Mark Cohen, a former chairman and CEO of Sears Canada Inc., said people used to think he was “nuts” for his dire predictions about Sears under the leadership of U.S. hedge fund billionaire Edward Lampert.
Mr. Cohen left the company in August 2004, a few months before Kmart Corp. announced it would buy Sears, Roebuck & Co. in a deal that married two of the biggest names in U.S. retail. At the time, Wall Street heralded the move as a masterstroke, sending shares in both companies soaring.
Through his hedge fund ESL Investments Inc., Mr. Lampert had gained control of Kmart during its troubled times in bankruptcy court. Kmart’s subsequent acquisition of Sears earned Mr. Lampert comparisons to Warren Buffett.
At the height of his prominence in the mid-2000s, his hedge fund had big-name investors including media mogul David Geffen. Its annual returns were widely reported to average about 30% annually.
Things subsequently went downhill. Sears Holding Corp.’s plan to sell most of its stake in Sears Canada is the latest blow for the Canadian chain after reporting nine losses in 14 quarters amid shrinking market share.
Mr. Cohen, who now teaches at Columbia University’s business school in New York City, said he’s seen it coming for a long time.
“The Canadian business, which was perfectly healthy and profitable when I left, has been a victim of Lampert’s intent to essentially liquidate the business,” Mr. Cohen said. “It’s a tragedy.”
Mr. Lampert, who did not respond to interview requests placed through a spokesman at Sears Holdings, launched ESL in 1988 at the age of 25. He started the fund after leaving a job with Goldman Sachs, just four years after graduating from Yale University.
His father, a New York lawyer, died when he was a teenager, leaving him to work nights and weekends in high school to help support the family. He was also reportedly kidnapped and held captive for two days during Kmart’s bankruptcy proceedings, an event that reportedly reinforced his preference for privacy.
Unlike other hedge funds involved in complicated financial transactions like shorting stocks and trading derivatives, Mr. Lampert’s investing strategy is to buy large stakes in a small number of stocks he thinks are undervalued and hold them for a long time. ESL’s longstanding investment in the car dealer AutoNation Inc. is an example of that strategy.
The Canadian business, which was perfectly healthy and profitable when I left, has been a victim of Lampert’s intent to essentially liquidate the business
According a report from the New York Times’ Dealbook blog, ESL’s assets under management shrank from a 2006 peak of US$15-billion to less than US$6-billion in December 2013, with many of its big-name investors cashing out their stakes as Sears announced a steady stream of disappointing results.
Wall Street may have been ecstatic about the Kmart-Sears deal, but retail experts weren’t so sure about it. Britt Beemer, chairman and CEO of the retail consultancy America’s Research Group, said Sears’ track record under Mr. Lampert is an example of how the typical finance industry mindset doesn’t apply well to retail.
“If you’re a merchant, you understand there are some areas where you make money and some areas where you make less money. If you try to make the same amount of money across the board, you create value for no one,” Mr. Beemer said.
Mr. Beemer cited Sears’ failure to invest in updating its displays as an example. “When you talk to consumers about shopping at Sears today, they’ve lost that consumer that has any fashion sense,” he said.
Kai Li, a finance professor at the University of British Columbia’s Sauder School of Business who has researched the influence of activist hedge funds on distressed companies, said Mr. Lampert’s downfall may have been micro-managing. Mr. Lampert is not only a major shareholder of Sears Holdings – he’s also the chairman and CEO.
Ms. Li said two investments with two very different outcomes by activist investor Bill Ackman’s Pershing Square Capital Management LP show the importance of delegating operations to people who know the business.
Mr. Ackman’s hand-picked CEO to run retailer JC Penney was a former Apple Inc. executive, whose turnaround efforts failed. His choice to run Canadian Pacific Railway Ltd., which flourished, was the former head of rival Canadian National Railway Co.
“[Mr. Lampert] was maybe an over-confident hedge fund manager to become CEO of a department store chain. Even Bill Ackman didn’t go that far,” Ms. Li said. “You need insiders to turn around a distressed firm, not a hedge fund manager.”
David Tawil, president and co-founder of the distressed capital-focused hedge fund Maglan Capital LP, said people tend to forget Mr. Lampert’s many successful investments. He also said it’s possible Mr. Lampert has come out ahead with his stake in Sears Holdings, given the dividends it’s paid out after selling assets in the past.
The Buffett comparison, however, no longer holds, he said.
“Warren Buffett is not only successful on a personal scorecard basis, he also makes his investments very successful. The executives and shareholders become very successful as well,” Mr. Tawil said. “Clearly, in the case of Sears, that is not true as it relates to Eddie. I think that’s the biggest real knock against him.”
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