You didn’t read the news wrong. Sears Holdings Corp (NASDAQ:SHLD) CEO and hedge fund manager (not to mention the biggest owner of SHLD stock) Eddie Lampert has arranged for a $500 million line of credit for the struggling retailer … after an affiliated hedge fund established a $200 million line of credit just last week.
For better or worse, the news is nothing new to Sears stock holders, who have watched Lampert personally — and through his hedge fund, ESL Investments — lend money to the once-iconic company in an effort to keep it afloat while it continues its turnaround effort.
While it’s a somewhat uncomfortable degree of self-dealing, it has yet to become improper, or even questionable. In fact, some SHLD shareholders are glad to know the company can secure funding somewhere. It’s unlikely most conventional lenders would be willing to take such a risk.
Most everyone else, though, is only keeping tabs on Sears stock and Lampert for the same reason it’s difficult to not stare at an auto accident: They can’t believe the brilliant hedge fund manager continues prop up what’s clearly a sinking ship.
As it turns out, there’s a very clear-cut psychological explanation.
A Psychologist’s Case Study
The term within therapy circles is “escalation of commitment,” though the behavioral finance industry has borrowed the idea and repackaged it as “sunk cost fallacy.”
The underpinnings are the same either way.
“Escalation of commitment” is defined as the tendency to invest additional resources in a lost cause, influenced by effort, money and time already invested. Similarly, “sunk cost fallacy” is the conclusion that further investment is merited since resources already invested would otherwise be lost, whether or not the cost/payback scenario makes sense.
When Eddie Lampert bought Kmart as it was coming out of bankruptcy in 2002 and then combined it with Sears in 2004, the plan was to restore to two cash cows to greatness and use that cash flow to fund other investments that ESL (“Eddie S. Lampert,” if you didn’t make the connection) wished to make. No problem. How hard can retailing be, right?
As it turns out, it’s quite hard. It was so tricky, in fact, that Lampert himself took over as CEO of the daily retailing operations in early 2013.
Eddie Is All-In
But the bleeding never stopped. The last time Sears turned a profit was in calendar 2010. Since then, SHLD has lost $9.8 billion, with no end in sight. Shareholder equity has withered from $12.7 billion in 2006 to negative $2.37 billion now, while Sears stock has fallen 94% from its 2007 peak.
Lampert has been keeping the company as liquid as it needed to be in recent years, though to no avail.
And make no mistake — Eddie Lampert is all-in with Sears, not just as its chief, but as an investor. Between his personal holdings in SHLD, the piece of Sears that ESL Investments owns, and the stake an affiliated hedge fund called Fairholme Capital is currently sitting on, Lampert effectively controls well more than half of the company’s stock. Once prepared to live by the sword, he’s now willing to die by it.
That equity stake doesn’t count the many loans he and the two hedge funds have made to the cash-hungry retailer either. Though most are repaid as new ones are made, any loan to Sears in its precarious state — even ones from the CEO that takes precedence over others — is a risky bet.
So why does Lampert do it? Why does he continue to fund Sears’ losing battle and hang onto his SHLD shares?
It’s the aforementioned sunk cost fallacy. He’s already put so much time, money and sweat into the failing turnaround that he can’t quit now.
Bottom Line for SHLD Stock
Lampert’s delusions aside, Sears Holdings remains a lost cause with or without infinite funding.
As yours truly has said before (numerous times), SHLD doesn’t have a liquidity problem. That’s just a symptom. Sears and Kmart have a retailing problem. That is, the companies aren’t attracting enough customers, and aren’t selling them the right merchandise at the right price.
If Lampert can solve that problem, liquidity is no longer an issue. But that’s a mighty tall order.
Some have also opined that this is all just a big real estate divestiture play, and that Lampert is merely looking to liquidate the company, selling its pieces more than the whole is worth. (Think the 1987 film Wall Street starring Charlie Sheen and Michael Douglas, in which Douglas’ character Gordon Gecko does exactly that with an airline.)
That’s not a plausible goal anymore. If that was the ultimate plan, it would have happened before the company imploded and became mostly net-unmarketable in pieces or as a whole.
Instead, Lampert is in until the end.
Of course, when there’s so little left to lose now as opposed to what was at stake just a few years ago, it’s easy to take that risk.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.