It’s never a good sign when investors ask for their money back, which is exactly what has happened to the hedge fund ESL Investments Inc., run by Sears CEO Eddie Lampert.
A group of investors largely comprised of large institutions all participated in a 2007 deal brokered by Goldman Sachs which raised a whopping $3.5 billion in capital. The redemption requests were issued just in advance of the expiration of a five-year period that insulated that money from being withdrawn. The funds will be distributed gradually in several different forms, including stock in other investments. Lampert’s hedge fund still houses more than $2.5 billion.
At the time the money was originally invested, ESL was renowned for its consistent success, enjoying annualized returns that topped 20 percent for more than twenty consecutive years, often bettering the S&P500 stock index.
However, the success of ESL is intricately bound up with the fortunes of Sears ever since Lampert took over as CEO of the struggling retailer. ESL is the biggest holder of Sears stock and has suffered from its spiraling decline. Since 2007, Sears’ shares have lost well over half of their market value.
Sears has persistently underperformed since Lampert ascended to its top post. For the third quarter, Sears reported an eye-opening loss of $534 million, or $5.03 per share, an increase from last year’s loss of $498 million, or $4.70 per share. Furthermore, revenue fell 6.6% to $8.27 billion. Net profits dropped a staggering 46.4%. Domestic same-store sales were down 3.1% with K-Mart posting a 2.1% dip.
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Sear has tried to stanch the bleeding by cutting costs, reducing overhung inventory and selling off assets. In the last fiscal year, this strategy has decreased its net debt by $400 million and raised $1.8 billion in new cash.
Sears is also considering selling Lands’ End, historically a reliably strong performer. This is an extension of Sears’ controversial strategy to sell off some its best performing stores for the purpose of raising as much capital as possible. Sears is crunched for cash and may be expecting a need for more after what many anticipate will be a disappointing holiday shopping season.
Over the last eighteen months, Sears has sold almost a dozen stores in the US and Canada, some of them admittedly among their best money makers. Some have noted that this an unconventional strategy since retailers typically invest more money into their top performing locations, rather than unload them. Robert Futterman, chief executive of RFK, a realtor which specializes in leases to retailers, said, “Retailers invest in their best stores and refurbish them, they don’t sell them.”
Given that Sears has wrestled with liquidity problems, it remains unclear how precisely the return of ESL investment dollars will affect the company’s future. Just recently, Sears secured term loan of $1 billion in order to refinance already existing debt.
The loan replaces Sears’ existing $3.275 billion asset-based credit line. A spokesperson from the ailing retailer said that the loan will be secured by the same collateral already in place.