Eddie and the losers

August 20, 2009

Why are there financiers who think that they — and they alone — can run businesses where nearly everyone else who has tried has failed? There is Guy Hands with EMI and Cerberus Capital Mangement with Chrysler, but Exhibit A has to be hedge fund manager Eddie Lampert’s nearly four-year adventure with Sears.

One can admire the financiers’ ambition, the sheer audacity in going against conventional wisdom. Yet something obvious has been lacking in all their bold calculations: How to persuade consumers to buy their offerings. These have been companies that need leaders who are more like the late Billy Mays than financial wizards.

That was underscored today by Sears Holdings Corp.’s embarrassing second-quarter loss. Sales at both Sears and Kmart stores open at least a year fell 8.6 percent from the quarter a year ago. Revenue declined 10.3 percent. It’s a tough market, to be sure, and the weak housing market has dampened demand for core items like appliances. But recent results from retailers like Home Depot show that Sears’ shoppers are simply going elsewhere.

“Ouch,” begins Morgan Stanley’s note to investors on the results. The Credit Suisse report is titled “Put a Fork in It.”

But the Lampert experiment with Sears, for better or worse — and it may very well worse — will be running for some time now. That is a wider window than what other financiers had in their relatively brief forays into troubled busineses like recorded music, autos or newspapers. This is a hedge fund manager who has some time to still turn things around. In part, that’s because Sears has $1.3 billion in cash, down from $1.5 billion in the quarter a year ago, but up from $1.2 billion in the first quarter.

And Sears could do still more cost-cutting, which has been Lampert’s main focus in attempting a turnaournd. The retailer has announced the closings of just 28 stores; analysts estimate that there are hundreds of stores that are unprofitable and should be closed.

That’s not enough, as the Morgan Stanley analysts note: “Acess to liquidity and costs cuts do not address the core issues of declining relevance and underinvestment.”

Yet at this rate, Lampert has a while to go before he is forced into an endgame with Sears. There is time for another restructuring, additional online initiatives — maybe even a significant investment in the stores themselves. It is easy to mock Lampert as a Warren Buffett wannabe who has fallen to earth, a hedge fund manager who was naive about retailing, but Lampert and Sears will be with us for quite a while yet.

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