Looking at Sears from the Inside Out, Part Two
More from the Mark Cohen Interview.
We continue with the interview with Mark Cohen, the former CEO of Sears Canada about how a hedge fund manager took down two of the most iconic brands in America.
Mark Cohen
This is the way he plays. This is the way lots of people were treated by Eddie Lampert, plus lots of companies. The way this guy is Donald Trump personified in his behavior. So to get back to the present, Kmart has got what, three stores left? Sears has got maybe 20 left. The only reason there are any left is that Lampert still got some net operating losses that he can yet harvest. And a curious thing happened when this thing went into bankruptcy. The company filed bankruptcy in October, I think of 18 yep, 2018. And retailers never filed for bankruptcy in October. They file for bankruptcy in January. They filed bankruptcy in January when they've harvested all of the holiday sales. They have all of that cash in hand, and they have failed to pay their bills. So they have leverage going into bankruptcy. They got a fair amount of liquidity even though they're filing bankruptcy and they owe a lot of money, but they go into court with chips in hand. When you file in October, you don't have the holiday receipts in hand. He had a file because there was 175,000,000. I'm not sure that's the exact number, but it was a substantial note due that he intended to pay off using a special dividend, which is something.
Mark Cohen
He'd been doing continuously by basically telling the board, issue a special dividend or pay me back for one of these collateralized stores. And the board finally, the US board finally woke up and realized that if they continue to do his bidding they personally were going to be in legal jeopardy. Someone clued them in, woke them up and so they refused to authorize the note and Lampert didn't want to write a check. So he put the company into eleven. Well, it goes through a proceeding and in the bankruptcy court in Westchester County in New York, by the way, the company casually got the bankruptcy proceeding placed in that venue because there's some flexibility that a company filing for bankruptcy has in choosing what court they might get. Well, in Westchester County there's one bankruptcy judge in the Southern District in the city, there's a dozen or more of them and they get selected randomly. Well, here's this one guy, he's the bankruptcy judge. His name is Robert Drain and he is the judge who presides over the bankruptcy. There are two warring sides in the bankruptcy. There's the creditors who coalesce around a desire to liquidate the company, to be able to harvest whatever cash they can get from what's left to pay off creditors.
Mark Cohen
And there's Lampert who presents to the court a proposal to buy the company out of bankruptcy and create a new company which he claims will protect tens of thousands of jobs, which didn't happen. Well, he convinces the judge that he's the better outcome. The judge is an idiot. The judge is also the guy who gave the sockets a multi billion dollar free pass on the Oxycodone litigation. Okay? The judge is hoodwink. He doesn't want to headline with his name on it which basically says, Judge Drain approves liquidation and 40,000 people are now out of work. So he gives Lampert the right to buy the company out of bankruptcy. It's been a couple of years now and the bankruptcy officially then the company is still officially in bankruptcy because Lampard never wrote the $47 million check that was negotiated as a basis of him getting possession of the company. I don't know if it was 47 million, but it's a big number. He never paid it. And so Drain, who's now about to retire, has appointed three mediators to sort this out. Of course. The creditors. Having been forted in their attempt to liquidate the company.
Mark Cohen
Are now seeking billions of dollars of recourse from Lampert in a process in bankruptcy that's called let me think of the words fraudulent conveyance. Which is a process whereby creditors claim that money is paid by the company before it filed bankruptcy. Which in the case of Lampard is billions of dollars in special dividends and the transaction in which company assets were sold to Saratage. They're claiming that that money was fraudulently conveyed and therefore should be flawed. Back. So there's three kmarts left, there's 22 series or something like that. By year end, there likely will be zero. The company has essentially disappeared. It doesn't exist anymore. People often ask, Did Lampert come out in all of this? My guess is not we'll never really know. You have to really understand the math behind the tuning and throwing of all these sums of money and the opportunity, costs and losses that he's encountered and has created for himself. Here is the largest retailer in the world, certainly even with a wounded Kmart, one of the largest in the world, a company in the case of Sears Roebuck, which was the Amazon of its day, which should have been an extraordinarily important player in ecommerce and started to emerge in ecommerce, except that Lacey was in charge of it and he had no idea what he was doing.
Mark Cohen
And when he became CEO, he had no idea what he was doing. And so it's gone. It's toast. And hundreds of thousands of people have lost their jobs in the US and Canada, and an untold multiple of those people with regard to their households, their friends and family vendors, all toast as a result of the disgusting behavior of Eddie Lampert and his cohorts who basically enabled this whole thing.
