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Investor with big stakes plans to drive turnaround
When Alan Lacy took charge at Sears, Roebuck and Co. four years ago, he called his top executives to a meeting to talk strategy.
A series of slides laid out Sears' plight--falling sales, a drooping stock price, ineffective marketing and high costs. Then Lacy laid out his turnaround plan.
"We will act," said one of the slides Lacy used at that meeting. "This will take time. But we don't have time."
Time just ran out for the Lacy-led turnaround effort at Sears. From this point forward, it's Eddie Lampert's show, with Lacy cast in a supporting role.
By engineering the $11 billion merger of two of his biggest investments--Sears and Kmart--42-year-old finance whiz Lampert has made a move to turn those investments into winners.
It's no sure thing. Not by a longshot. Even Lampert admits it won't all go smoothly. But he says that his big ownership stake in the combined companies should buy him the time he needs to do it right. Lampert will be the company's chairman, Lacy its CEO.
"We understand the potential for the combination. We're going to manage the potential, and we're not going to try to generate sort of steady progress," Lampert said Wednesday. "It's going to be probably lumpy progress over time."
Mergers are not easy under the best of circumstances. But taking two struggling retailers and taking on Wal-Mart Stores Inc. and Target Corp. makes that challenge even more difficult.
"The question is, are you putting the blind and the lame together? Or are you putting together two companies that can benefit from the synergies of the two," says Robert Miller, a principal at New York's Miller Mathes restructuring consultancy. "It's hard enough to take one company and fix it. Now you've got to take two companies and fix them both together. It's a real challenge."
In the entire, unsettled situation, perhaps only one piece is crystal clear: Eddie Lampert is in charge now.
It was Lampert who opened talks with Lacy this summer, just as Sears negotiated with Lampert over the purchase of up to 61 Kmart stores for $621 million. It is Lampert who, as Sears' largest outside shareholder, has been a booster and sounding board to Lacy since Lacy took charge at Sears. It is Lampert who controls Kmart and just put a new chief executive there, former PepsiCo executive Aylwin Lewis.
And it is Lampert, a former Wall Street arbitrage investor with no experience running any company other than his own ESL Investments Inc. private investment fund, who now is taking on perhaps the toughest challenge in retailing.
Turning around Sears has proven the undoing of many an experienced retailer. Longtime chief executive Ed Brennan could not do it during the 1980s. The flashier Arthur Martinez seemed briefly to have found the magic with his famed "Softer Side of Sears" marketing during the 1990s. But that flickered out.
Lacy has tried, with little success, since the century turned.
Now it's Lampert's turn. Lacy will retain the title of chief executive. But it's clear that the major strategic and financial shots will be made by the Yale-educated former arbitrage trader from Greenwich, Conn.
This will be the biggest test of Lampert's so-far-unblemished career. Little known outside financial circles until recently, Lampert made headlines in 2003 when he was kidnapped but talked his captors into releasing him before they could obtain a $1 million ransom.
Suddenly Lampert is the "It Guy" of Wall Street. He appears on Business Week's cover this week--in a story that unblushingly compares him to superinvestor Warren E. Buffett.
The comparison is strained. While both men started with relatively minor stakes and built them into fortunes, Buffett has shown his acumen again and again, from the Geico insurance company to the Washington Post Co., to the Salomon Bros. brokerage to the Coca-Cola Co. He has shown a remarkable 25 percent annual return, on average, over a 40-year investment career.
Lampert has shown a 39 percent return at ESL, which he formed in 1988. But except for a stake in the telecom company MCI, he has stuck almost exclusively to retail. AutoZone Inc. and AutoNation Inc. are his two other big investments.
The Sears-Kmart deal will determine whether Lampert ultimately is perceived as a dynamo or a dilettante. And as he plays out his big move, Lampert so far seems set to rely on Lacy.
There are bigger names out there. Vanessa Castagna, the woman widely credited for a turnaround at J.C. Penney, is believed to be available since she was passed over for Penneys' top job last month.
But Lampert has a history with Lacy. He backed Lacy's decision last year to sell Sears' profitable credit card operation for a $6 billion gain--a deal that helped boost the value of Lampert's Sears holdings because some of the proceeds funded a big stock buyback. And Lacy paid a full price for the Kmart properties Lampert unloaded on Sears earlier this year.
To turn the Sears deal into a success will require better execution than Lacy has so far shown.
Focus on refurbishing
As chief executive, Lacy has focused on refurbishing Sears' stores and fixing its image. He has come up with a new concept to position against Wal-Mart, the superlarge "Sears Grand" stores, but opened only fourso far. Frequent changes in the executive suite, a lack of merchandising flair and inexplicable foul-ups in putting inventory on the shelves have marred his record.
Lacy's biggest acquisition, the $2 billion purchase of Lands' End in 2002, has turned in mixed results. Lacy boasts that sales of Lands' End products have grown 20 percent since the deal, but sales from its traditional catalog and Internet channels have gone soft, and the success in the stores may have undermined Lacy's launch of Sears' brand-name Covington line.
The son of a small-town Tennessee merchant, Lacy has spent most of his career as a finance executive, first at Kraft before he came to Sears. But his facility with numbers has not helped Lacy with simple financial projections, such as his still-unfulfilled promise to deliver steady growth in the retail industry's most-watched measure--sales at stores open more than a year.
In Kmart, Lacy and Lampert will be dealing with a team that is not well known. Lampert hired Kmart's new CEO, Aylwin Lewis, early last month. Lewis is a former PepsiCo executive who helped run Pizza Hut and other restaurant operations.
Much has been made of Kmart's deft departure from bankruptcy, after shedding 600 stores and cutting some 66,000 jobs. But same-store sales still are stuck in negative territory.
But those stores may not stay Kmart's for long.
Lampert says he got thinking about the deal just as he was selling the Kmart store locations to Sears and Home Depot this summer. He didn't like seeing stores that earned $1 million a year go to a new owner who might earn $3 million a year--with none of it going to Lampert.
"The attraction, from my standpoint, comes from the fact that we have a combination here that would make each company better," Lampert said.
In its early years, Sears became the world's largest retailer by serving needs that customers barely knew they had. Sears virtually invented catalog shopping, and helped create the store credit card. Sears stores anchored America's move to the malls that began in the 1950s.
Even its false starts--such as the stocks-and-socks approach that saw it own the Allstate Insurance Co. and Dean Witter brokerage at one point--proved a boon. Sears investors benefited when it unloaded the insurer and the brokerage.
Now Sears is trying to refashion retailing one more time. It is hoping to show that an old-line retailer built on a foundation of mall-based stores can revise itself to compete with two of the sleekest, most efficient companies on the planet.
If Eddie Lampert can succeed at that, he will earn the accolades that have already come his way.