Sears-Kmart strategy still murky a year later

“When he names Warren Buffett as a model, you’ve got to believe there are things he has in mind with the cash that he has and the stock price that he has,” said George Rosenbaum, chairman of Leo J. Shapiro and Associates, a Chicago-based retail consulting firm. “I would think it’s acquisitions. But I can’t imagine what he might acquire. It may not be a retail business at all.”

Lampert promised last March 24 that there would not be wholesale store closings, and there haven’t been. But Rosenbaum speculated that more closings will occur in the already pruned-down Kmart chain, resulting in a smaller but more profitable group of Sears and Kmart stores.

“It’s the Lampert style,” Rosenbaum said. “Keep the stock high, cut spending to the bone, let sales down to levels where you’re running pretty profitable stores without a lot of investments in renewing the store or improving the offering. And then take the stock price and use it in businesses that are more interesting than Sears or Kmart.”

Davidowitz believes similarly. “There’s got to be another act to this because I think Eddie Lampert knows that what he’s doing is unsustainable,” he said.

Lampert used cost cuts and real-estate transactions to help Troy, Mich.-based Kmart Holding Corp. turn a $1.1 billion profit in 2004, a year after taking control when it emerged from bankruptcy.

That contrasts with the strategy employed at rival Penney’s, where then-CEO Allen Questrom launched a turnaround by upgrading stores and merchandise and opening new off-mall stores.

Some analysts say Lampert is treading dangerously with his opposite approach.

“To claim that same-store sales is a ’vastly overrated metric’ ignores every retailer’s primary performance target, expense leverage tool and definition of success, and his reasoning rests more on mathematics than merchandising,” said Carol Levenson, of the corporate bond research firm Gimme Credit, in a research note.

Lampert, whose personal wealth was ranked by Forbes magazine this month at $2.5 billion, could use his Greenwich, Conn.-based ESL Investments to fund acquisitions as he did with Kmart. So far, little of the money being saved through margin management and cost controls is being plowed back into the stores.

Sears Holdings had $4.4 billion in cash as of Jan. 28 when its fiscal year ended, $1 billion more than a year earlier.

“The cash arsenal is starting to build up again, just like it did at Kmart in 2003 and 2004,” said Richard Hastings, retail analyst for Bernard Sands LLC.

That cash was used in the Sears deal, which caught everyone by surprise when it was announced in November 2004.

Lampert isn’t any more likely to tip his hand about the next acquisition. But shareholders may hear more about his thinking at Sears’ April 12 annual meeting in Hoffman Estates.

Regardless, Wall Street couldn’t be more curious about Lampert’s next move after watching his unorthodox strategy in retailing over the last three years.

“This remains one of the most interesting major retailing case studies in the past 20 years,” said Hastings.

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