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Lampert Lashes Out

The Sears chairman says the media and Wall Street have ignored the retailer's strengths.
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Hedge fund star Ed Lampert lashed out at Wall Street and the media on Friday for the stock market's negative response to the

99% drop in third-quarter earnings posted by

Sears Holdings


, the retail empire he cobbled together by merging Sears Roebuck with Kmart two years ago.

"While we were not pleased with these results, much of the commentary in the media and on Wall Street following the results ignores the strength of our company and the progress that we have made," said Lampert, who is the chairman of Sears Holdings, in a letter to employees.

"In fact, over the past several years, we are one of the few retail companies that have actually reduced our overall debt levels, while at the same time investing over $1 billion on capital expenditures, making investments in inventory for our customers, contributing significantly to our pension plans for our past and future retirees and repurchasing over $3 billion of our shares," he said.

Still, shares of Sears Holdings have plummeted in 2007 from highs of $195.18 to recently trade at $106.59 -- a 45% drop. The selloff has come amid a slowdown in the U.S. housing market that has been particularly painful for home goods retailers like Sears and Kmart. It also sparked a credit crunch that stymied the world's financial markets as investors struggle to gauge just how much bad debt has been digested by the global finance industry.

The situation has tested the convictions of some of Lampert's most ardent supporters, who view Sears Holdings as more than a retail company. They trust in his ability to find value in the company's assets and wring cash out of the business to eventually power the stock higher with investments elsewhere.

That said, the arguments in favor of underlying value in Sears' assets have largely rested on the company's real estate portfolio, and they were made at a time when U.S. real estate values were soaring. Now, home prices are in decline, and many economists say those declines will spread to commercial real estate values before the downturn runs its course.

In the midst of this uncertainty, no clear thesis for underlying value at Sears has ever been made public.

For his part, Lampert has said that his interest in Sears is not based on real estate values, and he has frequently touted the company's prospects as a retailer. Meanwhile, the company has consistently posted declines in same-store sales -- a closely watched gauge of a retailer's ability to hold and grow its market share that Lampert has downplayed as less important than conventional wisdom dictates.

Despite same-store sales declines, Sears began to show impressive gains in profitability and cash flow after Lampert formed the company and launched an aggressive campaign of cost-cutting and price controls. Now, that profitability is disappearing while cash flows are shrinking as the sales declines persist and economic conditions worsen.

"When other companies manage expenses carefully, it is often characterized as a sign of good management and prudence," said Lampert. "In the case of Sears Holdings, meanwhile, expense controls are often cited as a root cause of poor performance."

Lampert pointed to recent commentary on

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-- fellow retailers where bad results have recently been attributed to "the difficulties in the housing markets, the overall macro environment, and the highly promotional nature of the retail environment that has existed recently.

"All of these companies have spent enormous amounts to open new stores and to remodel existing stores and still ended up with lower earnings," said Lampert. "Spending lots of money doesn't always lead to the results people expect."

The problem for Lampert is that so many of the investors that drove up shares of Sears when times were good were not betting on the company's prospects as a retailer. They were waiting for the company to sell off real estate assets at high multiples to demonstrate the hidden value in its portfolio, but those sales have not materialized.

Now, investors are looking for Lampert to make another big acquisition or winning investments elsewhere with Sears' dwindling cash balance. Lampert's investments, however, have taken a bad turn along with a broader selloff in the stock market that began over the summer.

The value investing crowd that reveres Lampert's abilities say the downturn is a temporary reaction in the market to uncertainty about the economy, and his investments will ultimately prove successful. They point to Lampert's aggressive share repurchases as a sign that he viewed the stock as undervalued when it was trading at its highs.

While big share buybacks are generally favorable for remaining shareholders, they can be a bad use of a company's cash if the repurchases are made at a time when its stock price was high. Much of Sears' recent share repurchases were made when the stock was above $150.

"We will take the actions we believe are necessary to drive value over the long term and manage the business closely and opportunistically in the short term," said Lampert.