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The Buffett-Lampert Comparison Is Officially Dead

Posted: Dec 03, 2008 09:39 AM by Eric Fox

Tickers in this Article: JCP, KSS, CC, SHLD

Well, it has been awhile since anyone compared Eddie Lampert, the famed hedge fund manager and main shareholder of Sears Holdings (Nasdaq:SHLD), to Warren Buffett. And judging by the latest earnings, we will probably never hear it again.

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The Latest Earnings Bomb
Sears lost $146 million, or $1.16 per diluted share in the third quarter of 2008. This loss included a charge of $101 million ($61 million after tax) due to store closings and asset impairments, and a mark to market hedging gain from Sears Canada. After factoring all of this in, The loss came to 90 cents per share, or $114 million.

The company reported that total domestic comparable store sales declined 9.0%, and it pulled guidance for the fourth quarter, citing the "severe conditions in the economy".

The Resurrection Plan
When Lampert took over Sears several years ago, it was heralded almost as the second coming. Lampert first came into his ownership of Sears through his control of Kmart, which came out of bankruptcy in May 2003. After Lampert took equity in Kmart to replace the debt owned by ESL Investments, his hedge fund, he used it to buy control of Sears in a deal announced in November 2004. This move was much like a traditional Warren Buffett investment; Lampert found a company that was undervalued, then he took a large stake in it to turn around the poorly managed and underfunded business.

The theory was that the combined entity would use its "extraordinary" cash flow to invest in other businesses, and create a network of companies under the Sears umbrella. The company would also monetize much of its real estate to generate cash. (To learn what Lampert should have done, check out Warren Buffett: How He Does it.)

Not So Fast
Unfortunately, for Sears Holdings shareholders, nothing has gone as planned. Sears has bought nothing in four years and instead spent $4.9 billion to buy back 41.4 million shares since March 2005. The average cost is $118.36 per share, compared to a current price of around $36. As for the plan to monetize its real estate ... let's just say that would be difficult given the current market environment and credit crunch.

Most of what is happening is not the fault of Lampert. We are in an extraordinary economic environment where retailers are bearing the brunt of the consumer spending slowdown. Sears competitors are also doing terribly. Kohl's (NYSE:KSS) reported that same store sales fell 9% in October, and J.C. Penney (NYSE:JCP) reported a drop of 13%. Many retailers like Circuit City (NYSE:CCTYQ) have filed for bankruptcy.

Bottom Line
The financial crisis and recession have been underway for quite some time. The National Bureau of Economic Research stated on Monday that the U.S. has been in a recession since December of 2007. Sears should have cut back on the repurchases and used the cash to de-lever its balance sheet. That's what Buffett would have done.

To evaluate individual retail companies, check out The Industry Handbook: The Retailing Industry and Analyzing Retail Stocks.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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