“THEY COULD HAVE MADE A DIFFERENT DECISION”: INSIDE THE STRANGE ODYSSEY OF HEDGE-FUND KING EDDIE LAMPERT
(Vanity Fair) -- In 2003, many were skeptical when Lampert married Sears to Kmart. Now, with hundreds of stores closed and thousands thrown out of work, Lampert defends his strategies in his first in-depth interview in 15 years. The author also tracks down the man who kidnapped Lampert before the Kmart deal went through.
Few people on Wall Street are as polarizing as Eddie Lampert, the billionaire majority shareholder of Sears and Kmart. His friends say he is reticent, while his critics find him aloof. His pals talk about his very high standards, while some observers say he is condescending, overly critical, and disengaged. Some people praise his determination and persistence, while others see only inexplicable stubbornness in sticking to failed ideas. “His critics will say he’s not really a team guy. He is a team guy,” insists Lampert’s close friend David “Tiger” Williams, a well-known Wall Street trader. “The Eddie I know works incessantly because he’s a ‘figure-it-out guy.’ ”
Williams believes that Lampert is a target for criticism because he is “a very shy person” and avoids the public eye. But Mark Cohen, who was C.E.O. of Sears Canada from 2001 to 2004, and now is a professor at Columbia Business School, says that Lampert is “the wizard behind the curtain, managing the business from Florida or Connecticut or aboard his yacht” via teleconference and taking from the company all he can. While admitting he runs the company primarily from Florida, Lampert counters that he has put a fortune of his own money into the business. Cohen responds that Lampert’s money is collateralized against hard assets, of which Lampert will take control if the company defaults on the loans. (A spokesperson for Lampert says that can happen only if Lampert is the highest bidder, and the purchase is approved by the bankruptcy court, “generally speaking.”)
Once a wunderkind, who at 25 established his own hedge fund, ESL, Lampert is 55 now and celebrating the silver anniversary of managing his own money and that of a few select billionaires, such as entertainment mogul David Geffen, Michael Dell, Thomas Tisch, and the Ziff publishing family. He has had legendary successes, such as his investment in AutoZone, the auto-parts retailer, in which he made a profit of around $750 million, at least 20 times his investment, and AutoNation, the car dealership, from which he has made $1.5 billion (and in which he still owns a large stake). He has also made winners out of Honeywell, Saatchi & Saatchi, and Liz Claiborne Inc.
But today those triumphs are largely obscured by his worst mistake: the 2005 merging of Sears, the iconic retailer whose doorstop mail-order catalogue was once a fixture in nearly every American home, with the downmarket Kmart chain, which he had brought out of bankruptcy in 2003. Twelve years on, this blundering into retail has made him a poster boy for what some people think is wrong with Wall Street and, in particular, hedge funds. Under his management the number of Sears and Kmart stores nationwide has shrunk to 1,207 from 5,670 at its peak, in the 2000s, and at least 200,000 Sears and Kmart employees have been thrown out of work. The pension fund, for retired Sears employees, is underfunded by around $1.6 billion, and both Lampert and Sears are being sued for investing employees’ retirement money in Sears stock, when the top brass allegedly knew it was a terrible investment. (Lampert’s spokesperson responds, “ESL never encouraged anybody to invest in Sears Holdings stock. The associate stock-purchase plan began in 2006. It was perceived to be an effective employee retention and incentive tool.”)
In 2013, Lampert, who was chairman of the board, had himself named C.E.O. of Sears Holdings, as the combined company is known. He’s had a rough four years since then. The company has suffered some $10.4 billion in losses and a revenue decline of 47 percent, to $22 billion. Those stores that remain open are often shabby, with minimal inventory and few customers. A year ago the company admitted, for the first time, that there was some risk of its ability to continue as “a going-concern,” a technical accounting term that sent shudders through the ranks of Sears’s employees, vendors, and creditors, because it is often a precursor to a bankruptcy filing.
On July 20, Lampert announced that Sears would allow its Kenmore appliances—one of the store’s most profitable brands, formerly sold exclusively in Kmart and Sears outlets—to be sold on Amazon. On his Sears blog, Lampert called it a “game-changing agreement.” But critics branded it as just the latest example of Lampert’s selling off the company’s assets in a desperate attempt to stave off the inevitable. “We suspect this is a move to beautify the Kenmore brand for divestiture and help alleviate some pressure, temporarily, of Sears as a going-concern,” Bill Dreher, an analyst at Susquehanna International Group, wrote his clients.