Dennis Sanders
One of the questions that I've always had is the role of the media in all of this. Now business media has been following this and they will pretty much kind of share the story. But it doesn't seem like, with the exception of maybe the CBC, you haven't really heard national media really take on this story of what was going on, especially Lamper's Incompetence. Why do you think that was?
Mark Cohen
Because they were afraid of Lampert! Because Lampert has always had very high power, ultra-aggressive PR people who were all over the media. If anybody were to be so, to have the temerity to write any kind of negative story. Don't forget, when he first took this whole thing over, he was being touted as the next Warren Buffett. So the media was a bit embarrassed to now start revealing the fact that he was no Warren Buffett. Now I started making comments, very pointed, negative comments about Lampert and Sears by name, and Lacey on CNN, CNBC, CBC, and in print, wall Street Journal, Washington Post, new York Times, etc, etc, etc, etc, etc. And every time I either appeared or was quoted, Lampert's minions would attack the media, demanding retraction demanding that they never talk to me again, and making all sorts of threats. The media is caught between a rock and a hard place. Okay? I said on air, hey, Lampert, you want to argue the point? Sit next to me at the podium and let's talk about why I think you're a fucking crook. He obviously, and none of his minions would ever dare to do that, but they made a point of harassing the media by getting to Michael Bloomberg, who got to his senior editor at Business Week.
Mark Cohen
I don't know this for a fact. But I'm sure this is what happened because after giving them a lengthy interview, which they sought from me, they informed me that they were going to put a sort of a counter story in the interview. And I said, no way. I won't participate in that. They got trapped because in the same week they ran the print interview, they invited me to participate on Bloomberg TV, and they couldn't muzzle me on television. So the media look, the media is trapped, and I don't want to describe the media as I don't want to paint the media with one broad brush because that's not fair or appropriate. But look at how difficult the media, broadly speaking, has had describing what's gone on over the last five, six years with regard to Trump. I mean, the media should have shut him down before he even ran for president. He's from New York. I'm from New York. He's been widely known in New York as a crook forever. His father was widely regarded as an aggressive ticket and a crook. It was no secret in New York that if you were black, there was no way you were ever going to rent an apartment and a Trumpowned housing development.
Mark Cohen
You could stand on your head. You'd never get a lease. Not a secret. Okay, now, he was ultimately nailed. He claims he never admitted guilt, and they signed the nole contende. But in New York, a New Yorker, a resident of Queens or Brooklyn would readily tell a friend or family member if they were black, don't bother. You're not going to get a lease. This was not a secret. And yet the media treated him and to some degree still treats him. So how did Lampert get away with it? He's a billionaire who's been touted as the next Warren Buffett, and he's reclusive. He's secretive, and he hires these mad dogs who go after the media with a whole manner of threats and all sorts of stuff. And here's me basically saying, hey, the guy is a crook. I've described him as what were the words I used at one point, which I'm told he went ballistic over. He's either delusional or he's I use three words, it's been a while. I said he's either dishonest, delusional, or something else. And when someone said, Aren't you worried that he's going to come after you?
Mark Cohen
I said, well, he can't do anything to me. Bring it! And by the way, he had to pay my legal fees for those three years of litigation, which was almost $600,000. So people like him get away with things, and I'll say one more thing, and then I'll be quiet. It takes talented leadership and the enormous devotion and effort of enormous numbers of people to create a successful business, whether you're talking about retail or it doesn't matter. It takes enormous devotion to the task at hand. Over many years, to create a successful enterprise. It only takes a Lampert with a handful of people like Alan Lacey and Steve Mnuchin to break the glass from which it can never be put back together. And we see that in businesses all across the spectrum of the enterprise.
Dennis Sanders
What do you think has been the result of Lampert's leadership? I mean, you hear a lot about how malls are kind of empty or dealing with these large spaces, but there seems also been a human toll to this as well that we don't always hear about.
