The Producers

In 2011, I was consulting for the retailer Sears on their pricing strategy as part of my work for The Greatest Good . I distinctly recall a side conversation that I had with a senior manager, who explained why he was there.

"It's an interesting time to be at Sears," he said, "we're a failing company, so there's license to take bold bets."

And, indeed, it was failing. It seemed that the internet era caught the company by surprise. That was puzzling, considering that the catalog + mail order model that Sears perfected was tailor-made to take advantage of an online world.

In 1975 Sears was a powerhouse. It embodied American capitalism and accounted for 43% of all department store sales. As of writing this, Sears has declared bankruptcy and their stock is trading at less than ten cents.

So what happened?

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It starts with another retailer: KMart. In 2004 KMart declared bankruptcy. Eddie Lampert, a Goldman-pedigreed hedge fund manager, instructed his fund ESL Investments to take a 53% stake in the retailer. That stake only cost $1B, but for good reason. KMart’s stores were dated and its systems were old. Like many other retailers, KMart was struggling to deal with urbanization and the rise of the internet.

Lampert instructed KMart to borrow heavily under the pretext of modernizing formats and building digital capabilities. The money was never used for that, though. Lampert used those funds to acquire a controlling share of Sears for $11B. The combined entity was rebranded Sears Holding Company (SHC), and Sears gave up its single-letter ticker S (sold to Sprint) and began trading as SHLD. Lampert owned a significant majority share.

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To understand the next part, here’s a quick reminder of corporate finance basics:

• The management of a company has a fiduciary responsibility to shareholders (who own its stock), but not to debtors (like banks, who lend it money).
• This "flips" in if a company goes into bankruptcy. In that case, the remaining assets are liquidated, and debtors (e.g., banks) get paid before shareholders (hedge funds that own shares).
• So in short: when KMart borrowed money, if the investment in Sears didn’t pay off and the company tanked, then a bankruptcy court would sell off the assets and repay the banks with the value that’s left.

But what if you can siphon off the value so that there's no money left once that "flip" happens?

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Once KMart had a controlling share of Sears, Lampert and ESL Investments doubled down on their strategy by borrowing yet again from banks. They used the same pretext - they wanted to renovate the Sears stores & build digital capabilities.

Lampert then proceeded to orchestrate a remarkable deception. His goal was to maintain the appearance that the company was in good standing, all the while selling off anything of value and distributing that value to shareholders through dividends. He plundered all of the crown jewels: he sold Land’s End; he spun off the real estate holdings into an entity called Seritage (acquired by Lampert’s ESL fund for a low price); he sold off legendary brands like Craftsman tools. Every time he sold an asset, he distributed the proceedings to all of the shareholders.

But Eddie was the largest shareholder. So to put it simply - he sold the brand Land's End and then paid himself with the proceeds.

At the same time, it was critical to keep the appearance of good financial standing to avoid that "flip" that would move control over to the banks. How did they do that? First, they closed a bunch of stores. This reduced costs. The problem was this hobbled the only way of booking more revenue in the future. So the second trick was to project high revenue (that never materialized). Annually, Lampert gave top-down orders on predicted revenue. Any difference between the reasonable good-faith estimations and his orders was booked as “unidentified initiatives” or “go-gets” (as in, someone, somewhere in the company was expected to “go get” that revenue).

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This is where I had a brief part to play. In 2011 I was working for The Greatest Good , a now defunct consulting firm led by brilliant economists. Our biggest client was Sears. We had multiple long-term engagements with them. We performed clever analysis to identify ideal pricing schemes, and set up test and control stores to show the results experimentally. Being economists, we snootily looked down on the mandate to focus on revenue, and instead optimized for profit. Being novices at corporate politics, we made every mistake in the book. We created slides that showed that “our” performance was better than “their” performance.

Naturally, our firm was unpopular at Sears both at the leadership level and among mid-level management. Despite good results, the political will to deal with us eventually dried up, and we were fired. There’s a leadership lesson here about arrogance and inexperience (ours). But yes, in retrospect we were one of the “unidentified initiatives” that was used to justify unreasonable revenue projections. We could have stuck around and made a killing in consulting fees by being a little nicer and a little less clever (story of my early twenties).

We thought Sears was in bad shape then (a teammate who’d left the company for business school sent an image of a Sears recruiting flyer with the slogan: "are you ready to be part of retail history?" We hung it on the wall). However, we had no idea what was to come.

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After progressively selling off pieces of the company, Lampert was ready to show his hand. In 2018, Sears declared bankruptcy and revealed that the once-great institution had virtually no value-generating assets left. The debtors (who gain control once the "flip" happens and the entity goes into bankruptcy) sued to require management to sell off remaining assets piecemeal so as to maximize value. They lost in bankruptcy court, and Lampert sold SHC to the evil-sounding Transform Holdco LLC for $5.2B. You might have guessed it - Transform Holdco is owned by ESL Investments. Eddie ransacked Sears, then bought the leftover parts for pennies on the dollar.

As a final indignity, when ESL acquired the remaining assets, they declared that they would not pay out the pensions to Sears employees. Legally, if the $2.3B pension plan defaults, a federal corporation called the Pension Benefit Guaranty Corporation (PBGC, which has a $500M budget), would be on the hook to pay out the benefits. Paying that out would require allocating taxpayer money from other initiatives. In a normal world, the PBGC would sue ESL Investments to force them to pay out the pensions. When this happened in 2019, however, the PBGC reports to the treasury department, whose head, Steven Mnuchin, is on the board of ESL. Womp womp.

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Sears once built the tallest building in the world (for those Chicago loyalists it will never be Willis). The combined effort of thousands of lifetimes was poured into creating an organization that lasted a hundred years. Now that organization is a memory.

Eddie Lampert is a petty thief. He stole from banks, from his employees, and from taxpayers. He stole from me a year of my time. I worked long hours, I contributed some of the best ideas I’ll ever have, and I really cared. I gave the best of myself and that furthered the machinations of a petty thief.

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I’m angry, but I don’t regret it.?

I didn’t see the pattern then, and I’m not sure I would have had the courage to do anything differently even if I had. And perhaps that is what I learn from this. The long lens of history will surely judge us, but in ways that are impossible to predict. I’m still proud of the work we did; of the relationships I built; of how I learned and grew. I cherish the memories of mistakes, of feeling “in the trenches,” of stretching myself.

You can steal my output, Eddie, but you can never take my experience.

Disclaimer: this is my opinion based on court documents . It is not intended as a statement of facts.