The vultures are circling, waiting for Lampert to throw in the towel so they can try to make money by buying Sears’s discounted debt. But Lampert continues to claim that’s not going to happen if he can help it.
The spate of negative media coverage and the dire predictions of Wall Street investors might explain why Lampert, generally regarded as reclusive, agreed to sit with me for an interview, in what his spokesperson calls his first “one-on-one first-person interview in several years,” which I calculate to be 15. (In May, Lampert did a short Q&A with Lauren Zumbach in the Chicago Tribune.) His desire to keep an unusually low profile may have something to do with the fact that he was kidnapped in 2003 and held for ransom by four young men over a long weekend.
Lampert’s Greenwich estate fits the image of how you’d expect a billionaire hedge-fund manager to live. Assessed at nearly $26 million, it consists of six acres on a spit of land that juts into Long Island Sound. The main house is around 10,000 square feet, with a lot of stone and glass. After I was buzzed through the security gate, a guard popped out of nowhere to usher me into a grand but sparely furnished room facing Long Island Sound. On the walls hung a few large, expensive-looking fine-art photographs. Suddenly, from a side door, Lampert emerged with two handlers from Teneo, the financial-advisory and public-relations firm, who would monitor our conversation.
Lampert looked fit, if a bit awkward, in a gray polo shirt buttoned to the top. He was shod in a pair of brand-new “pure platinum” Nike Air VaporMax Flyknit sneakers. He, his wife (Kinga, 43), and their three children spend most of their time in Florida, where the children go to school. He made the point to me that, in Florida anyway, he’s not the least bit reclusive. “I’m out there like a normal person, and I really enjoy that,” he says. (Perhaps it’s just coincidence that Florida, unlike Connecticut and New York, has no state income tax.) He also has a home in Aspen.
Lampert rarely visits Sears Holdings headquarters, outside of Chicago—some say only once a year, for the annual board meeting. Lampert dismisses any criticism of his long-distance management style, saying he’s a big believer in handing over power to his management team. “There are cultures where people work from home, and they still get things done,” he says. “The ability to trust people, the ability to empower people, that’s the model.”
Mark Cohen, for one, isn’t having it. “He’s had a puppet board who have never pushed back in any way that anybody has ever seen, and why would they?” he says. “They’re all handpicked Eddie acolytes, and people have asked me for over a decade, ‘How does he get away with this—it’s a public company and why isn’t the board in action [given] the continued failure of the business?’ To which I say, ‘The board is meaningless . . . There’s no governance here whatsoever.’ ”
Lampert’s spokesperson responds that the board “currently has six members . . . who are deeply committed to the maximization of stockholder value. . . . [They are] deeply informed and involved.”
Cohen points out that current Treasury secretary Steven Mnuchin “has been a shareholder and a member of the board of directors of Sears Holdings from the day that the combined company was formed [until becoming Treasury secretary], so he spent 11 years at Eddie’s side. . . . [With] all of Trump’s focus on jobs, job preservation, job creation, somebody ought to ask his secretary of the Treasury what his involvement has been for 11 years in the destruction of well over 100,000 jobs at Sears.” (A spokesman for Mnuchin declined to comment.)
Lampert is no stranger to the plight of hourly workers, struggling to make ends meet, because he grew up as one. His early years were spent in Roslyn, New York, an affluent village on the North Shore of Long Island. His father was a successful attorney, his mother a stay-at-home mom, for him and his sister, Tracey, but when Lampert was 14 his father died of a heart attack. “That was the end of camp or going away to Europe like the other children,” his mother told The Wall Street Journal in 1991. She went to work as a salesclerk at Saks Fifth Avenue in Garden City for the next 20 years. “Eddie was very strong . . . trying to be the man of the family,” she recalled. During summer vacations he worked in a warehouse packing boxes.