Mark Cohen
Well, the mall, the Great American Shopping Mall, which, by the way, was in no small measure spawned by the investment that Sears Robuck made in the through a subsidiary, a wholly owned subsidiary, real estate subsidiary called Hallmart, in which Hallmart bought hundreds of locations throughout the United States, which became the footprint for the Great American Shopping Mall. Which is why so many of those Sears stores were in the catbird seat in the premier location in the mall. Sears was the original one of, if not the original, prime mover, because back in the day, those leaders realized that this migration out of the inner city and outboard into newly formed suburbs and this migration inboard from rural communities into these newly formed suburbs was going to create a marketplace. And then, of course, Eisenhower invested in the interstate highway system, which acted as the enabler because these malls were built at the foot of the exit and entrance ramps, or the exit ramps of these interstate highways. So Sears was a prime mover and was a principal tenant in almost 1000 of these malls. The mall, the classic Great American Mall, has a trading radius of typically 7 miles.
Mark Cohen
That's a generalization. So it draws customers from a radius of 7 miles, and it also employs most of its employees from that same seven-mile radius. When the mall starts to shut down or actually goes out of business, an enormous number of people who have seen them all as both their shopping center and their employer are in a world of hurt because many of them are homemakers who have taken advantage of the flexibility of mall employment scheduling. Malls are open 77 hours a week, so they're working part-time or full time, on and off shift, and so they're able to take their kids to school, pick their kids up, et cetera. Suddenly they're out of work. And alternative employment is in an Amazon distribution center that's 30 miles away. Or if it doesn't pay less, it may pay more. But it's an eight hour shift. It's not a part time shift, and it's an eight hour on your feet. No fooling. The Amazon distribution center is a production shop, so you don't get to stand around and chit chat with your friends while you wait for a custom to show up. So this has created this tremendous crisis locally in hundreds of places throughout the United States.
Mark Cohen
The crisis is still rolling where the employment base has disappeared it's tough. This is what e-commerce has wrought hand in glove with the fact that the real estate community overplayed its hand. You know, they built too many malls. The first mall in the community was wildly successful the department store moved from downtown these new specialty stores occupied the concourses between the food court and the anchors. Customers loved it because it was near their homes. So they built a second mall in the community and that was wildly successful on the other side of the interstate or a couple of miles down the road and then they built a third one and that was wildly successful. Then they built a fourth one and it took some business away from the first three but it was still successful. Then they built a fifth one and the first one started to die and the first one in some communities was now on the wrong side of the tracks because as the suburban community evolved what was the place to live and work and shop was no longer the place to live and work and shop. It moved across town and that's one of the reasons why so many of these original malls started to die and then e-commerce of course has siphoned off an enormous percentage of the business.
Mark Cohen
So a customer who had always been handcuffed to their local mall which might have been a good-looking mall, might have been a crappy mall, might have had an exciting Macy's to shop in, it might have had a dump that's where they had to shop. They didn't have to, but it's where they shop. They were handcuffed. Now they've got an alternative, it's called ecommerce. They can shop, they can browse from anywhere in the world, they can shop from anywhere. They can shop with anyone in the world and they can do it from their living room in their pajamas or they can go to the mall but they don't have to and they love it. Why would they not love it? What do you think has been the.
Dennis Sanders
Loss of the Sears? What does that meant for consumers? There was one time, I think maybe in an interview you did at one point kenmore had about 40% of the market which was astounding but by having grown up with Kenmore and purchased them myself, I can understand that but has the consumer lost something with the demise of Sears?
Mark Cohen
Well, in the US Sears had a 40% share in appliances and the Canadians had like a 38% share and Kenmore was in both cases the largest component of the business. Kenmore was the be all end all in appliances. Particularly refrigeration washer dryer dishwasher it represented enormous value at opening price and enormous appeal at the high end because it had all the bells and whistles of new technology because Kenmore was a force of nature in the appliance industry it was a cradle to grave brand which is to say you bought a Kenmore washing machine and you got a great warranty. And you could buy an extended warranty and you keep that washer dryer running for the rest of your life if you wanted to. Because there would always be a Sears service person who would always have parts and would promptly fix your washer if it broke down. Promptly, efficiently and cost effectively. Which is why millions and millions of households relied on Kenmore. They loved it. Why wouldn't they? Same thing with Craftsman tools. Craftsman had a lifetime guarantee. If you ever broke the wrench, you just brought it into the store, they gave you a new one.
