Inside Sears' Death Spiral: How an Iconic American Brand Has Been Driven to the Edge of Bankruptcy
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Inside Sears' death spiral: How an iconic American brand has been driven to the edge of bankruptcy HAYLEY PETERSON JAN. 8, 2017, 8:41 AM Seph Lawless; Skye Gould/Business Insider One morning in late 2015, on Sears' vast Illinois campus, more than a dozen employees huddled in a videoconference room on a floor dubbed "B6." There, two mid-level employees were preparing a presentation for the CEO, Eddie Lampert, when their boss rushed in with some last-minute advice. On a chart pad he wrote three words. "He looks at the presenters and says, 'Do not say these words to that guy,'" according to a former Sears executive who described the meeting to Business Insider. "That guy" meant Lampert, who would soon appear on a giant projector screen at the front of the room, beamed in live from a home office inside a $38 million Florida estate — 1,400 miles away from headquarters. The pad with the three words was out of sight of Lampert's video feed. One of the words on it was "consumer." The stakes were high. If any of those words were uttered in front of Lampert, the two presenters would "get shredded" by the CEO, whose frequent tirades had fostered a climate of fear among the company's most senior managers, said another person — this one a former vice president. These two and other executives say "consumer" can trigger Lampert. He wants employees to instead refer to shoppers as "members," which is his term for customers who are enrolled in Sears' Shop Your Way rewards program. It was at that moment, as the executive attending the meeting watched fellow employees anxiously censor themselves in front of Lampert, that he realized he needed to flee the sinking 123-year-old company. Sears is in trouble Lampert, a former Wall Street prodigy, took control of Sears more than a decade ago and became its CEO in 2013. But he's rarely seen in the office, typically visiting about once a year for the shareholder meeting and projecting into videoconference rooms at Sears' Hoffman Estates, Illinois, headquarters the rest of the time, according to interviews with employees. He prefers to stay on Indian Creek Island, off the coast of Miami, behind a desk dressed up with the Sears logo. The island has been dubbed the "billionaire bunker," partly because of a private police force that protects the island's 86 residents. "The only way you see Eddie is through a screen," one former executive told Business Insider. "We used to joke about who had to go upstairs to get Sears CEO Eddie Lampert. fixed and see Oz." Lampert's physical absence might be better received Reuters if Sears, which also owns Kmart, was in better shape. But the retailer, famous for selling everything from shoes to vacuum cleaners to whole houses, is facing its biggest crisis ever. It's closing hundreds of stores. Others are in shambles, with leaking ceilings and broken escalators. In some, employees hang bedsheets to shield shoppers from sections that stand empty. Lampert, a billionaire, is trying to keep Sears afloat. He has provided up to $1 billion in financing to help keep it in operation. Business Insider Business Insider spoke with more than a dozen employees, ranging from store clerks to senior executives, about the unraveling of Sears. Many spoke on the condition that they not be identified for fear of legal retribution from Lampert and Sears, including one person who specified that she would only speak off the record upon the advice of an attorney. Some said they had signed nondisclosure forms barring them from sharing information about the company. The content of this article was described in detail to two Sears spokesmen, both of whom declined to comment when asked. Requests to interview Lampert were also declined. The employees who spoke to Business Insider describe an internal mess with a revolving door of executives and low morale. Senior executives say Lampert has cut investments in stores because he's trying to turn it into a tech company that collects and sells customer data through the Shop Your Way program. In the past, Lampert has defended his strategy, saying he intends to turn Sears into a more "asset-light" organization, but one that would still include physical stores. He denies widespread claims that he's stripping the company of all its most valuable properties and brands and hastening its bankruptcy. At the same time, he has executed a series of real-estate and financial transactions to help prop up Sears. While the failure of the company could certainly wipe out his hedge fund's investment in the stock, these deals have set Lampert up to benefit in