“There were a lot of times,” Lampert says, “when [my mother] came home, and it’s like, ‘I’m going to lose my job. I don’t know what we’re going to do. We’ll have to sell the house.’ ”
At Yale, which Lampert attended with help from financial aid and student loans, he was the student who, at finals time, would move into the library and stay there. “He was very, very serious about doing the work,” says his friend Benjamin Bram, a founder of Watermill Trading. Lampert, Bram, and Steve Mnuchin (who was in the class behind the two of them) roomed together off campus.
At Yale, Lampert made connections that would be important to his future. His membership in the elite secretive fraternity Skull and Bones opened to him a rarefied world inhabited by the likes of George W. Bush and Stephen Schwarzman, now C.E.O. of the Blackstone Group. The holy grail among this set was Goldman Sachs, then, as now, Wall Street’s most prestigious firm. The summer after his junior year Lampert got a highly coveted Goldman Sachs internship. It probably hadn’t hurt his chances that Mnuchin’s father, Robert, was one of the firm’s senior partners, in charge of the equity division.
After graduation, Lampert ended up in the risk-arbitrage department at Goldman, reporting directly to Robert Freeman, the partner in charge of the firm’s business of buying and selling stocks involved in takeover transactions. “[Eddie] just had a drive and ambition amongst a group of pretty ambitious guys that I thought was unique,” Freeman says. “He was like a young bucking bronco . . . on a fast track to be successful.”
In February 1987, Freeman was led off the trading floor at Goldman by a U.S. marshal and arrested outside the firm’s Broad Street headquarters on charges of insider trading. “If you were at Goldman Sachs and you were a person working for Bob Freeman, you probably saw your career flashing before your eyes,” says a former Goldman colleague. Eventually, Freeman pleaded guilty to one felony count of insider trading and ended up serving four months in a minimum-security prison in Pensacola, Florida. Lampert gave a deposition in the case but was never implicated in any wrongdoing. “It was certainly an experience that [Lampert] wishes had never happened and one that he learned a great deal from,” says Lampert’s spokesperson.
After that experience, Lampert resolved to leave Goldman Sachs. During the summer of 1987, he met Texas billionaire investor Richard Rainwater on Nantucket. Over lunch Rainwater told Lampert, “There is life after Goldman.”
Lampert took the advice to heart. A year later he left the firm and started ESL with $28 million in seed money from Rainwater. The fund, Lampert explains, was dedicated to long-term investing—something, he claims, few others aside from his hero Warren Buffett were doing at the time. Rainwater also introduced Lampert to important future clients, such as Geffen. Within a year, though, Lampert and Rainwater had a falling-out. According to The Wall Street Journal, their dispute was about ego, strategy, and turf. “He’s so obsessed with moving in the direction he wants to move that sometimes people get burned, trampled on, bumped into,” Rainwater said of Lampert. “I think he has gone about alienating himself from almost everyone who he’s come into contact with.”
A former colleague agrees: “He’s really an extreme guy. There’s something odd about him, I think, his lack of emotional connection to people. . . . It’s so important, but some people just don’t have that. They’re off in their own little world.”
AutoZone was Lampert’s biggest coup. After acquiring 30 percent of the company, he orchestrated a series of aggressive stock buybacks that had the effect of driving up AutoZone’s earnings per share by reducing the shares outstanding. The stock price went through the roof. In 2012, he sold his stock for between $500 and $600 per share—for a total of around $1.5 billion. “For people to say he knows nothing about retail is a little tiresome, because in AutoZone he made a bundle of fucking money,” says Tiger Williams.
But there is a big difference between retailing auto parts and selling the thousands of diverse products—from pajamas to tractors to cosmetics—offered by Kmart and Sears. Nevertheless, Lampert’s success with AutoZone led him to believe he could handle rescuing Kmart, which had been fighting a losing battle with the big-box stores, such as Walmart.
In 2003 he bought the majority of Kmart’s debt before the company went into Chapter 11, after which he took control of it. He immediately set about reducing inventory in the stores, slashing expenses, and cutting back on advertising. “Lampert has a view, which he shares publicly, that he doesn’t believe in the traditional manner of how retailers run their business,” says Cohen. “He thinks investment in stores is not appropriate.”