Mark Cohen
They didn't care that you did something to the wrench that no one should have ever done to the wrench. They just gave you a new one. It was part of the relationship. Okay, so what's happened? Well, customers can still buy washing machines. It's not as easy as convenient or as confidence inspiring if you buy a washing machine from Home Depot or Best Buy or even Costco, because you don't have this overarching umbrella of integrity insured. So the consumer is still able to service their needs, but not as efficiently as they had been over time. The high integrity retailers like Costco have built an increasingly large and high integrity appliance business. Will they ever reach the pinnacle of excellence that Sears and Sears Canada had? I don't know. It took those two companies decades to build that reliability. The ability to service, the ability to deliver, install and service appliances and do it profitably is something that requires an enormous network of people and facilities, people in facilities to deliver, install and then service. It requires the ability to mount and inventory. Parts go way back in time. So if you've got fitting on your twelve year old washer that you're in love with, you don't want to replace, and it's corroded and it's got to be replaced.
Mark Cohen
Sears had the part, and if, God forbid, they didn't, they gave you an incredible deal on a new one. On a new washer. But they almost always had the part. I visited the Part Depots in Canada. I had people who are proud to tell you that there wasn't a washer that anybody was using that they couldn't see fit to have fixed. This was a heritage of excellence that took decades to build. Lacey started to cut the heart out of it and then Lampert killed it. By the way, I'll tell you another one more lacy story. In the lower level of the main building in Hoffman Estates, which, as you may know, is like a 2 million square foot white marble and glass monument to the original Sears management's lunacy. This is something Martin has inherited. Quite impressive. When I joined, I didn't think anything would ever impress me. I was gobsmacked by this place. But any event, in the lower level of one of the main buildings was the Sears Engineering and Testing Center, staffed by a whole team of engineers with all sorts of equipment. And their job was to approve production plans for all Kenmore craftsmen and diehard products before they actually went into production, and then to sample test products across the whole house, including jeans and underwear.
Mark Cohen
They tested everything sold, especially products that Sears sold under its own label. And their requirements were far more stringent than in appliances, for example, than you will underwrite the labs. So their requirements were always far more stringent. Well, Lacey Village Idiot looked at that Cost center and decided that the $7 million on the company's PNL to support that engineering center was superfluous. And he killed it. He closed it. I'm in Canada, and we rely upon the Chicago based engineering center to certify all the stuff we're selling in Canada and a separate Canadian certification. But it's the same standards, so I say delays. Are you kidding? Are you crazy? Why did you do that? Well, we don't need to spend that $7 million. We can rely on underwriter labs. I'm now scrambling to find a replacement in Canada, okay? Because we need to have something more than the Canadian underwriter labs. And then something happens. A whole line of gas stove is deemed to be dangerous. It's got an underfooting the footing of the gas range. It's a whole line of ranges. But they have a common foundation, if you will, satisfies underwriter labs requirements, but just barely.
Mark Cohen
And the class action suit is mounted because someone has apparently put a 50 pound turkey on the oven lid, and the range has tipped over. Someone got injured. There was a fire. I don't know what happened. And Sears has to set up a $500 million liability for future accidents, while at the same time, they have to mount this gazillion dollar recall to have these ranges retrofitted so that they're safe. This is so lacy, you could save $7 million a year. This is the same stupidity that surrounds the (Boeing) 737 Max crisis, the same stupidity that surrounds the GM ignition key assembly crisis, where a bean counter or bean counters look to save some money. It looks like it's impressive. Only to create this enormous financial burden because of the stupidity of their actions. Well, that lab didn't let anything go into a store that wasn't tremendously examined and tested, from chainsaws to, well, washing machines. And customers, whether they knew or had any specific knowledge for decades, had come to rely on that. Surety. And it's disappeared.
Dennis Sanders
What do you think is a lesson to be learned here about business in America?
Mark Cohen
Well, I don't know of and I don't think anybody else knows of a better economic system than the one we have. It's imperfect, just like democracy is messy and imperfect. A capitalist economy, capitalism based economy, is messy and imperfect. And there is no way to protect the body politic from excesses Lamperts of the world. There are ever ongoing attempts to close the loopholes and create regulations and provisions when calamities occur that should not have occurred. In hindsight, the Canadians, which never had a decent pension protection system, are now being lobbied to make up for the catastrophe that Sears Canadian employees have faced because their pensions have been wiped out. Unlike in the US, where most pensions are protected by the US government. It's a work in progress that will never be complete. And there will always be people and groups who find ways to suborn the rules or create processes that take advantage that haven't been foreseen. At the end of the day. If you were the owner of an enterprise. As Lampert effectively became by being the lead shareholder. The fact that the enterprise is a public company is of no solace because the lead shareholder essentially owns it outright if he or she has a board that is complicit and boards tend to be complicit.
