Who Killed Sears & Kmart? An Interview
The second in a series about the demise of Sears and Kmart and who is to blame.
The following appeared on Medium and the En Route Podcast in mid-2021. You can listen to the episode by using the links at the end of this article.
As I’ve said before, I’ve had a strange obsession over the last decade or so and that following the story of the downfall of Sears and Kmart.
What’s that, you say? You think you already know the story? Let me guess, you think Amazon ate Sears’ lunch because it failed to keep up with the times, right?
Now you wouldn’t be totally wrong in believing that is the reason that Sears is nearly defunct. But that’s the public story-the one people hear from the media. There is another reason that Sears is going down the tubes and it’s hidden from plain sight.
Do you remember what happened to Toys R Us? A private equity firm bought the chain and piled on tremendous debt. The investors and shareholders made money and didn’t lose a cent. The employees of Toys R Us lost their jobs in some cases without any severance.
Something similar is happening to Sears and Kmart. Over the last 15 years, the owner of a hedge fund and the shareholders have stripped the company of value, selling off valuable brands and closing stores. All the while those shareholders haven’t really lost anything in the process.
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What’s happening to Sears is something that has happened throughout retail and not just retail but in other sectors of the American economy. It has affected millions of jobs and yours could very well be next. Below is the transcript of an episode of En Route about the downfall of Sears and how its former CEO Eddie Lampert will be able to walk away from what was once America’s great retailer without losing a cent of his own money. In August 2021, I chatted with Warren Shoulberg a retail journalist that has followed the Sears and Kmart saga for years. He lays out in plain English why these two iconic chains no longer matter. You can listen to the interview by using one of the links below.
The following was edited for length and clarity.
Sanders: Well, the final thing that I wanted to talk to you about was the story and kind of the downfall of Sears. The memory that I have grew up in the Seventies and Eighties is especially going to Sears. That kind of sold everything and from clothing for school to the lawnmower that we owed. And usually, the story that we hear about its downfall has been about Amazon, that it wasn’t keeping up with the Times, and that’s why they are basically not existing anymore.
Sanders: But that doesn’t seem to be the whole story. There seems to also be a lot of kind of what kind of started in 2005 with the merger with Kmart and with their CEO. Would you be willing to share a little bit about that story and how that happen?
Shoulberg: Sure. So I am a bit obsessed with the Sears and Kmart story, so been following it since I’ve been following it forever. I’ve been covering retail for a long time. So first, a little context, which is that as recently as the 1980s, Sears was the biggest retailer in America. And as you said, they sold everything. And it’s not unfair to say that they were the Amazon of the era. If you wanted something, you went to Sears, either their big catalog or their stores or whatever. In their earlier days, Sears sold houses. Even in the 1980s, they had a real estate brokerage company and they had a credit card, which is the Discover card. And they had car insurance. And they were the place to go. Similarly, Kmart in the 1990s was the biggest retailer in America, and Kmart was a great store. They almost were Target, like in terms of having some terrific apparel fashion, some interesting home stuff, and just having a little bit of an edge compared to some other retailers. And these were both good retailers.
And for a variety of reasons, they started to decline. Some people say that both Sears and Kmart took their eyes off their core businesses as they bought other companies. And I mentioned all the other things that Sears did, and some people criticized them for focusing more on financial services and real estate than on retail. Maybe. But I think if they had success, success successfully executed that strategy. That was a brilliant plan. Kmart bought up a lot of others or bought or started a lot of other retail chains.
They owned a home improvement, chain. They owned a warehouse club. They owned two book chains. So they also had a strategy of we’re going to have multiple nameplates under one brand. And again, people criticized and said that they then stopped paying attention to Kmart. To me, it’s not so clear cut, but clearly, both Kmart and Sears declined as core retail businesses. And I’m going to say Sears made the fatal flaw in its retail business. You can trace it back to the 1940s when Sears started to expand into the suburbs.
As the baby Boomer started and people moved to the suburbs, Sears made a strategic decision to put it stores in shopping malls. Had they put those stores as in strip centers, I think they would have had a very different outcome. This has been my theory. I’m not sure anybody else shares it, but you think about it. The shopping mall customer is not buying lawnmowers and power tools and work clothes and things like that. Those are being bought today. And Home Depot and Lowes, which are in strip malls or freestanding. So Sears made a big a big mistake that took 40 years to catch up with them. But it did. Kmart, I think, just stopped investing in their stores. So when Eddie Lampert bought Sears in 2000 and then he bought Kmart in 2005, they were both declining, but both were still pretty good businesses. They had about 3500 stores between the two of them, and there were a lot of opportunities there. They had loyal customers. And, you know, Eddie Lampert came along and said he had a great press agent who said that he was the next Warren Buffett, and he was going to be investing in the businesses and wasn’t going to be a hands-off owner.