other ways, creating a conflict of interest, a shareholder lawsuit claims. A Kmart in Hillsboro, Ohio, uses white sheets to hide empty store space. Mark Schmidt Failure is a near certainty, according to industry watchers. Analysts are expecting Sears to file for bankruptcy within the next two years, and perhaps much sooner. Former and current Sears staff members who spoke to Business Insider put the blame squarely on Lampert for destroying the iconic American brand. The next Warren Buffett Lampert, 54, has the pedigree of a Wall Street blue blood. He graduated from Yale, worked at Goldman Sachs, and started his own hedge fund, ESL Investments, when he was 26. He was a celebrated investor for much of his three-decade career. ESL generated annualized returns of more than 20% a year for 20 years, marking one of the strongest long-term investment records in history, according to a 2013 Wall Street Journal article. In 2004, BusinessWeek (now Bloomberg Businessweek) asked if Lampert was the next Warren Buffett. But Lampert's career before Sears' downfall was not without drama. Most notably, on a January evening in 2003, as Lampert was walking to his car from his office in Greenwich, Connecticut, four people grabbed him, shoved him into a rented SUV, and took him to a cheap motel, where he was held captive for 28 hours, according to The Journal. The ever private Lampert has never spoken about the incident publicly. At the time of the kidnapping, Lampert was hammering out the final details of a deal to acquire the discount retailer Kmart out of bankruptcy. Then in 2005, he combined it with Sears to create Sears Holdings in what was, at the time, the largest retail merger ever. ESL, which has long been one of Sears' largest shareholders, now owns about half of the company with Lampert. About a year after the deal to create Sears Holdings closed, Lampert described the company — which included more than 3,000 Sears and Kmart stores — as a "$55 billion-revenue, 350,000-person startup." "My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come," Lampert, then just chairman of the company, told shareholders in a March 2006 letter. He has publicly compared Sears' strategy to Apple's and Microsoft's, and in his most recent letter to shareholders, he said that Sears is trying to meet new customer needs like Uber, Amazon, and Tesla are doing. Sears is facing more scrutiny from Wall Street than those companies, however, because of the sheer fact that it's a retail company, he said. "In an environment where new companies like Uber can raise almost unlimited capital, what are the implications for older companies that are held to a very different standard when it comes to profitability and regulation?" Lampert wrote. A hard look at the numbers shows that Sears Holdings looks nothing like a fast-growing tech company. In the near term, Sears must raise about $1.5 billion to stay in business through 2017, Eddie Lampert's home on Indian Creek Island. according to Moody's. Bing Maps Skye Gould How Sears would raise that money "remains unclear," according to Kirk Ludtke, an analyst at Cowen & Co. "But we suspect that it involves the closure of a significant number of unprofitable stores," he recently wrote. The company is doing just that. It announced in the last week that it's closing 150 Sears and Kmart stores, or roughly 10% of its store base, in early 2017. Sears has arranged a deal to sell its iconic Craftsman brand to Stanley Black & Decker for about $900 million, which includes a cash payment of $525 million in the near term and another $250 million in three years, as well as ongoing payments of a percentage of Craftsman sales. The company is also looking for buyers for its Kenmore and DieHard brands. And Lampert has been lending the company money to pay off debt and keep it afloat. Within the last two weeks, ESL has promised Sears up to $1 billion in loans and letters of credit, in addition to a $300 million cash infusion in the second quarter. ESL has suffered, too; its assets are down to $2.8 billion from $18 billion in 2007, according to a March 2016 regulatory filing. Traditional big-box retailers have been hit hard by the rise of online shopping and falling foot traffic in shopping malls. But current and former workers say Sears' problems have more to do with Lampert's management and strategies than the larger industry changes. 'He would find a hole in the data and then explode' The videoconference room where employees meet, virtually, with Lampert has become infamous for the shouting matches that happen inside. The first time a new Sears vice president strolled into the room, two years ago, he found top managers sitting around a table, burying their faces in computers.