It's pretty safe to say hedge-fund manager Edward "Eddie" Lampert has gotten far more headaches than he bargained for in 2005 when he bought a major stake in what has since become Sears Holdings (Nasdaq: SHLD).
Back then, he promised a more profitable company and more growth. He's subsequently delivered 18 consecutive quarters of declining year-over-year sales and managed to turn a reasonably profitable company into one with growing losses.
Oh, and there's no end in sight to the widening losing streak.
What happened to this American retail icon? To answer the question meaningfully, we have to go back to Lampert's beginnings.
Hedge fund pro turns retail wizard… or maybe it was just luck
By most accounts, 49-year-old Eddie Lampert started on the right foot. He formed his hedge fund, ESL Investments, in 1988 with the intention of following in the value footsteps of Warren Buffett. And for a while, he did it quite well, using Buffett's model and boasting of average annual gains of nearly 30% for the first several years of the fund's existence.
It wasn't until 2003, however, that Lampert forever cemented his name into investors' memories with an amazing retailer turnaround story.
Though K-Mart was technically coming out of bankruptcy proceedings at the time, the market had pretty much assumed the worst, even if there was still going to be a semblance of a company left when it was all said and done.
But contrary to what most thought, Lampert didn't see the remainder of K-Mart in a pessimistic light. He saw a company with an established name in the discount retail business that had 1,500 stores. Most important, he saw an opportunity to acquire a cheap stock that owned 1,500 pieces of prime real estate.
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He paid just under $1 billion for a big chunk of the reorganized outfit -- real estate and all -- worked some magic, and ended up selling 68 of the company's stores to Home Depot (NYSE: HD) for $850 million... almost what he had paid for the entire company just a few months earlier.
His stake in the remaining 1,400-plus stores was valued at $2.5 billion by the end of 2004.
The revamped K-Mart became such a reliable cash flow producer ($17.1 billion in revenue in 2003 alone), it largely funded the acquisition of a majority stake in Sears in late 2004. The combined companies became the Sears Holdings we know today.
Unfortunately, the magic Lampert worked with K-Mart hasn't worked with Sears at all.
This isn't a K-Mart redux
Despite promises of synergy between the two companies, few have been realized. And despite promises of cost-cutting its way to greater profits, Lampert's stinginess with capital expenditures has ultimately led to falling sales and increasingly-frequent dips into the red ink. Per-share earnings of $9.00 in fiscal 2007 have turned into a per-share loss of $4.69 in fiscal 2012. The company is expected to lose $4.56 per share this fiscal year.