In November 2004, Edward Lampert (Trades, Portfolio) was dubbed “The Next Warren Buffett (Trades, Portfolio)” by BusinessWeek (pre-Bloomberg), and from 1988 to 2008 he earned nearly 30% a year for investors. Since then, his largest investment, the retailer Sears Holdings (SHLD, Financial) has been dead money, absolutely crushing Lampert’s long-term rate of compound returns, which are more in the 15% to 19% annualized range now.
Sears Holdings Versus S&P 500
It’s amazing that the stock has held up this well. If it wasn’t controlled by one of the best money managers in the last 25 years, it would probably be going the way of RadioShack.
SHLD in 2006
- Sales: $49.4 billion
- Profit: $857 million
- Book: $71.15
SHLD Today
- Sales: $31.2 billion
- Profit: -$1.6 billion
- Book: -$8.89
Eddie + Bruce = 73% of SHLD
In 2007, Lampert managed over $15 billion, now he’s essentially managing his own money ($2.25 billion), having lost around 25% of his net worth in the last decade.
The good news for investors who wish to follow Lampert is that he controls over 50% of the company, has made a loan to the business of $400 million, and is heavily invested personally owning more than 25 million shares. It’s apparent that he’s going to turn it around, unlock value, or go broke doing it.
Fellow money manager, Bruce Berkowitz (Trades, Portfolio) has been in the SHLD trade for years now as well, owning 13% of the company. He, too, has seen a decline in assets under management drop from $14 billion in 2011 to around $4 billion currently.
If you don’t know the value story, it goes something like this…
Sears has billions of dollars tied into the company’s real estate holdings, which by square feet alone (200 million) makes it one of the largest in the world. Investors like Berkowitz have compared SHLD to other property groups like Simon, GGP, and Kimco who have less square footage, but trade at much higher market values.
Berkowitz actually put together a website with all the relevant information (www.fairholmeonsears.com), even going so far as to state that “Over 50% of the 717 Sears stores are located within the top ten mall REITs. Over 400 SHC properties are located within 30% of the “Super Zips” (zip codes identified by high median incomes and high educational attainment) in the United States” as an angle.
In my opinion, to unlock the value of the massive space they maintain, Sears will have to close stores and transform the properties into something else -- offices, condos, etc. Inside of current mall space, there is nothing the company can do besides sell or lease to a new tenet.
A Future Without Clarity
It’s still unclear if Lampert will continue to try and turn around the lousy retail business or if it's just a rouse. He should treat it like Buffett with textile mills and get out. Eddie, get out of retail!
In April, Sears initiated the registration of a newly formed REIT to handle 254 stores, raising $2.5 billion (hopefully) for the company. It has also been partnering with the other property giants, namely General Growth Properties (GGP, Financial) and Simon Property Group (SPG, Financial), both of which have formed joint ventures with Sears.
Yet, the details of these deals seem to include a lease back to SHLD, simply freeing up some cash but not unloading the burden, and leaving Sears still focused on retail.
The stock is at $41 right now, and the market value is above $4.34 billion. I am really rooting the company to turn around, but right now it’s bleeding more red ink. The Miami boys, Eddie and Bruce will continue to suffer through it.
