problems that Eddie Lampert somehow didn’t see coming.
The big “so what?” is, there’s no telling what to have faith in from Eddie Lampert’s 2013 wrap-up letter to Sears shareholders.
It all sounds promising, but a lot of things sounded promising before … only for the company to reverse its rhetoric and take a diametrically opposite action.
Be that as it may, perhaps what’s scariest of all about the letter is that Lampert insists on working the same five-pronged strategy that’s been in place since Feb. 6, 2009. Those five pillars are/were…
At first glance it sounds good, right? Take a closer look, though. They’re not “plans,” per se. They’re goals … and they’re ambiguous goals at that.
Were they part of a bigger turnaround plan that first focused on (1) satisfactory customer service, (2) having the right merchandise in the right place at the right time and (3) rebuilding a tarnished reputation for poor service and aging stores, the five pillars might be a worthy portion of a bigger, more deliberate, more specific plan.
But they’re not. The five pillars are the turnaround plan. They’re the only thing Lampert has specifically discussed (in detail) in every shareholder letter since they were introduced in early 2009.
Well, it has been four years. If the five pillars haven’t worked yet, they’re not likely to now no matter how intelligent the discussion of them sounds.
Oh, to be fair, the company has taken some specific, deliberate actions that fall into one or more of the five goals. For instance, e-commerce has gone from essentially nonexistent for Sears to … well, measurable under Lampert’s leadership, as he opened up the Sears.com platform to third-party sellers. That initiative is under the umbrella of pillar No. 4.
It’s tough to say the online-sales effort has reinvented the company, though. As of right now, 97% of the company’s sales are still done in its stores.
The establishment of the site www.managemylife.com clearly lies under the umbrella of pillar No. 1, offering anybody basic appliance repair tips and providing online manuals. What’s not clear is if managemylife.com has actually added revenue the company would have achieved without the site.
The point is, Eddie Lampert is running Sears as if retailing was a science or a matter of financial engineering. It’s not wholly a science or an accounting exercise, though. It’s also an art, and a relatively messy art at that because retail is about inherently finicky people … associates as well as customers. It’s a concept Lampert can’t seem to grasp, which is largely why SHLD stock has tanked under his tutelage.
Until he stops treating the company like a portfolio of assets and starts treating it like an entertainment and vanity-serving experience (which is what successful department stores are doing), Sears Holdings and SHLD stock will continue to struggle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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