Mark Cohen
You know. And so it's the best system there is. I'm not here to suggest some other alternative. I'm here to suggest that because politics is imperfect and politicians are in some respects inherently dishonest, what gets them to the table, renders them ineffective in some respects, or disqualifies them, we're always going to be subject to the vagaries of these activities that are for most people, completely disruptive and disruptive. Lampert should have been called out for what he was. I don't know, that would have changed the direction of the tides. Vendors who supported the company he was running should have found other places to sell their goods. Vendors would ask me whether they were clients, consulting clients, or just friends. Should I sell Sears? To which I said, not if you've got someplace else to sell your goods, because eventually he's going to stiff you. And he started to stiff people long before he went into eleven. I said, you lie down with dogs, you wake up with fleas. This is the way business runs. If your business with someone who's not on the up and up, you're going to struggle at some point when they get the better of you.
Mark Cohen
And that's what Lamperts the world like. The Trumps of the world, that's how they play. He never paid those Polish steel workers who put up the structure, the superstructure of Trump Tower. He stiffed them. He got away with it. He stiffed those stupid investors who put billions of dollars into those casinos in Atlantic City. He stiffed those gullible people who signed up for Trump University. He got caught at that. But I don't know that those people were made whole. So it's an imperfect system. Caveat emptor always reigns supreme, which is to say, let the buyer beware, let the investor beware. Be careful who you rely upon. It's the best you can do. I now am at the podium in front of students every semester. These are masters and mistresses of the universe. They're elite. They've typically been out in the workforce for a couple of years. They've made a lot of money. Now they're back in business school looking to make a lot more money. And I endlessly counsel them on paying an enormous amount of attention to what they're really doing. And I say to them. And this is advice I got from a very early mentor at Abraham and Strauss when you're in a discussion with a counterparty and you've been advised by the lawyers that what you're planning on doing is legal.
Mark Cohen
Before you sign your name. Ask yourself the question what would your mother think if she was sitting in the room listening to what you're about to do? Assuming your mother is not a criminal, and if your mother would have a bit of a problem, they might want to put the lawyers opinion off the side and not go for it. Common sense, good judgment always reigns supreme. Something you can't teach. You can only make an appeal towards selling your best stores. And claiming you're repositioning the business is a paradox that can't be explained, which is what Lampert was doing both in the US. And Canada.
Dennis Sanders
One of the final question is, at the end of the day, does Lampert then get to walk away from this?
Mark Cohen
Oh, yeah. He's long ago put I don't know this, but he's long ago put enough money in hefty bags in the backyard to support his yacht and his jet and his palatial homes. You know, don't cry for Eddie Lampert. He may not have as much money as he might have had if he had taken a different course, but when you reach a certain level of wealth, it doesn't matter anymore, in my opinion. How many multi-hundred-foot yachts are you going to occupy? How many G 650s are you going to fly around on? How many homes are you going to? At some point, these guys are in it for bragging rights, I suppose, or whatever else motivates them. He certainly isn't going to get accolades from the media for being the next Warren Buffett, that's for sure.
Dennis Sanders
Interesting. I I one of the things that I remember in doing some of the research, I think shortly, maybe a year or two after he took over, the stock price for Sears was still around over $100 per share when it went for bankruptcy. Was that? I believe $.37
Mark Cohen
Well, he's taken billions and billions and billions of dollars in both the US and Canada out in special dividends, billions of dollars, and he's gotten away with it. And look, it is what it is when the stories are all written. Lampert is not going to be described as someone as a paragon. Yeah.
Dennis Sanders
It doesn't help for those who have lost their jobs, but at least maybe history can at least render some type of a judgment.
Mark Cohen
I agree.
Dennis Sanders
Well, thank you for taking the time to chat with me. I think this was an important story for people to hear. I do hope that they can kind of hear this story and see and maybe learn what happened to kind of one of America's greatest retailers.
Mark Cohen
Well, I was reticent to participate, and I think you now know why.
Dennis Sanders
Yes, I do.
The interview with Cohen left me with two thoughts. First, the customer service Cohen describes, especially when it comes to appliances is something we aren’t going to see again. I think that is gone for good. The second thought: is there some way to prevent the Eddie Lamperts of the world from using companies like an ATM or are we doomed to have businesspeople like this take advantage of companies?