Fast Eddie CEO of Sears Holding – Financial Wizard or Terrible Manager – #27
It was the year 2004 when Fast Eddie merged –K Mart (In deep Trouble) with Sears an (Equally Troubled Company) – in a deal worth $11.5 Billion. Why would a savvy business person take part in this merger, one that involved personal investment on his part? My answer to that question leads me to this BLOG #28 as I want to present my view of Fast Eddie that might not be covered by the media, nor challenged by anyone that might have a deep interest in the welfare of Sears such as Customers Stockholders, Employees, Board Members, Banks and renown investors such as Warren Buffett who thinks along the line of Fast Eddie as he invested heavily into ESL and Growth Properties Seritage, both of which Fast Eddie is a major Stockholder. This fact alone should have raised the red flag in that he was conducting business that represented favorable conditions to him – the opportunity lay in the ability to manipulate certain deals that resulted in assuring profitable one-way deals that favored the companies which he was a majority owner outside of Sears.
The early observation of Fast Eddie’s actions were covered-up by his experience and expertise which everyone saw as a carry over of his skill sets as a prime turnaround artist who bet on distressed and under performing assets. After all Sears was such a company with extensive real estate holdings underpinning many of the 2000+ stores that were in-place at the time of the merger. This fact alone contributed to the share price of Sears Holding climbing to $133.00 in 2007. However, everyone knew that success in retailing rests on having a viable, smart, growing and profitable Customer base. It seems that all the financial wizardry in the world can’t overlook the Customer who was rapidly declining in an environment of shifts to e-commerce and also new and modern looking stores. We stress the importance of a plan which seems to have eluded Fast Eddie right from the outset, as he quickly eroded the $55Billion in reserves that Sears had accumulated and which rivaled Target Corp. and dwarfed Macy’s Inc.. What happened to the revenues, profits, and the continuation of Sears Holding as a viable retail company. The following represents my view of the key steps of the demise of Sears Holding from My point of view:
- As early as 2005, it became evident that the Sears-Kmart deal was about turning assets into cash rather than building a powerhouse retailer.
- Fast Eddie simply didn’t have a grand nor short-term strategy/plan which would have needed the approval of the Board of Directors, employees, stockholders and financial institutions. He was a rogue operator that simply was going to do it his way – right or wrong!! The lesson to be learned – no matter what – don’t let a rogue run the show!
- You have to know your competition (both existing and new/on the horizon) – Amazon Inc. has reshaped retail after 2004, forcing retailers to retrench, many turning to ideas that required heavy investments in e-commerce/on-line shopping, tools and pricey upgrades to physical stores.
- Fast Eddies evaluation of the competition was as follows: He was reluctant to commit capital to fresh ventures. He was quoted “we will not simply throw money behind any concept, but instead we will test, evaluate, refine and “prove the math” so that the investment is justified. Had Fast Eddie followed the words of his quote Sears could have been – the Amazon of retail – in other words just Corporate Gobbledygook (CG). Don’t let CG rule in your business!!
His CG resulted in Sears and Kmart stores coming down from 2000+ to 700 today in an era where retailers were spending billions on new stores. Sears &Kmart stores were simply not keeping up.
- What’s really revealing is the fact that Fast Eddie’s dual role as CEO of Sears Holding as well as the majority stockholder of the Hedge Fund through which he controls 49% of Sears stock. His dual roles are inherently at odds with each other. As CEOof Sears he has an obligation to deliver maximum Value to Shareholders; as the top guy at the Hedge Fund his answerability lies solely to himself, he’s at pains to convince me and any other onlookers that his activities, offers, purchases and low costs for extensive assets amount to anything more than self-dealing. Yes, get prices of Sears stock so low (less than a dollar per share) and have the assets value to run down so low, in order to allow Fast Eddie to ride in as the hero with another asset-backed loan. There is no evidence of any interference or questions raised by anyone except for Joe Cahill, a columnist for Crain’s Chicago Business who raised serious questions for Fast Eddie’s wheeling and dealing practices in his weekly column.
