Wednesday, May 14, 2008

[pretty woman] and the world of asset stripping


If you're not in the world of business, it might puzzle you how the world economy has got to where it is. This article traces the beginnings of Sears through to its current sorry state and in so doing, affords us an insight into the mindset of modern business.

May I humbly suggest, regular readers, that even if this is not your cup of tea, it will reward your patience to read it through because it's not just about finance - it's about people as well:


As the United States spread west to the Pacific coast on its manifest destiny after the Civil War, it was the general store that civilized it. With so many small Western towns popping into existence in the late 19th century, the general stores were able to act as local monopolies, charging monopoly prices.

In 1888, Richard W Sears came upon the idea of selling his wares directly to the public through printed mailers, using the new technology of the railroads to circumvent the established distribution networks of the general stores, in much the same way as Amazon.com [today].

Sears, along with his partner Alvah Roebuck, soon developed a reputation for quality merchandise at reasonable prices [and] it was natural for Sears, Roebuck to shift its focus from mail order to actual retail stores. In 1925, Sears opened its first retail outlet, [and] by the end of the Roaring Twenties the company was opening a new retail outlet in an American city every two days

Looking ahead and projecting the tremendous outpouring of American population from the cities to the still nascent suburbs, the company started an ambitious expansion plan that placed hundreds of new Sears stores right alongside the new Interstate highways It also branched out beyond America's borders.

These were the halcyon days of homogenized American suburban middle-class conformity, when Sears was the number one retailer [leading to] the Sears Tower in Chicago in 1974.

But, as the children of the baby boom grew and moved out [they] demanded more personalized consumer choices.

The "me" generation of the 1970s [now] put their money first at Kmart, later at Wal-Mart; those that were willing to pay up for more trendy fashions did so at more upscale clothiers Macy's and Nordstrom's. Similar market segmentations occurred with the company's once-lucrative appliance businesses.

By 1991 Wal-Mart replaced Sears as America's leading retailer and has never looked back since. Sears, its stores consistently seen as stodgy and old fashioned, its "all for one and one for all" marketing philosophy seen as out of step with the times, lacking in "pop", settled into a graceful, steady decline.

That was the condition of the company in 2004, when it had the misfortune to catch the attention of modern turbo-finance capitalism.

Some people, when they see some poor unfortunate lying on the ground, help the person to their feet. Not modern turbo-finance; it saw Sears lying in the gutter, decided like a vampire that there was no reason why the very lifeblood should not be drained from it.

Edward S "Eddie" Lampert, a 42-year-old former Goldman Sachs bond trader, through his ESL hedge fund, established a 53% majority controlling interest in Kmart, which, in the futile attempt of trying to compete with the larger and more efficient Wal-Mart had bankrupted itself. Lampert closed stores and slashed jobs, restoring the company to operating profitability.

By 2004, Kmart's regular stream of income reached $3 billion [but] Lampert had no intention of plowing this sum back into the company, to modernize its dowdy stores, or, more importantly, its creaky supply and distribution system. He was going to use Kmart's cash stream to [help become] a younger, and richer version of Warren Buffett.

By early 2005, Lampert's ESL hedge fund was folding both Sears and Kmart into a single corporate entity, to be called Sears Holdings.

Overnight, Lampert became one of the titans of American retailing [and] in running perhaps the most fabled, trusted name in American commerce, Lampert gave every indication that he cared very little about the enterprise that others before him had labored over a century to build.

A fictional predator


Same-store, year-over-year sales, the key metric for retail success, have spiraled down month after month, quarter after quarter, even though the first years of Lampert's reign were a time of significant US economic growth.

Retail advertising budgets have been slashed. Funding for maintenance, upkeep and renovation for the stores have been cut way back; at many shopping centers, the Sears store is becoming more the mall eyesore than its anchor.

As for investing the capital to maintain healthy levels of inventory in both stores, so that customers don't find empty shelves when coming in to look for a product and then turn around and never come back, well, that's not all that important anymore, either.

You might think that [there would be] approbation and sanction from Wall Street.

Not true. During the first two years of the Lampert reign, the stock market adored Sears Holdings, up 15% in 2005, 47% in 2006. Had the stock market entered a dimension where bad corporate practices were now good, and incompetent management now adored?

In reality, what has been happening [is] that the operating expenses for both entities have been cut to the bone, in order to free up the billions that Lampert would use for hedge fund speculation at ESL, to generate large returns for the shareholders and keep Sears and Kmart alive long enough to bleed them dry.

Those were the days when the funds had discovered a very simple way to make absolute scads of money [but] things sure changed in 2007. Many of the hedge fund strategies [like] huge heavily leveraged bets on subprime mortgage paper, came up lemons last year. Sears Holdings' profits fell 99% from the third quarter of 2006 to the same period of 2007. The stock is down 50% from its high in April of 2007, as opposed to a less than 5% decline by the RTH retail index.

Lampert's ESL bought an $800 million stake last year in Citigroup, just before the subprime storm made landfall and now the stock went from $51 to $24. Herb Greenberg of the Moneywatch named Lampert as the worst chief executive officer of 2007; considering last year's competition, quite the distinction.