“We were focused on getting each store profitable and running each store well,” Lampert explains. The plan, he says, was for the world to know that Kmart—which at this point was not in debt—had “undeniable financial strength. . . . Even people who didn’t think Kmart would last a year out of bankruptcy, they said, ‘Well, Kmart may still not be successful, but I get you’re not going out of business anytime soon with all that cash.’ ”
At 7:30 P.M., on January 10, 2003, the Friday before the week during which the finishing touches were to be put on the Kmart reorganization, Lampert went to get his car in the garage of his Greenwich office building. Suddenly he was shoved into the backseat of a rented black Ford Expedition sport-utility vehicle and driven, blindfolded and handcuffed, to a Days Inn, 55 miles away in Hamden, Connecticut. Four young men held him hostage for the next 28 hours in a $49-a-night room. They told him that unnamed AutoZone officials had offered to pay them $3 million to murder him, and they taunted him with a shotgun. On Saturday morning, two of the kidnappers used Lampert’s credit card to go on an $800 shopping spree for electronics equipment.
Lampert and two of the kidnappers, who had stayed behind at the Days Inn to guard him, settled on a $5 million payoff. On Sunday, at around two A.M., one of the kidnappers drove him back to Greenwich and let him out on a highway off-ramp to get the money, according to published reports. Why they would have made such a stupid move has not been answered until now.
Lampert, who had not slept in days, walked the half-mile to the Greenwich police station. Tracing the stolen-credit-card transactions (the kidnappers had also purchased a pizza with one), police arrested four local men soon thereafter: Renaldo Rose, a 24-year-old ex-Marine; Shemone Gordon, 23; Devon Harris, 19; and Lorenzo Jones, 17.
In the years since, Lampert has not talked publicly about the kidnapping, nor have the more puzzling aspects of the case been cleared up. When I asked him about it, he frowned. “You’re not going there, are you?” he says. “I don’t really want to talk a lot about it for a lot of reasons, but I know it’s not an unimportant event.” All he’ll say is that the experience was “not good” and “they could have made a different decision—let’s put it that way.” Did it change your life? I asked him. “Yeah, yeah,” he says. “I’m just not comfortable talking about it.”
“THERE ARE DECISIONS MADE, INCLUDING BY ME, THAT MAY NOT HAVE BEEN THE BEST,” LAMPERT SAYS.
In 2004, Renaldo Rose, the ringleader, was sentenced to 15 years in prison. He was released early, in July 2016, and returned to his native Jamaica, where he now runs the Foreign Ink mobile tattoo studio, out of a van. Reached by phone, he willingly gave his version of the kidnapping. He recalls that, after serving in the Marines, he “hooked up with some friends and they were already doing jobs.” They encouraged him to focus on wealthy local targets, and he read about Lampert in a news article “that showed he was one of the wealthiest, if not the wealthiest, at the time.”
Rose says that after being abducted Lampert “freaked out and one of the guys started punching him in the head. So I had to yell at them: ‘Listen, you both calm down. Keep quiet and you’re gonna be all right.’ I made [Lampert] a promise, ‘Listen, you don’t give us no problem and we’ll let you go.’ And he did, so he never freaked out again after initially.”
It still haunts Rose today that he might not have gone to prison had he killed Lampert and the other kidnappers: “So it was either like, O.K., get rid of everybody. [But] with Shemone Gordon, [Lampert] was like family almost. He argued against all that. I still think we should have just got rid of everybody. But, I don’t know. I did have to consider that. Lampert . . . never gave any problems, so I kind of had to keep my word on that.”
Rose dismisses the idea of the AutoZone executives offering $3 million for Lampert’s murder as the fabrication of one of his cohorts. But he recalls an intriguing exchange that he says took place between Gordon and Lampert:
“I heard Eddie. I heard some of the discussions, because there was even a discussion when it came to him buying Kmart. He was asking questions such as ‘When I get out of here, do you think I should do it?’ . . . He said he felt that Kmart was tied up with something with the Mob or Mafia. They used it as a piggy bank. That was the first time I’d ever heard. I’m like, ‘Shit. The Mafia is still around?’ But he was really hesitant about doing it.” (Through his spokesperson Lampert denies he made such comments.)
In the end, Rose says, the main reason he decided to let Lampert go was that his partners were so inept. By using Lampert’s credit card, against Rose’s instructions, his partners in crime had alerted police to their whereabouts. Rose says they released Lampert not to get the ransom money but to call off what was by then a hopeless caper.
