Sears' Lampert: How Much Trouble Is “The Next Warren Buffett” In?

In a cover story from November 2004, Business Week dubbed then 42 year old investment prodigy Eddie Lampert “The Next Warren Buffet”. Shortly after, the merger between Lampert-run Kmart and Sears was announced with Lampert to be Chairman of the combined enterprise (Press Release November 17, 2004).

Ever since, Sears (SHLD) has been a huge story stock with a wide following among Lampert fans, including Mad Money’s Jim Cramer, who have called it “the next Berkshire Hathaway (BRK.A)”. The idea was that, like Buffett had done with textile mill Berkshire Hathaway, Lampert, who idolizes Buffett and poured over his writings as a young man, would use the cash flow from the retailers to fund his investments, ultimately building a Berkshire style investment empire.

The problem is that Kmart and Sears were, and continue to be, struggling, second rate retailers who are being badly beaten by the competition. Same store sales have been falling off a cliff forever, including Monday’s announcement that they declined 3.5% in the 9 week holiday period ended January 5, 2008. Also in Monday’s announcement is that 4th quarter earnings will be off by about 50% from last year.

For a while, investors ignored the reality of the decidedly mediocre retail businesses and focused on Lampert’s investment wizardry, bidding shares up about 90% from the time of the merger announcement until earlier this year.

SHLD 4-year chart

But since an ugly pre-announcement in May, investors appear to have woken up to the reality of Sears’ retail businesses and shares have shed more than 50% of their value and now trade below the $100 level they garnered at the time of the merger.

At this point, the stock has become a battleground between bulls and bears.

15% of outstanding shares are sold short and MarketWatch columnist Herb Greenberg named Lampert his Worst CEO for 2007. Some see shares continuing to lower - along with the declining fundamentals at Kmart and Sears (see, for example, “The Softer Side of Sears: Oh, no! Sears is still a retailer!”, Daniel Gross, Slate, 7/11/07).

But there are many who are still believers in Lampert’s legendary investment ability, including Cramer (also see “Don’t Mess With Eddie Lampert”, Morgan Housel, The Motley Fool, 12/4/07).

Sears shares are trading at about 16 times this past years earnings and it doesn’t seem to have thrown off much cash in 2007. With a continuing deterioration in their core business, a tough macro environment and superior competitors (Best Buy (BBY), Walmart (WMT) ) I have to wonder how much trouble “the next Warren Buffett” might really be in.

Disclosure: Top Gun has no position in Sears (SHLD) shares.

Comments

[the_Bird:]

Well, that didn't tell me anything that wasn't already immediately obvious...

2008 Jan 15 08:55 AM

[jswede:]

there's a good little read on ESL/Sears at portfolio.com... micromanaging and analysis to the point of paralysis.

2008 Jan 15 09:13 AM

[Mike Goodson:]

Would you rather have Lampert in charge of Sears right now or someone who's been ONLY been in retail? Anyone who bought SHLD because they thought it was next Berkshire Hathaway probably got what they deserved, but the story make not be completely broken. See more thoughts on SHLD here:

www.vestopia.com/Blogs...

2008 Jan 15 04:13 PM

[SImonBurnett:]

"When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact" Warren Buffet

2008 Jan 20 03:11 AM

[Greg Feirman1:]

LOL SImon.

2008 Feb 01 04:18 AM