Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Sears Chairman Eddie Lampert could use a dose of his own medicine. 

On Thursday, the reclusive hedge fund manager released his annual letter to shareholders, in which he whined about how unfair it was that traditional retailers such as Sears are held to different standards than West Coast startups. He highlighted Uber's ability to raise almost unlimited capital, Amazon's historical evasion of sales tax, and Tesla's acceptance of government subsidies.

"What are the implications for older companies that are held to a very different standard when it comes to profitability and regulation?" he wrote, following the company's $580 million loss -- its 23rd consecutive quarterly loss

Cry me a river, Eddie. 

Lampert has written about 63,000 words' worth of shareholder letters since 2005, when he took over what was once America's biggest retailer and began writing annually about what he calls Sears' transformation. The letters provide a rare view into what the heck Lampert is thinking, as he rarely speaks to the media (besides a 2004 BusinessWeek cover story proclaiming him the next Warren Buffett) and certainly doesn't talk to Wall Street analysts, who have all but given up coverage of the company altogether. 

But it's that first shareholder letter he wrote that I'd remind Lampert of today. He closed it with a line that began: "Of course, the proof is in the performance." 

Seared Profits
Sears shares have declined by nearly 80 percent since Eddie Lampert became board chairman
Source: Bloomberg

So let's go back to 2006 -- shortly after Lampert orchestrated the merger of Sears and K-Mart and took the reins of the newly formed Sears Holdings. At the time, Sears' enterprise value stood at $22 billion, it took in $49 billion in annual revenue and made $2.2 billion in cash from operations. Today, its enterprise value is around $4 billion, and it's been five years since the company reported a profit.

By any financial measure -- sales, profit, cash flow -- Lampert has done nothing but rip apart the retailer. He's also saddled it with a lot of debt, tapping $5 billion in two years from capital raises and asset sales. He's sold off divisions such as Lands End and Sears Canada and spun off the bulk of the company's best properties into a real estate investment trust. He used all of that money to fund the operations of a company that continues to bleed cash.

Undressed
Sears hasn't posted a profit since 2011
Source: Bloomberg

Lampert extols the retailer's mobile sales growth and "Shop Your Way" membership program. But even he admitted in this year's shareholder letter that, despite investment in transforming the company into a more digital retailer, it still makes the bulk of its money from its stores -- a quickly declining proposition. 

So now the company is running out of assets to sell; its auto centers and brand names such as Kenmore and Craftsman are likely the next to go. And its ability to borrow money is drying up, starting in April, when it will lose $1.3 billion in revolving credit availability, according to Bloomberg Intelligence analyst Noel Hebert. The company is burning through cash so fast, a number of analysts surveyed by Gadfly give Sears about two years before it's forced to fold.

Even shareholder Horizon Kinetics recently told clients its investment thesis includes the possibility of Sears going out of business, and it believes Sears' real estate and leases are worth more than the market cap of the company, anyway. 

Lampert has a lot of money tied up in Sears and stands to suffer if it goes bust. But that's not to say he hasn't made money himself. In addition to any salary or profits he may have taken over the years, Lampert's hedge fund, ESL Investments, has retained a 48 percent stake in Sears Canada, a 50 percent stake in Lands End, and a 43.5 percent of Seritage's operating partnership, according to Hebert's research. ESL has also made numerous loans to Sears, collecting loan payments along the way. This also means that, even if Sears does go bankrupt, Lampert may notch a few wins, as many of the loans ESL has made to Sears have been backed by valuable real estate and other assets that serve as collateral. 

Fairholme Capital Management CIO Bruce Berkowitz, Sears' largest outside shareholder, may finally feel a sense of urgency. A Sears investor for more than a decade, he recently signaled a more active role at Sears in a December filing with the SEC. On Thursday, he was given a board seat at Sears. 

Meanwhile, Lampert in his 2016 letter promised to accelerate efforts to turn around the company and pledged to stop letting operating losses "erode the asset value of the company." But the proof will continue to be in the performance. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net