The next week Lampert completed the Kmart deal and soon set about his cost-cutting strategy. It yielded results. “His cash flow exploded, and he was being touted by the financial media as the next Warren Buffett,” remembers Cohen. In 2003, Lampert says, operating profit was around $400 million; the next year it was $900 million. In 2005 he decided that Kmart should buy Sears. “Kmart was a turnaround,” he says. “Putting Kmart and Sears together was a transformation.”
Lampert explained his strategy for the combined company: “When we put Sears and Kmart together, part of the idea was we had all of these Kmart stores that were off-mall,” he says. “Sears was sort of stuck in the mall, and Sears, before we made the acquisition, was starting to move off-mall.” Lampert’s vision was to keep Kmart and Sears stores as close to Walmart as he could get them. “That’s where all the people in town are going,” he says. He believed that Sears and Kmart were differentiated enough from Walmart to be complementary, not competitive. He says he invested a lot of capital in Kmart stores but didn’t get a return on his investment.
“I’m not sure Kmart on its own could ever be a great retailer,” he says. “But you put Kmart and Sears together, in combination they had a chance . . . Kmart had the locations and Sears had the brands.”
Lampert also says that starting in 2006 he began making “countercultural investments in online commerce.”
“I’m told, for about two years, Lampert actually attempted to run the business,” says Cohen. “So for about a year and a half or two years the financial performance of Sears Holdings looked pretty good, but in fact all that he was doing was completely cutting capital expenditures and operating expenses.”
Lampert’s spokesperson responds, “Managing capital expenditures and expenses tightly has been required, not optional, to improve the company’s operating performance and financial flexibility in order to achieve its long-term transformation.”
The combined company never really found its niche—which was supposed to be somewhere between Walmart, on the low end, and Macy’s, on the high. And then came the 2008 financial crisis, when, according to Cohen, “Lampert stopped appearing to support the business in any conventional way and started to invest free cash flow in derivatives. He hived off Sears Roebuck’s three consequential brands—Kenmore, Craftsman, and DieHard—into a Caribbean-based wholly owned sub of ESL so the company was paying royalties to Eddie Lampert for the use of its own trademarks.” (Lampert’s spokesperson calls this “completely false . . . There is no Caribbean-based wholly owned subsidiary of ESL nor any subsidiary nor any payments to ESL or a subsidiary of ESL for any of the trademarks.”)
The company has been in steep decline ever since. “There are a lot of decisions made over a long period of time, including by me, that may not have been always the best decisions,” Lampert admits. “But I did have a point of view in terms of how shopping habits were going to change. I could have put a lot of capital in a Kmart or Sears store and it could look like Bloomingdale’s or it could look like Saks, but we didn’t have access to products that would be consistent with that. In other words, if I built an equivalent of Nordstrom’s, it’s not like all of a sudden Nike would be selling to us.” Or that Nordstrom’s customers would be coming through his doors. Instead, he says, he targeted his capital on improving his customers’ online experience. “I did believe that people are going to be one click away from the best possible experience, the cheapest price, and whatever product they want,” he says. “And I could have a better Web site than Nordstrom’s. I could have a better Web site than Bloomingdale’s. In other words, I don’t need to invest in fixtures, but I do need to invest in the features and the experiences.”
But Lampert was evidently ahead of his time in trying to get Sears buyers to shop online. At the time they were just not comfortable enough with the technology to do so. Whatever the reason, Sears’s Web site never remotely rivaled the sales in the stores. Or on Amazon.
Now that Amazon is eating Sears’s lunch, Lampert is faced with his latest challenge: staving off a Sears Holdings bankruptcy, and he is using every corporate-finance strategy in the book.
In addition to making billions of dollars in loans to the company to provide Sears Holdings with more cash, he has announced the closing of some 300 more stores since the beginning of 2017. He sold Sears’s Craftsman line of tools to Stanley Black & Decker for around $900 million. He is considering the sale, or monetization, of the DieHard battery and auto-center brands. “Most of the big transactions that he’s been into, like the sale of Sears Canada stock or the sale of Lands’ End, have involved or are caught up in special dividends where he’s taken the cash out and returned it to shareholders,” argues Cohen, “and of course he’s the principal shareholder.”
