This Man Killed the Original Amazon (And Made Money Doing It)

Written By Briton Ryle

Posted June 28, 2017

As a kid in the early 1970s, I used to surf the original Amazon’s “website,” fantasizing about all the stuff I would buy as I saved up my $5 allowance. A minibike topped the list. A new bike was also up there. I can still remember the brand-new smell of the snow boots I got as I took them out of the box. I was so happy that I slept with them that night. 

Of course, I didn’t actually order from Amazon. It was Sears, and the “website” was the catalog. The first catalog came out in 1888, selling watches and jewelry. By 1896, Sears had its own Prime, selling the catalog for a quarter, which you could get back if you spent $10 or more. 

Sears shut down its “website” in 1996. And now it looks like it will shut its doors sometime this summer. We can thank a hedge fund guy named Eddie Lampert for driving this iconic American company into the ground.

Now, obviously, Amazon has made it tough for all retailers to compete these days. Amazon has driven a bunch of companies into bankruptcy. When it just sold books, it crushed Borders and nearly took down Barnes & Noble. As it expanded its focus, it took out a bunch more. Ironically, as Kmart failed, Lampert and Sears stepped in and took it over. Bad move — now Sears is going down. 

In fairness, it’s not just Amazon that’s killing retailers. They over-expanded over the last couple of decades to the point where the U.S. has three times the retail square footage per capita than any other country. Operating costs are just too high. 

But Sears is a bit of special case. Eddie Lampert has been gutting the company and will make a lot of money as it goes under. 

Lampert’s Checkered Past

Eddie Lampert got his start at — where else? — Goldman Sachs in the mid-1980s. He was early to the hedge fund game, starting his ESL Investments firm in 1988. In 2004, he was the first hedge fund guy to make $1 billion in a year. By 2006, he was worth over $3 billion.

Lampert’s style was to invest heavily in a small number of companies. And he was good at it, drawing comparisons to Warren Buffett. But here’s the thing: This kind of success tends to go to your head. You start to think you can do it all. And that’s probably what made Lampert take over as Sears CEO in 2013. At the time, Sears represented about a third of ESL’s $4.6 billion in investments. 

By 2016, Lampert’s fortune had fallen to around $2 billion. And, yeah, it was largely because of his massive exposure to Sears (he owned 28% at the time). 

If you looked at the situation from the outside, you might think Lampert was going down with the ship. When he took over, annual revenue was around $40 billion. Analysts expect just $17 billion for current fiscal year. Lampert has lent Sears at least $700 million and upped his stake to 49%. Stands to reason that he is losing right along with Sears…

Now, Amazon will do $168 billion or so in revenue this year. That’s a whole lot better than Sears ever could’ve imagined in its best years. And it’s fair to say that some of the revenue has been taken directly from Sears. But the fall of Sears is a bit more complicated…

Because those loans to the company and the amount of shares he owns has given Lampert the opportunity to gut the company for his own benefit. 

How to Profit from Failure

Part of the reason Sears revenue has fallen so dramatically is that Lampert sold off key assets to raise cash for the company. Sears spun out Land’s End in 2014. Land’s End is currently worth around $360 million. In 2015, it sold 235 stores to a real estate investment trust called Seritage Growth Properties for $2.7 billion. Sears is then leasing back those stores for $134 million a year (plus 2% a year inflation raises). 

And Sears spun out part of Sears Canada in 2012, which is currently worth around $80 million.

But, of course, Lampert’s hedge fund owns 59% of Land’s End. Lampert also owns 43% of Seritage Growth Partners. And he owns 45% of Sears Canada. 

And those loans he’s made? They are secured by real estate, which Lampert will get in a bankruptcy. And since he is the biggest creditor, he will get the biggest pieces when the inevitable happens.

Then there’s the Craftsman tool division sale to Black & Decker from January 2017. That deal brought $900 million to Sears. But not all at once. It got a down payment of $525 million. And it will get another $250 million in three years plus 3% of all Craftsman sales for the next 15 years.  

That’s a sneaky deal, because it’s highly unlikely that Sears is around in three months, let alone three years, to collect that loot. Which means — you guessed it — as the biggest creditor, Lampert will be getting checks for a long time. 

The Big Lie

In a letter from March 9 of this year, Lampert wrote, “I firmly believe we will succeed in becoming a new kind of retailer as we provide real value to members with value offerings, personalized services and easy access to the brands, convenience and value they want, whenever and wherever they want.”

This is basically a lie. He knows Sears will be bankrupt. He has assured it by selling off the most valuable pieces. And he will profit from it when the inevitable happens.

Sears’ board responded with a letter to shareholders dated March 22 that read: “Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company.”

That’s Lampert they are talking about. The ship is going down, but the captain will definitely not be on board.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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