Kmart investor hush-hush on retailing plans
Lampert's interest in Sears also uncertain

March 27, 2003

BY JENNIFER DIXON
FREE PRESS BUSINESS WRITER

At the same time secretive, savvy investor Edward Lampert was buying a controlling stake in Kmart Corp., he was quietly amassing enough stock in Sears, Roebuck and Co. to make him its second-largest owner.

Analysts and retail experts say they don't know why Lampert is betting on two warhorses of American retailing.

Could he be thinking merger? Is he hedging his bets? Does he want to get his hands on Sears and Kmart's real estate? Or is he just rummaging for bargain prices in the retail bin?

"He sees things others don't," said a New York analyst whose company forbids speaking to the media. "I can't imagine what he has up his sleeve."

Kmart insiders say that while Lampert is involved in the turnaround, they aren't sure where he is taking the retailer.

"Nobody knows," said someone inside Kmart, who asked not to be identified for fear of retribution. "It's driving everybody nuts."

Whatever Lampert's thinking, the Greenwich, Conn., multimillionaire would have a huge impact on Kmart's employees, vendors and landlords. He will become its largest single owner when the Troy retailer is expected to come out of bankruptcy at the end of April.

Lampert earned a personal fortune estimated at $800 million by paying attention to detail and investing large amounts of money in undervalued companies in sleepy industries. His company, ESL Investments,has had only one down year out of 14.

ESL Investments is essentially a private investment club for wealthy people. According to the New York Times, his clients in the last 10 years have included David Geffen, the media mogul, and Michael Dell of Dell Computer. ESL investors are asked to put up at least $10 million and lock up their money for at least five years. Lampert then invests that money.

While Lampert has a reputation for activism as an investor, he seems to be taking more of an interest in Kmart than usual.

He and a fellow investor in Kmart are to name four of its nine new board members as Kmart emerges from Chapter 11 bankruptcy protection April 30. Lampert has not asked for a seat on Sears' board.

Lampert serves on the boards of two other retailers in which he has a stake.

Kmart insiders say Lampert is deeply involved in turning around the retailer. He has at least two to three lengthy conference calls a week with the company's chief executive, Julian Day, and participated in a number of meetings with the executive team.

And William Crowley, the president and chief operating officer of ESL Investments, is at Kmart's headquarters regularly, according to someone who works in the building.

A former Kmart executive, referring to Lampert, said: "He is real involved and to my thinking, this will become more apparent as time goes on."

Lampert has a lot riding on Kmart, with an investment in the company estimated at about half a billion dollars.

ESL and a second investor, Third Avenue Trust,are to control in excess of 50 percent of all shares when Kmart comes out of bankruptcy.

While the discount chain's insiders are unsure of Lampert's plans for Kmart, analysts are equally uncertain about his interest in Sears.

Documents filed with the Securities and Exchange Commission last year show he was increasing his investment in Sears steadily. In October, he owned 22.8 million shares, or 7.2 percent of the company. By Dec. 31, 2002, he owned 28 million shares, or 8.9 percent of the business.

Through his spokesmen, Lampert has declined requests for comment about his plans for Kmart and Sears. Analysts say there are several possibilities for his interest in two icons of American retailing:

• Kmart and Sears real estate. Michael Markowski, director of research at StockDiagnostics.com, which specializes in cash flow research on more than 10,000 stocks for investors, said Lampert might believe the value of Kmart and Sears is in store leases -- and the locations could be snapped up by other retailers like Wal-Mart Stores Inc. if Kmart and Sears are pushed out.
• A liquidation of Kmart, should it not survive outside bankruptcy, that could potentially allow Lampert to recoup his investment and make a profit.
• A merger. Kmart gets some of Sears' best-known brands, Kenmore appliances and Craftsman tools, lawn and garden equipment.

Sean Egan, managing director of Egan-Jones Ratings Co. in suburban Philadelphia, said any investor with as much money tied up in Sears and Kmart would have to consider a merger.

"It would be unusual for any investor with the position he has in both these companies not to seriously consider putting them together," Egan said.

"He can make the argument of economies of scale, hope to raise additional equity and be cashed out that way," Egan said. "It would be unreasonable for any decent investor not to consider that."

Adding to the merger speculation: Kmart's chief executive is a former Sears executive. Day, Kmart's president since March 2002 and chief executive since January, worked at Sears from March 1999 to September 2000. He left when he was passed over for the top job.

Day said recently that he has a strong relationship with Lampert, and the two first met "a couple of years ago. I met him before I came to Kmart."

Howard Davidowitz, chairman of Davidowitz & Associates,a national retail consulting firm in New York, says that despite his track record of success, Lampert might have chosen a pair of losers in Sears and Kmart.

"He's a man who made a fortune so he's not to be underestimated, but I disagree," Davidowitz said. "I think these two investments are both insane."

Kmart, he predicted, ultimately will liquidate.

Besides lacking key executives, including a chief merchant who would decide what goods to sell, the company's reorganization plan lacks evidence that managers have a strategy to set the retailer apart from competitors in the minds of shoppers.

And while Kmart will come out of bankruptcy with no debt and $2 billion in financing, it has turned a monthly profit only once in the last year -- $349 million on $4.7 billion in sales in December. In 2002, Kmart lost $3.22 billion on sales of $30.76 billion.

Sears, Davidowitz said, also lacks a vision and its revenues have been stagnant over the past three years -- $41.4 billion in 2002, $41 billion in 2001, $40.8 billion in 2000.

Lampert's company has two seats on the board of AutoNation Inc.,a retailer of new and used vehicles, and one on the board of AutoZone Inc., an auto parts and accessories chain. One of his investment companies owns about one-fourth of each business, making Lampert the largest single owner of both.

Lampert told the Sun-Sentinel of Ft. Lauderdale, Fla., in an interview last year that "as a board member, you ask a lot of questions and bring your knowledge to bear, but it ultimately falls to the CEO. . . . My focus is very much on being a partner of management to see the company improve its performance and create value for shareholders."

But when it comes to his plans for Kmart, and the future of the century-old retailer with its roots in Detroit, Lampert isn't saying.

Contact JENNIFER DIXON at 313-223-4410 or dixon@freepress.com.