There have been several stories this week about what CEO Eddie Lampert is doing to Sears. As Paul Krugman says, its the story of how an “Ayn Rand-loving hedge fund guy is driving Sears into the ground.”
A bit of background: Lampert cut his teeth on Wall Street at the risk-arbitrage desk of Goldman Sachs under Robert Rubin, who later became U.S. Treasury Secretary and now serves as vice chairman at Citigroup. In 1988, Lampert founded ESL Investments and joined the billionaire’s club at age 41. He rose to fame in the early 2000s for seizing control of Kmart during bankruptcy and then using it to take over Sears. Along the way he was kidnapped and deposited on a motel toilet in handcuffs for nearly 40 hours, and lived to tell the tale. Lampert is known for his touchiness and odd habits, such as conducting meetings from a bare bones room to Sears executives forced to tune in by videoconference. He hates flying.
You might say that Lampert is the distillation of the fervent market worship and wrong-headed economic approaches that came to dominate the U.S. in the 1980s and have yet to run their fatal course. He adores Ayn Rand, and is reported to have given out copies of Atlas Shrugged during an ESL annual dinner. Lampert is also a fan of Friedrich von Hayek, the Austrian economist beloved by conservatives and libertarians. As a Robert Rubin protégé, he absorbed the lessons of a man whose discredited economic focus on budget deficits ended up starving the country’s infrastructure, education and alternative energy.
Looking at what Lampert has done to Sears, we can see what happens when the lessons of his mentors are actually applied in the real world. It isn’t pretty.
Long story short, instead of managing Sears in a way that allowed its many divisions to support and complement each other, he broke the company up into warring fiefdoms and told them they must compete with each other. Mine Kimes writes at Bloomberg Businessweek,
Since the takeover, Sears Holdings’ sales have dropped from $49.1 billion to $39.9 billion, and its stock has sunk 64 percent. Its cash recently fell to a 10-year low. Although it has plenty of assets to unload before bankruptcy looms, the odds of a turnaround grow longer every quarter. “The way it’s being managed, it doesn’t work,” says Mary Ross Gilbert, a managing director at investment bank Imperial Capital. “They’re going to continue to deteriorate.”
Joe Cahill at Crain’s puts it more starkly.
Mr. Lampert spent billions of dollars of the company’s once-prodigious cash flow in a vain effort to prop up the stock price through share buybacks. Between 2005 and 2011, Sears spent $6 billion on buybacks. Nevertheless, Sears stock has lost half its value over the last five years.
Part of the problem, according to Parramore, is that neither Lampert nor any of the top execs he brought with him had any experience with retail. And they didn’t think they needed any. Lampert seems to have believed he could make Sears and Kmart profitable again by applying Randian/objectivist principles. Cahill continues,
At least initially, Wall Street bought into the contradictory notions that he could use the company as a Berkshire Hathaway-style vehicle for other investments while restoring the two chains to their former glory. And if all else failed, we were assured, Mr. Lampert could simply harvest the vast value stored up in Sears’ real estate.
Mr. Lampert, for his part, insisted that his goal was to turn around the company’s retail operations. But he did little to discourage the Buffett analogy, misguided as it turned out to be.
Lampert is basically overseeing a slow-motion liquidation, Cahill says. And maybe that was his intention all along. But reading these articles, I get the impression that Cahill really believed he could run Sears better than it had been run in the past. Read the Bloomberg Businessweek article in particular on this point. Parramore concludes,
The lessons of Crazy Eddie seem so obvious that a bunch kids running a lemonade stand could understand them. You have to know something about the business you’re running, especially a big one. Success requires cooperation rather than constant competition. Greed is ultimately destructive.
The invisible hand of the market appears to have attempted to slap Lampert upside the head to teach him these things. But he remains committed to his nonsense, and the real losers are all the hard-working people who have lost their jobs, and the potential loss to the American economy of two revered brands.
It’s probably a good thing Ayn Rand never tried to run a business.
Somehow, this all makes me recall our old buddy and GOP presidential candidate Mittens, who believed he could run America like a vulture capitalist firm. We surely dodged a bullet when he lost.