- Fast Eddie was cute when he formed his views and refused to develop a plan, he said; he didn’t need a plan because he was backed by 2000+stores. BLOG #10 COVERS THE ESSENTIALS OF WHAT A SIMPLE PLAN SHOULD LOOK LIKE! You need a plan, as can be seen from the evidence provided by the inept Sears management team. Without a plan, you will be blowing all over the place like a sailboat without a rudder. If you don’t have a one page plan, develop one NOW. You don’t want to be like Fast Eddie, fly by you the seat of your pants and randomly increase prices, don’t do advertising and make no improvements to 2000+ stores. Where was management?
- If Fast Eddie had any plans for Sears Holding. They were mostly unsuccessful. However, when it came to enriching himself he managed to sell 266 properties to Seritage an ESL company were quickly converted to new malls, lucrative
condominium developments or many of the stores were leased back to Sears for which they received leasing income.
- Fast Eddie used share buybacks to lift the stock price- the stock did march to a high of $133.00 per share – at that price how much stock did he sell to recover his original investment in Sears Holding? Financial engineering worked for a short time, but quickly turned into a lack of investment which hampered its ability to compete with Amazon, Wal-Mart, Target and other e-commerce retailers. That is, assuming he would have had a plan to compete versus enriching his own causes. While Sears Holding spent $6Billion on share buybacks, both Target and Macy’s also repurchased stock during the same period, but not at the expense of innovation. Target spent roughly $23B on stock buybacks during the same period, but dished out $31.6B for capital improvements. Amazon, Target and Wal-Mart spent more than $2B in e-commerce In fiscal years 2015 – 2016, roughly equal to Sears capital expenditures for the entire decade.
- Fast Eddie formed Growth Properties Seritage which was owned by ELS as previously mentioned. This company was solely responsible for buying and leasing-back the stores to Sears. Not only was he enriching himself through a variety of financial schemes, but he was getting his share of the lease payments being made by Sears stores.
- We could write a book about all the financial wizardry, but suffice it to say that Fast Eddie did not have the welfare of the thousands of employees in mind (although he did fund the pension plan), nor stockholders, board members, suppliers or creditors. He had every intention to keep loaning to Sears on an asset backed basis so that he would not have to face the scrutiny that a bankruptcy would bring. He knew that bankruptcy was inevitable, therefore, he offered to buy Kenmore for $400M which would have benefitted his holdings. Thank the Board for dragging their feet on this offer – Fast Eddies last hurrah – for now he is facing the scrutiny of the courts which have the job of dealing with the remaining assets. Once you get past the secured debt (Fast Eddie has a big chunk), few stand to benefit. The loopholes and self enrichment strategies that have and will be used by Fast Eddie, will amaze you. One thing for sure is that he didn’t share too much data. How can that be in a Publicly Owned Corp.?
The lessons to be learned are many, but two stand out, and should be adopted in any business that you are involved with.
ACTIVE INVOLVEMENT OF BOARD OF DIRECTORS
Could Sears have been an Amazon? The answer is yes! However, this would have involved the two key management factors already mentioned, as well as utilization of sound management principles. It can’t happen if the head person is allowed to run the show without any transparency or oversight. Fast Eddie was no more interested in underwriting an all-out competitive e-commerce push than he was in keeping Sears competitive in the retail field. He starved retail operations until they became unprofitable. Sales sank and losses rose, forcing Sears to sell off assets including real estate, its Craftsman brand, close hundreds of stores (1300+) and borrow Billions of dollars to pay its bills. Who was the only one to benefit?
Now you know why it took so long to get to the point reached on 10/15/18 – bankruptcy.
Should any of the subscribers need any additional data on the Sears dilemma, please contact us. We look forward to receiving lots of questions regarding the material covered in the BLOG. The media has been ringing their hands about POOR Fast Eddie having lost a fortune over the past decade –NOT TRUE – he might be the only winner. Can anyone believe the facts that I have stated in the Blog.
This will rank high in the standings of : “IT STARTS and ENDS WITH MANAGEMENT”