Last week, shares of Sears (SHLD) rose over 7% as news about a possible sale of its parts-appliance brand Kenmore was initiated. The potential acquisition of the business is led by Eddie Lampert and ESL Investments Inc., a hedge fund based out of Greenwich, Connecticut. Eddie Lampert is both the CEO of Sears Holdings Corp. and ESL Investments Inc.—named after Lampert’s initials. Sears is down roughly 77% year-to-date with their revenue and market share declining rapidly as their debt increases. Sears has been weighing its options for this part of the business for about two years but have been unsuccessful in finding a buyer, and the risk of defaulting and bankruptcy looms the retailer. CEO Lampert will recuse himself from the board as the Sears board members acknowledge and carefully review the billionaire’s offer.
Regardless of Lampert’s connection with the retailer, Sears in is need of large injections of capital to sustain its business. Sears is estimated to be losing $1 billion in cash a year, and its sales continue to decline. The retailer also has billions in debt as analysts warn that the company is at risk of defaulting. The letter of proposal by ESL Investments Inc. values Sears’ Home Improvement and Parts Direct businesses at nearly $500 million. The sale of the business and its assets will minimize the pressures and help the retailer stay afloat for the time being. On top of the buying the widely popular home improvement products of Kenmore, ESL Investments Inc. has also opened doors about purchasing Sears’ real estate—estimated around $1.2 billion of debt. This marks another occasion where Lampert is often on both sides of the deal. Mr. Lampert, on top of serving as Sears’ chairman and CEO and largest investor and lender, is also a chairman of Seritage Growth Properties. Seritage is among Sears’ biggest landlords. Mr. Lampert was previously involved in a lawsuit, in which shareholders claimed that there had not been an independent, fair valuation when Mr. Lampert sold around $3 billion worth of properties to Seritage. Although these efforts are advantageous to Sears, respectively, many criticize Mr. Lampert’s ties to the retailer and strategy. So far, Mr. Lampert’s strategy on scaling back is ineffective as Sears has avoided bankruptcy by extending its credit and as it closed its last location in Chicago. Furthermore, there is also the argument that the sell-off of Kenmore will further weaken the retailer by giving shoppers less reason to visit. Nonetheless, Eddie Lampert is not letting the historical retailer deteriorate without a fight.
Mr. Lampert’s loyalty to Sears can be a substantial loss to his hedge fund and his integrity, but he is confident in the retailer’s value. Sears is one of many retail stores that have been enduring significant losses in market share and revenue due to changes in consumer preference and e-commerce giants. Sears’ survival is questionable, but acceptance of the proposed deal will ensure some more time and less pressure on debt obligations. Many companies, especially smaller sized businesses, do not have the luxury and financial support as Sears, so businesses risking defaults and bankruptcy need to carefully and strategically weigh out its options. It is necessary to assess and restructure its operations, cut down costs, and reevaluate strategy (i.e., identify which products are worth selling and which are not) to receive a credit line to stay afloat.