And all of that turned out to be absolutely untrue. And his strategy from the very beginning was to pull cash out of that business. It was not to run the businesses. If it had been to run the businesses, we would have seen very different activities. But instead, they kept selling real estate and it wasn’t just real estate. They sold brand names. They stopped investing in their stores. I don’t have the numbers in front of me, but you look at Sears and Kmart's capital expenditure budget versus a target, and it was a fraction of it.
They just weren’t spending any money to keep the stores modern and to keep the stores up to date. And both Kmart and Sears had a lot of old stores that needed a lot of work and they weren’t spending it. This wasn’t just a real estate play to sell off real estate assets. It was to keep spending to a minimum and keep drawing cash out of those businesses that went back to the shareholders of which Lampert was the biggest shareholder. He had 50% of the company and there were all kinds of things.
The example I’ve used several times. Sears owned a regional store called Orchard Hardware on the West Coast, and it was a nice little business. They probably should have never bought it, but they did. And somewhere along the line, they sold it to investors for a modest amount of money. And they took the proceeds from the sale and paid out a dividend to Sears shareholders, of which Lampert got half of it. And then the new owners and Sears was still a minority owner of it 49, I think.
And again, excuse me for not having any exact numbers in front of me, but they then took out a line of credit of about $600 million. And this is my recollection. And again, may not be precise on the numbers. They took that $600 million and issued another special dividend to their shareholders, of which Lampert and ESL holdings, which is his company, got $300 million of it. And Old Orchard now had $600 million in debt that they didn’t have the day before. Within 18 months, old Orchard found for bankruptcy was out of business.
Now again, it was a plan to take cash out of it, to send that cash back to shareholders and not to invest in the business if they’ve taken out to 600 million dollar credit line and invested it in the stores. That would have been one thing, but that’s not what they did. So this is what Lampert kept doing. He sold the big brand names and so the store count kept diminishing. He took their best to store their best performing stores and sold those first because those were the most valuable assets.
And those stores now have targets in them. Or Home Depot. Sears Holdings filed for bankruptcy in 2019. They still had 1800 stores, which is pretty significant. Lampard bought convinced the bankruptcy caught that he was the best choice for keeping the company going, and they came out of bankruptcy in mid-2019 with 400 stores and within a year they were down to 197. And now in 2021. And TransformCo, which is the company that owns Sears and Kmart now does no longer answers questions and talks to anybody about what they’re doing.
They’re a private company, obviously as best as I can tell. And I talk to some other folks who are following it even more closely than I do. There are about 50 stores left between Sears and Kmart. It maybe, I don’t know, 30 Sears stores left and 20 K marts, and that’s it. And they’re just not a player anymore. So it’s a real tragedy. These stores might not have made it under the best of management based on the competition from Amazon and Walmart, but it didn’t have to turn out this way.
They could have played a role…
Sanders: Yeah, I think because I followed the story as well over the years, and the question I always keep having is why didn’t was anyone able to stop it, or was this a case that everyone basically was in favor of it? They knew that they were going to get something out of it, some money. And so they just kind of let it happen.
Shoulberg: Well, again, Lampert controlled the board of directors and the board of directors basically rubber-stamped his plans, and the shareholders were making money. The Sears stock and the first half of the first decade of the 2000s was a great stock to have, and a lot of people made a lot of money on it. And decline started later on in the second decade of the 2000s. But as long as people were making money, that was okay and they weren’t doing anything illegal. I don’t want to say anything like that. All of this was perfectly legal. As the owners of the company, they could do what they wanted. And I think the misunderstanding is anybody who bought into the fact that all of these things were for the benefit of the retail business. I think that’s the flaw is that they were for the benefit of the investors and the owners, and they went to the detriment of ongoing retail businesses. And Lampert tried to sell this. He’s a very charming, compelling guy. I spent a half-hour with him once, and he was amazingly compelling in trying to convince me why all these things were good. And this was a long time ago, you know, you came out of it and said, yeah, okay, I believe in this guy, but it turns out he just had a different mission. And again, perfectly legal. Well within his rights as the owner of the company to do. And a brilliant strategy if your strategy is to make money.
Sanders: A while back, I wrote an article kind of actually comparing Eddie Lampert with President Trump and talking about that. They were both good at BS, kind of spinning a story that was believable but wasn’t true. I mean, they were saying one thing and actually doing another. But what they were saying was so compelling that you wanted to believe them to trust them. And I’m just wondering, is that, did you see any connection there.
