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Eddie Lampert's Sears experiment looking like a failure

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What would happen if a brilliant hedge fund manager took over a retailer and ran it with a rigid focus on financial metrics, putting aside all that soft stuff about branding and marketing?

Take a look at Sears Holdings (NASDAQ: SHLD), and you have your answer. While macroeconomic trends haven't exactly been the company's friend, the stock has plunged from close to $200 per share in early 2007 to its current price of $66 per share. Just a few months ago it was trading in he mid-$20s.

In a scathing piece in Barron's (subscription required), Jonathan R. Laing explains just what a mess of things Lampert's strategy has made. Sales are tanking because of uncompetitive pricing, poor service, and lousy merchandising -- and the upside that once came from liquidating the company has disappeared with the arrival of a meltdown in commercial real estate.

Worse, aggressive stock repurchases have rendered the company's balance sheet weak and overleveraged. According to Laing, "The danger in milking the stores is that a retailer can pass a point of no return, in which falling sales trump tight cost controls and profitability goes into irreversible meltdown. Some analysts see Sears Holdings inevitably facing that fate down the line."

For now, the "Liquidate and make everyone rich" scenario is off the table -- and horrifically-timed share buybacks have also helped to destroy what shareholder value hadn't already been torched by a tanking real estate market, pension fund shortfalls, and good old-fashioned operating losses. Back in January of 2008, Herb Greenberg wrote this about Sears:

With real estate values falling, some experts have said the value of Sears real estate is suffering at the hands of the real estate market. One retired retail veteran I know, who has held top real estate positions at many of the largest retail concerns, has a different take. "The real problem," he says, "is that the portfolio has the same meager value today as it had just prior to Mr. Lampert's purchases! There are many reasons for this. In addition to the obvious facts that competition has passed them by, the two main reasons are: the myths associated with the assumptions connected to leasehold value, the restrictions imposed on the value of the Sears-owned mall stores."

A year and a half later, and that's all more true than ever. The question for investors is whether that's already more than reflected in the stock price. Sears was sexy once, but now it's downright contrarian.

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Last updated: November 27, 2009: 03:16 AM

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