Lampert has spun off Lands’ End, Sears Hometown & Outlet Stores, Sears Canada, and Orchard Supply, each into its own public company. “We’re fighting to survive—that’s pretty clear,” Lampert says.
His critics see things differently. Robert Chapman, a California-based hedge-fund manager, calls Sears Holdings “a total shit show” that is in “secret liquidation” mode. He says he recently came out of a Kmart in Jackson Hole, Wyoming, that offered so many bargains he couldn’t believe his eyes. “He’s not calling it a liquidation sale,” he says of Lampert, “but if you’ve gone into one of the stores, it’s a liquidation deal.”
Cohen says, “[Lampert] is a guy who may have harbored some notion of running this business, but if he did he’s pivoted to just simply manipulating it, if you will, for his own benefit. . . . This is the creative destruction of a very weak brand [Kmart] and a perfectly viable brand [Sears], both of which together were doing something like $50 billion when he took over, and he’s getting away with it because he’s been able to treat this like a private company. No public company would ever allow a chief executive officer to remain in their seat who was so intimately tied to these manipulations and presiding over the failure of a business like this. This is not normal, if anything is normal these days. This is certainly not normal.”
Cohen believes that a bankruptcy filing is inevitable, and that Lampert will end up benefiting from it because he will be able to “walk away” from onerous store leases and other liabilities, such as the underfunded pension plan, and get rid of those assets that he hasn’t been able to sell. Since he’s the largest Sears Holdings creditor, Cohen says, “he’ll then bring this thing right back out as a new company, and he’ll become the new shareholder, and he’ll start this process all over again because Sears still has a substantial inventory of at least theoretically valuable real estate, and as long as there’s any plus value to any consequential outcome it’s all to his benefit.”
For his part, Lampert says he is going to keep fighting for as long as it makes sense: “I believe in what’s possible, and we’re doing things that are necessary to keep the company going. . . . It’s definitely not just humbled me, but it’s expanded my awareness of real issues that exist in our society. . . . I feel like I can make a contribution by being involved, O.K.?”
Cohen takes a more cynical view. “This is all just a perversion of our free-market system,” he says. “This is the actions of a controlling shareholder treating a company as if it is truly private, with no oversights, no constructive oversight whatsoever, with no intent to protect any of the requisite constituencies other than essentially himself.”
Lampert’s spokesperson says, “There is no merit to the speculation that Mr. Lampert is working to benefit from the ‘liquidation’, ‘failure’ or ‘bankruptcy’ of Sears Holdings . . . All shareholders—and the Board of Directors that represents them—ensure there is oversight of their interest in the Sears Holdings, as do several other stakeholders (lending partners, the Pension Benefit Guaranty Corporation, vendors, employees, members, etc.) who have their own different interests in the Company. So, it is untrue and unfair to allege that the company is being manipulated to only serve the interests of Mr. Lampert.”
Despite Lampert’s optimism, Sears continues to decline. Many other big-box retailers had a surprisingly robust 2017 holiday sales season, but sales at Sears suffered mightily, down around 17 percent. Lampert once again tried to reassure the company’s suppliers and equity holders that it had enough cash to pay its bills as they became due. On January 10, he announced that he had arranged an additional $300 million of new loans to ease the terms on other loans that Sears already has, in order to buy more time. He also announced that Sears would find another $200 million in cost savings not related to already announced store closings. Nevertheless, the fourth-quarter 2017 loss could be as much as $320 million, and Lampert announced he is going to close another 103 Sears and Kmart stores by this month.
Despite everything, the Sears Holdings stock price has slumped to $2 a share, down considerably from the high of $134 per share some 11 years ago. Sears Holdings now has a market value of around $250 million, making Lampert’s nearly 60 percent stake worth $150 million.
At the end of our interview, Lampert made it clear he’s not done yet. “Put it this way, if I consider all the other alternatives, they’re not great for a lot of people and I just want to be responsible. If I didn’t believe that this company could be transformed still—the window is definitely shrinking—but if I didn’t believe that, I would try to take a different path. But I don’t know what that path exactly would be. It’s not a question of giving up or not giving up.”