The Sears logo is seen outside an Sears Auto Center shop in Brooklyn, New York, Oct. 10. Photo: shannon stapleton/Reuters
Sears, Roebuck & Co. is one of the most storied names in American retail—once perhaps as dominant as Amazon is today—but now the 125-year-old Sears Holdings stands on the brink of bankruptcy. Herein lies a parable of markets and mismanagement.
After amassing $5.5 billion in debt, Sears is facing a cash crunch with a $134 million payment due Monday. CEO Edward Lampert, whose hedge fund ESL is Sears’s biggest creditor and shareholder, has been keeping the company afloat with short-term borrowing and financial gymnastics. But other creditors and investors are finally losing patience.
Sears began in the late 19th century as a mail-order catalogue that sold products once accessible only to city dwellers to rural Americans. Its reach into living rooms across America helped the growth of venerable manufacturers like Schwinn, GE and Whirlpool. During the post-World War II boom, Sears super-stores catered to middle-class Levittowns. Washing machines, lawn-mowers, TVs, socks—Sears had you covered.
Over the next few decades, Sears diversified by launching its own auto shop business, appliance manufacturer and financial service unit that sold insurance, real estate and credit cards. “Socks and stocks” was the quip when Sears bought broker Dean Witter in 1981. But the synergy never worked, and the new businesses contributed to a defuse corporate organization. Meantime, Walmart , Target, Home Depot and Costco poached customers.
Enter Mr. Lampert, whose hedge fund won a controlling stake of Kmart in bankruptcy in 2003 and two years later merged with Sears. Mr. Lampert boosted profits by raising prices and spending less on advertising and store upgrades. The CEO warned shareholders in 2007 that, “Unless we believe we will receive an adequate return on investment, we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do.”
Mr. Lampert used share buybacks to lift the stock price. Investors cheered as Sears’ stock marched to a high of $133 in April 2007. But higher prices and unkempt stores eventually turned off customers. A lack of investment also hampered its ability to compete with Amazon, Overstock.com and e-commerce retailers.
Over the last seven years Sears has run more than $11 billion in losses as annual sales have fallen by half. To stanch the red ink, Mr. Lampert has sold unprofitable stores and turned to financial engineering. In 2015 ESL created a real-estate trust that acquired 266 Sears properties and leased them back to the retailer. ESL and the company’s pension plan also issued short-term loans.
An era of low interest rates that whet investor appetites for higher yield helped sustain Sears’ access to credit markets for a time. But vendors are now demanding immediate payment for inventory, and banks see no path to a turnaround outside of bankruptcy.
Sears may have been better off restructuring its debt years ago so it could make investments to better compete in the digital era. Target’s online sales have grown 41% over the last year. Walmart is projecting 40% year over year e-commerce growth.
Bankruptcy will allow Sears to reduce its debt burden, though Mr. Lampert’s ESL will have to swallow large losses that he no doubt wanted to avoid. Yet Sears will never recover if Mr. Lampert insists on starving the business of investment. Sears’ travails are a reminder that short-term management rarely prospers.
Appeared in the October 13, 2018, print edition.