It wasn’t that long ago that Eddie Lampert, Chairman of ESL Investments and Sears Holdings, was paraded out as the “next Warren Buffett“. He had gambled big on KMart when it was insolvent and won big. KMart made a big resurgence. Big enough to be able to buyout one of the most American of American brand names – Sears. It was a huge deal at the time. But it was a curious deal as well.
Sears has been on the decline since the advent of Target and Wal-Mart. They just don’t attract the same loyal customer base and their niche is much more defined – Sears with hardware and appliances and KMart with garbage (seriously, does anyone know what KMart actually sells?). At the time, it looked like Lampert was actually jockeying to become the next Buffett.
The one benefit of a retailer is that they spit off an incredible amount of cash. And if you’re savvy with cash, as Lampert is, you can really generate some incredible future cash flows. But Lampert has been pouring that money back into the stores rather than investing the cash inwhat he’s good at. The few investments he has made have been in swaps and various ventures into beaten down shares of banks and home related stocks – which obviously got murdered last year. Lampert’s latest 13F filing is a virtual who’s who of the financial crisis:
Lampert is attempting the impossible. He is geniunely trying to turn Sears and KMart into legitimate competitors to Wal-Mart and Target and more importantly he has taken a sharp detour from his personal niche. I just don’t think it’s possible for Sears and KMart to compete. Personally, I think the brands are horribly tarnished beyond repair. I don’t go into a KMart or Sears because, well, they’re called KMart and Sears. He could probably rename the stores “Bulls Eye” and start using a blue “Bulls Eye” sign, throw up a slogan that says “low low prices” and consumers would never know they were in a Sears or KMart and I’ll bet my life their sales would improve. But what’s more interesting is why this great investment manager got away from his niche. Why did a great money manager convince himself that he could beat the Targets and Wal-Marts at a game they have perfected? Why doesn’t he just generate huge cash flows off of these businesses and use that to grow the business through acquisitions as Buffett did with Berkshire? Hubris? Boredom? I don’t know, but it’s looking like a costly venture. At least his AutoZone stock is ripping….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.