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Questions about Sears start at the top

Wall Street is starting to conclude that when it comes to running a department-store company, Eddie Lampert is a terrific hedge-fund manager.
Image: A shopper is seen at the Sears store in Berlin, Vt.,
Sears Holdings Corp. reported a 99 percent drop in third-quarter profit Thursday on weak sales at its Sears and Kmart department stores and continuing investment losses under hedge-fund manager Chairman Eddie Lampert.Toby Talbot / AP
/ Source: The Associated Press

Wall Street is starting to conclude that when it comes to running a department-store company, Eddie Lampert is a terrific hedge-fund manager.

Nearly three years after pairing ailing Sears and Kmart under his control, the investment whiz encountered his biggest trouble yet in the third quarter in trying to turn around parent Sears Holdings Corp., which he chairs.

The company earned just $2 million in a dismal performance that heightened questions about Lampert’s strategy and Sears’ future as a retailer, prompting a double-digit selloff in its stock Thursday. Sales at both chains’ stores worsened, profit margins eroded badly and Lampert no longer was able to rely on cost-cutting to shine up the bottom line.

“Unfortunately, visits to the stores show very little evidence that Mr. Lampert has figured out the magic sauce that makes good retailers profitable and we doubt that we will see that in the near and medium term,” Credit Suisse analyst Gary Balter said in a research note about Sears entitled “Death Spiral?”

“It should be clear to investors that if Sears continues to try to make it as a retailer, it will likely not happen.”

Responding en masse to the 99 percent profit decline, investors pummeled Sears’ stock amid a growing exodus of those who had believed Lampert would figure out a way to turn the company around.

Shares tumbled $12.25, or 10.5 percent, to close at $104.09 Thursday after dipping as low as $98.25 — barely half the peak of $195.18 in April.

The company signaled little hope for improvement in the near future, either, in a challenging retail environment that adds to the pressure on Lampert to either get help for the retail operation or do something else.

“He wanted to be the next Warren Buffett, but Warren Buffett never stepped in and ran a company,” said retail consultant Howard Davidowitz. “Warren Buffett always bet on great managers. Eddie Lampert bet on himself to run a retail company where he had no background.”

Sears no longer holds conference calls under Lampert and the chairman, who heads ESL Investments Inc., does not comment routinely on quarterly earnings.

The Hoffman Estates, Ill.-based company, which earlier this week said it may buy out the rest of retro-themed retailer Restoration Hardware Inc., narrowly avoided its first loss with net income of a penny a share. That was down from a profit of $196 million, or $1.27 per share, a year ago and far off the consensus estimate of 50 cents per share from analysts surveyed by Thomson Financial.

Sales for the quarter ended Nov. 3 slipped 3 percent to $11.5 billion from $11.9 billion.

“We are very disappointed in our performance for the third quarter,” said Aylwin Lewis, chief executive and president, in a statement. “We cannot blame our results entirely on the retail and macro-economic environments. We have much on which to improve and are working hard to do so.”

Retail consultant George Rosenbaum thinks acquiring Restoration Hardware — a widely questioned move — would be a “bold and correct move,” enabling Sears to add a trendier brand to its current offerings. But that’s not nearly enough, he indicated.

“They can’t cut costs any more, or only marginally,” he said. “They have to become merchants.”

Comparable sales, or those from stores open at least 13 months, declined 4.2 percent for the quarter at Sears stores and 5 percent at Kmart, with notable declines in clothing and lawn and garden goods at both.

Sears attributed the weaker sales to increased competition, light consumer spending because of the weak housing market and credit concerns, and unseasonably warm weather, which hurt sales of apparel and other seasonal merchandise. A falloff in home construction has cut into its sales of major appliances.

“I think Sears is feeling the pain more than some of its close rivals, given its weak competitive position and its exposure to the home furnishings sector,” said Morningstar analyst Kim Picciola.

Strong investment income had initially brought higher profits under Lampert but that trend has long stopped, leaving Sears without a strong buffer for lackluster sales. Sears had $30 million in interest and investment gains for the quarter compared with $140 million during the same period last year.

Cash and cash equivalents declined to $1.5 billion at the end of the quarter, down from $2.1 billion a year ago and $4 billion on Feb. 3. Gross margin declined 90 basis points to 27.4 percent, hurt by markdowns taken to clear seasonal merchandise and higher inventory levels due to lower sales.

Davidowitz, chairman of New York-based Davidowitz & Associates, said the company is too low on cash now for Lampert to carry out the major acquisition he had long been expected to make, especially having committed to share buybacks.

“He’s got to do something that moves the needle,” he said. “Restoration Hardware doesn’t do anything and his cash is disappearing. ... I think it’s starting to get scary.”

Lampert’s options, according to various analysts, include continuing to attempt a retail turnaround against daunting odds, taking the company private, selling off assets such as Lands’ End or more real estate, or liquidating, which Davidowitz said would take 15 years.

For the first three quarters, profit was $394 million, or $2.66 per share, down from $670 million, or $4.29 per share, a year earlier. Revenue declined 3 percent to $35.5 billion from $36.7 billion.