The sorry saga of Sears illustrates just how far distorted American ethics and values have become from exposure to the great credit and money carnival of the past few years. "All that is solid melts into air, all that is holy is profaned," Karl Marx wrote in 1848.

In this case, nobody thought twice, nobody blinked an eye, when Wall Street took a truly unique American institution, Sears, and turned it from a fine, respected American society matron into a common streetwalker reduced to pimping through the night for Eddie Lampert.

Kevin Phillips notes that "By 2004-6, financial services represented 20 to 21 percent of gross domestic product, manufacturing just 12 to 13 percent."

Somewhere along the line, America got the idea that the buck generated from financial services was equivalent, or even superior to the same buck made actually making and sustaining something - such as the great brand Sears once was.

America's ... dream of endless wealth created through little or no actual work, [has met] reality. Very few observers think that Sears can survive much longer, still under withering competitive pressure from Wal-Mart and being bled to death by the likes of Lampert.

The old world charm of shopping where the prices were reasonable and the quality guaranteed - all that seems to have fallen to modern practice. From American diners to chains like Sears - do people really, truly, want to see all that swept away?

Does anyone care any more? Is this the sort of person we now revere?


A few words about Eddy Lampert from Time

No one has more faith in Eddie than Eddie. Which may explain why he's so comfortable leading Wall Street in the new world of high finance, one in which hedge funds like his and giant buyout firms are going toe-to-toe in the arena known as private equity. Lampert is part of the new breed of hedgies who have gone from passive investing to actively buying and managing firms to seek outsize returns.

Here we have a fundamental divide - the modern person concerned only with the online bargain and the catalogue, seeing nothing lost in the scramble for the dollar, living for efficiency and maximization of profit at all costs, the days of plastic and the chip, as against the person operating at a different level who appreciates quality of service, the friendly bank manager's one to one relationship, the passbook, the pleasure of shopping in a historic department store where the pride of the staff is plain to see and the presence of human values instead of pitiless self-interest.

I'm not naive enough to think that there was ever a halcyon era or that Sears were not motivated by profit but I'd argue it was not from profit alone - there was a certain pride in creating something from nothing and then maintaining it - the lure of the name or the plain common sense in shopping there.

Surely there is still a place in the commercial world for old-fashioned values; surely it can even make sound business snese. I'm given to understand that accountants interpret it as goodwill.


Eddie


10 comments:

  1. So a man bought a dying company, held it on to make money and then lost a fortune speculating...

    and this is bad? ;)

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  2. Don't you value America's heritage, m'lord? It's oldest institutions?

    I was told this was so, that America doesn't value its traditional places and would rather see new, sleek "comfort zones" [the diner story] but I refused to believe this could be so.

    Tell me you do value the things which go together to make up your cultural heritage.

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  3. I agree wholeheartedly wiht you, James. When Mulroney, the mossyt hated PM in Canada, sold Canada down the river wiht Free Trade, it opened up our doors to shoddy companies like WalMart which , wiht their cheap tat , overtook our old stores like Consumers Distributing, 100 yrs old.
    Thye went bust, because the blind were more interested in saving a few pennies, which effected Canadian economy and jobs, sending profits stateside thus supporting foreign investment over their own.

    I NEVER once shopped at Walmart nor would.

    I love your knowledge of N. America which is probably more rounded than the natives.
    Great post!

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  4. Never shop in Wal-Mart myself; the place puts me in mind of a zoo without any cages.
    Sears is still a valued store for blue collar workers; their tools are some of the better ones on the market. When I used to work in a shop, Sears was the place of choice for reliable tools.

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  5. How many billions did sears lose every year before lampert?

    What did lampert do about the pensions at both retailers?

    The post was ok but you left out a few major details.

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  6. There is actually a very simple explanation for this. Simply that Wall St and the fund managers are actually lousy at their jobs because they could only make money in a bull market, only really had one business strategy and the moment a chilly wind blew in they rolled over and expired.

    Talentless lumps of soap in a suit.

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  7. Sears isn't an 'institution' when it's bilking it's people out of billions James.

    He stepped in, spent his money to keep it alive and made money off it.

    You forget that without him 'gouging' it, Sears and Kmart would have died long before they did (and Sears is still kicking around).

    Progress is a wonderful thing, I don't see many people wishing for horse and buggys anymore (AlGore not included).

    Ubermouth thinks its bad that people want to save money, touche; build you a store and charge more for the items that Walmart provides. Remember this though, POOR people shop a lot at Walmart ;)

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  8. Our local Sears was within walking distance of where I lived in Washington DC in the mid 1980s. Even then, it was a dying company. I can imagine that the onset of serious competition from the likes of Walmart, which were only just getting going at that point would have squeezed them dramatically.

    Hard to describe their market position at that time, but they had a solid if uninspiring reputation.

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  9. I am not opposed to a sale, but not at a price of senidng Canadian funds statewide and employyes to the dole lines.

    I neither shopped at Sears, Consumer's or Walmart , but one has to support their country's economy first.

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  10. Lampert and pensions - have to look at that.

    Thanks for filling us in on all that, people.

    ReplyDelete

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