Shoulberg: Yeah, I certainly wouldn’t argue with that. They’re both very good, both very good showmen. And Trump convinced 75 million Americans that he was the best choice. So he’s really good at what he does. And Lampert is very good at what he does. Anytime anybody was trying to stop him or fight him, he was steps ahead of them and had it figured out two years down the road. So they’re both very good. And the link between the two of them is that Trump, Secretary of Commerce, Steve Minuchin, Commerce Treasury Treasury, was on the Sears board for a number of years and went to College with Lampert. I’m not saying that there was any tie-in beyond that. But it’s just an interesting little quirk of history.
Sanders: One of the other questions that I have with the role of the media in this. There were stories actually about what was going on. If you read a few, I saw someone like The Washington Post or CNBC or something. I think some of the local Chicago media since that’s where the company was based. But in general, you didn’t hear a whole lot about this story in the media about what was really happening. And I’ve always wondered why, because it seems like the story that you would hear from the general story you would hear from the media is that simply fiercely to keep up with the times.
That wasn’t the whole story. Why do you think that the media, in general, didn’t pick up what was going on with Eddie Lampert?
Shoulberg: Yeah, it’s a great question, you know, up until the last couple of years, you’re absolutely right. He did a great job in getting great press for what he was doing, and the business press bought into it and did not question it. And even when things started to decline and he was blaming Amazon, they bought into that, too. You know, you think about it. Sears began life as a direct to consumer catalog business, and they were in existence, I don’t know, 25 years before they opened their first store. So they had the model in place to continue to transition it from a print catalog to an online business. And instead, they shut the catalog down. I look at JC Penny. Penny did the same thing. Sears wasn’t the only one. JC Penny had a great heritage of selling direct to consumers, and it’s a tragedy that they weren’t able to transition that. Compare that to again. And I know I’ve gotten off tangent and I’ll come back to you in a second. Compare that who I mentioned before, Williams Sonoma, which also had a heritage of selling directly through their catalog.
And they were smart enough to transition that to selling online. And they were brilliant at it. And they still are. Sears and Pennys were not the business press. I think just and the general press just did not do their homework, and it’s disappointing. As a member of the press, it’s not our finest moment. I will sound self-serving, but I have been, but I think I’ve been able to see through the Sears Kmart thing for a very long time, and it infuriated me when other media continued to drink the Kool-Aid and to buy what he was doing. So I don’t know what the answer is, except they just didn’t do their homework.
Sanders: What do you think is the result is going to be the result in retail, of the loss of these two retailers and what Lamport was able to do.
Shoulberg: So first off, the Sears and Kmart names are going to live on in one form or another when the current company actually goes out of business. Somebody will buy the Kmart name and they’ll resurrect it in some form and somebody will buy Sears name and resurrect it in some form. So those brands are going to stick around as retail businesses. They’re already gone with so few stores left. They’re just not a factor at all. And they haven’t been for two or three years. So the damage is already done. There’s no more market share to divide up. Who’s ever already taken it. Whoever was going to take it has already taken it. So certainly Walmart and Target got a big chunk of it calls got some of it. The dollar stores got some of it.
Yeah, the impact has already happened. And I don’t think when they go out with the final whimper, no one’s even going to notice. But they will be sad stories about the demise of these guys and they’ve been dead for years. Just no one’s had the heart to tell them.
Sanders: So when you say that and I do agree, I think the brands will survive in some form. Do you think that would be restarting the business or doing like Montgomery Ward, which has someone bought the name and has a website and all of that?
Shoulberg: Yeah. It’ll probably be the Montgomery Ward model… an online business. They’ll talk about opening stores. You look at Toys R US and somebody bought the intellectual properties and said they were going to start online and they were going to open stores and they did open I think three stores and they were very different models. And whether they would have worked or not, we don’t know because they went under during the pandemic. Somebody will buy them. They’ll talk about stores.
If the store is open, I’ll be shocked and they’ll be online businesses. There’s still a Sears hometown operation, which also Eddie Lampert now owns and they have a couple of hundred stores. And these are kinds of franchises. They’re an odd mix of stuff. And they sell lawnmowers and appliances and some other odds and ends and repair stuff. You know, they’ll stick around for a while. Sears Auto, I think, still has some Viability. Somebody will buy that. I’ve been shocked. He has not been able to sell that so far, but I think so.
We’ll see Sears Auto stores and Kmart probably not, probably as an online business. But don’t be surprised if somebody starts opening dollar format stores under the Kmart name. That’s the scenario. I see if anything’s going to work, it’s going to be something like that. But big 100,000 square foot stores, no.
Who Killed Sears and Kmart Series: