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Mergers & Acquisitions October 29, 2013, 8:41 am 213 Comments

For Once-Mighty Sears, Pictures of DecayBy DAVID GELLES

Brian Sozzi One of 18 photos of scenes inside Sears stores that Brian Sozzi,chief executive of Belus Capital Advisors, posted on his blog to show the state of the stores. “It’s just badnessthroughout,” he said in an interview. “Every store has something fundamentally wrong with it.”

Updated, 8:46 p.m. | When Brian Sozzi, the chief executive of Belus Capital Advisors, visited Sears locationsin New York and New Jersey this month, he said, he found barren shelves, haphazard displays and badlystained carpets.

Also missing: customers.

“It’s just badness throughout,” Mr. Sozzi said in an interview. “Every store has something fundamentallywrong with it.”


2 of 24 11/13/2013 12:17 PM

Photos of the stores that Mr. Sozzi posted on his blog attracted more than a quarter-million views andcaptured the sentiments of customers dissatisfied with the company. The website Business Insider titled apost: “18 Depressing Photos That Show Why Nobody Wants To Shop At Sears.”

Yet it is these core Sears stores that Edward S. Lampert, the hedge fund manager who is Sears’s majorityowner and chief executive, believes represent the future of the retailer.

To help raise cash for that future, Sears announced on Tuesday that it was looking to split off its Lands’ Endand Sears Auto Center brands, two of the company’s best-known assets. It also said that Sears Canada, whichit controls, had sold five store leases for $384 million.

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In a statement, Sears said the moves would let it become “a more focused company that is easier tounderstand and to manage,” and that it would concentrate on its best-performing Sears and Kmart stores.

But even after the disposals, what remains of Sears appears to have rapidly diminishing value.

On Tuesday, the company also released limited information about its financial performance that suggestedthat its core retail business was plummeting. Sears said that comparable store sales fell 3.7 percent in the 12weeks ended Oct. 26 and that it expected adjusted earnings before interest, tax, depreciation andamortization, or Ebitda, of negative $250 million to $300 million.

Gary Balter, a retail analyst with Credit Suisse, said in a note that the early results represented “an amazingrapid deceleration into the abyss for the U.S. retail operations.”

Sears has been under pressure for years. Among brick-and-mortar retail competitors, it has lost out toWalmart, Target and Home Depot, while Amazon.com and other online outlets have forced all retailers totrim prices.

J.C. Penney, a Sears competitor that came under the influence of another hedge fund manager — William A.Ackman of Pershing Square Capital Management — is also struggling to survive. (Mr. Ackman recently soldhis entire stake for a loss.) Other department stores like Macy’s and Nordstrom have moved upmarket.


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JimYoung/Reuters Inta Krueger shops for a refrigerator at a Sears store in Schaumburg, Ill.

Ten years ago, Mr. Lampert took control of Kmart while it was in bankruptcy. He then orchestrated Kmart’s$12 billion buyout of Sears in 2005. With both companies under his control, he formed Sears Holdings, anumbrella group that included several business units, each competing for limited resources.

Performance initially improved, but in recent years a lack of investment has hurt the core retail business.After cycling through several chief executives while reportedly micromanaging the company, Mr. Lamperthimself became chief executive in January.

“He’s not a retail executive, he’s an asset manager,” said Mary Ross Gilbert, managing director at ImperialCapital. “What we’re seeing reflects what an asset manager would do, which is find ways to realize value.”

Mr. Lampert, a mercurial free market advocate and a professed Ayn Rand fan, declined requests for aninterview.

Sears is likely to spin off Lands’ End, which was acquired for $1.9 billion in 2002, giving shareholders stockin a new public company. It employed this strategy successfully this year, spinning off Sears Home and OutletStores.

It will try to find a buyer for Sears Auto Centers, but it may have trouble given that the brand is weak, manycenters are attached to bigger Sears stores and there may be liabilities involved with the sale ofenvironmentally sensitive businesses.

With those assets gone, analysts say, it is only a matter of time before the company continues its liquidation.One likely disposal is the 51 percent of Sears Canada that the holding company still owns. Kenmore andCraftsman, two brands under the group’s control, are also mentioned as possible targets. Some of its realestate in the United States may also make for attractive targets.

“They are a zombie retailer,” said Mr. Sozzi, who has a sell recommendation on Sears stock. “And withtoday’s announcement, they are dismembering their body.”


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The moves announced on Tuesday gave investors some hope, with shares of Sears surging 11.75 percent, to$62.09.

“There’s much more value in the company broken up than there is when it’s together,” Mr. Balter of CreditSuisse said in an interview.

So far this year, Sears shares are up 50 percent. Yet since reaching a peak in 2007, shares of Sears have fallenmore than 67 percent.

The plight of Sears today represents a depressing decline for a once-proud American retailer. Founded 120years ago as a mail-order catalog merchant, Sears became one of the country’s great department store chains.In 1973, it held the naming rights of the Sears Tower in Chicago, then the world’s tallest building. But thecompany has failed to keep pace with a rapidly shifting retail environment, especially in recent years.

After the expected disposals, what remains of Sears and Kmart is likely to be a collection of down-marketstores that are badly in need of a makeover, as illustrated by Mr. Sozzi’s photos.

“They haven’t spent on the store base, and that’s the issue,” said Ms. Gilbert of Imperial Capital.

On Tuesday, Sears seemed to reaffirm this view, saying it would consider closing more stores while trying tominimize any associated costs. But analysts cautioned that even this could be a costly process because ofcosts associated with severance, pension obligations and real estate.

“It’s not free to close stores,” said Mr. Balter of Credit Suisse.

He was among those who viewed the dismal pictures posted by Mr. Sozzi. But Mr. Balter said he wasn’tsurprised by what he saw.

“I go to the stores all the time,” he said. “Those pictures weren’t unique.”

This post has been revised to reflect the following correction:

Correction: October 31, 2013

An article on Wednesday about the declining fortunes of the retailer Sears and its strategy for revivalmisspelled the name of a Sears competitor. It is J. C. Penney (not Penny).

A version of this article appears in print on 10/30/2013, on page B1 of the NewYork edition with the headline: For Once-Mighty Sears, Pictures of Decay .

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Company Reports, Lampert, Edward S, Mergers, Acquisitions and Divestitures, Sears Holdings Corporation,United States

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JohnACriticGreat Neck

This is a sad story. As a kid, in the 1950's, i always looked forward to the big thick Sears cataloguewhich has so much to see and read and for my parents to buy. Sears was known for quality, service anddependability. I had an uncle who worked there his whole life and retired comfortably as a result. Itwas a great store. These tragic events highlight very clearly what happens when asset managers andhedge fund operators get a hold of a great franchise and run it into the ground. They know nothing ofthe business they invest in and look solely to makeing as big and as quick a profit as possible. Thesekind of actions have lead to the demise of many great names in American industry and retailing. Inaddition, one cannot overlookd the impact on the lives of so many employees and their families whowind up jobless, many after long years of service. It's simply a great shame.

Oct. 31, 2013 at 11:18 p.m.Recommended2

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MartyVbeverly hills CA

Maybe their violent commercials had some effect??

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6 of 24 11/13/2013 12:17 PM

Showing people smashing into appliance, and more?Who makes these awful TV promotions?

Oct. 31, 2013 at 9:28 p.m.

ex-everythingSan Diego, CA

This reminds of predictable Sunday dinner debates I used to hear comparing Monkey Wards to Sears inthe early 50's. My Dad and Grandpa would almost come to blows arguing about which was worse--endless arguments over paint, appliances & tools. I would just roll my eyes.--Now I remember all thatwith affection ,almost and wish they were still around to discuss the present retail stores' decline. Offtopic, I know. Just brings up sentimental associations .Love the comments in the NYT's

Oct. 31, 2013 at 9:25 p.m.

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Larry LDallas, TX

Sears is an example of what happens to a company when it is run by financial engineers and not peoplewho actually know how to do something in the real world.

Given how much leverage, how much money and the % of GDP that the financial sector now occupiesin the U.S., Sears should be a warning of what will happen to the rest of the U.S. if we continue foranother generation with this same mindless lack of effort.


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Bill JonesPasadena CA

I've already posted, but I have to add something...my Dad bought Craftsman tools for years. He workedon cars and his hobby was carpentry. He always told me that good tools were worth paying for. He sawCraftsman as a premium brand, well worth the price. Years ago we lived in Argentina. One time myfamily visited the Iguazu Falls, near the borders of Argentina/Brazil/Paraguay. In those days the roadswere of poor quality. We got stuck in the mud a lot and had to pay men with tractors to pull us out of

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7 of 24 11/13/2013 12:17 PM

the mud. Toward the end of the trip we got stuck again. My Dad was running low on cash, so instead ofoffering money to a tractor driver to pull us out of the mud my Dad offered him a Craftsman wrench.The tractor driver looked at it like it was a brick of gold. He was delighted to accept it as payment fortowing us out of the mud.

Oct. 31, 2013 at 3:15 p.m.

Bill JonesPasadena CA

A hedge fund manager has no business running a department store. Hedge fund managers only focus onthe parts, not the whole. To Mr. Lambers Sears is (or was) a huge collection of assets to be sliced anddiced into a bazillion pieces...sold off, mortgaged, subleased, or torn down for land value, not a greatretailer with a proud heritag, an impressive collection of in-store brands like Craftsman, and a vital linkto America's middle class. Woody Allen is said to have remarked, "A stock broker invests your moneyuntil there's none left" or something like that. About Mr. Lambert we could say, "A hedge fundmanager oversees a great American retail empire until it is worthless."


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jherlingMineola NY

Instead of losing money closing stores, why don't they spend money upgrading stores?

Oct. 31, 2013 at 10:57 a.m.

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BarryWhite Plains, NY

These guys are so smart they are stupid. They have a sinking retail ship and have overvalued theirproperty assets. They are selling the family silver to pay the power bill. Most of those old stores have tobe town down. The few retailers expanding in this saturated environment don't want the old garbage.Only the AAA locations are sought after and it's cheaper to build a new retail box than adapt a 50 yearold store. Of course sometimes you keep some bones of the old building so you avoid the risky issuesgetting approvals for a new building.

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8 of 24 11/13/2013 12:17 PM

I don't know about Lands End. Sears tarnished it. It it has great potential. I looked at it in Sears recentlyand felt I would do better at Uniqlo or LL Bean. Brooks Bros. and Dockers fill my in box daily andhave aggressive sales and more aggressive clearances. When I go to a dept. store they often don't havemy size or what I want. TJX units are more convenient and don't play price games. Sears will sink.

Oct. 31, 2013 at 8:00 a.m.

DHNMentor, Ohio

Sears has made a lot mistakes over the years. When I worked there, we were encouraged to getcustomers to open Sears credit accounts as they made a great deal of money on these accounts. I don'tknow when they handed there credit card operations off but they certainly aren't making money now. Iremember when they bought Caldwell Banker and some stock brokerage and the running joke wascome to Sears for "socks and stocks." All I remember is wondering what the hell are they thinking?Then came Kmart; how were these two to fit together? Then Lands End; now what?

Yes, the stores and merchandising are hideous but service is even worse; buy something and thetransaction process is tortuous.

They lost their way a long, long time ago. "Satisfaction guaranteed or your money back" I think not.

Oct. 31, 2013 at 6:54 a.m.

Paul Gottliebeast brunswick, nj

The brokerage that Sears bought was Dean Witter Reynolds, and through them, Sears offeredThe Discover Card. Sears also owned Allstate Insurance Co. Dean Witter is now gone, butDiscover and Allstate live on, no longer connected with Sears.

Oct. 31, 2013 at 9:21 a.m.

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Wildrider51Phoenix

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9 of 24 11/13/2013 12:17 PM

We have a Kenmore Washer we bought in 1989 that runs like a dream, has never needed maintenance,and shows every sign of lasting another 20 years... what has Sears come to? "Where America Shops,"they were, one of the Grand Stores of my childhood. What a shame.

Oct. 31, 2013 at 6:53 a.m.Recommended1

JenIndiana

I never understood what happened to Kmart, it wasn't a bad store when I was a kid, but it seemed likein the past decade or so, they were terrible. Sears are the same way. I visited a few locations, theynever had what I needed, the prices were bad, the stores ugly, the help poor, no registers open, etc. Idon't understand how this can happen in a company when there are so many people in charge. Doescorporate think it's okay? Do regional managers visit the stores and decide they are fine? The problemwith these stores just seems so obvious it makes me think the people in charge are just collectingpaychecks and sleepwalking through their work.


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JJIL

Anyone know what this means (in reference to the potential sell-off of Sears Auto Centers)?: "...theremay be liabilities involved with the sale of environmentally sensitive businesses"

Oct. 31, 2013 at 6:46 a.m.

Resident AlienATL

My first thought was that it's a reference to the potential for expensive clean-ups of land andpremises permeated by decades worth of automotive related chemicals and fluids.

"Environmentallhy sensitive" as euphemism for "polluting."

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Oct. 31, 2013 at 7:15 p.m.

AshleyVancouver, BC, Canada

I am shocked by the striking similarities that I have read in these comments between Sears and SearsCanada -- which staff at my local store like to remind us are not the same company (they are, just undera bit of a different umbrella).

My experience was not too long ago when purchasing a gift for someone who registered for theirwedding at Sears (I still can't fathom why they registered there...). It was a blender and after paying Isaw all of their "We Match Prices" signs. So I proceeded to find the same blender on Walmart.ca forliterally half of the price. I took my purchase to the closest customer service desk -- not the one I mademy purchase at. After waiting at least 20 minutes to work my way through the line (I mean there wereat least 4 people in front of me ?), I explained the situation to the older woman, who I am sure hadmade a career of working at Sears, and she rudely informed me that I had to take my purchase back tothe desk that I had bought it at. I could not understand this, as there was a massive sign saying customerservice. I was so appalled by her lack of customer service that I spoke my mind and said it was peoplelike her providing such poor service that was the reason that Sears was going out of business, to whichshe informed that they were absolutely not going out of business. Funny, because their largest store inVancouver had just closed down in favour of Nordstrom.

Left such a bad taste in my mouth, haven't been back since.


13.

LauraOrlando, Florida

Mr. Lampert and his cabal are notorious for the shenanigans à la Sears style. At the end, all employeeswill lose everything they have and have worked for, for years, but his holdings, now at 3+Billiondollars, will still be intact or increase. Any bets? This community has more crooks that I care to count,and have elevated it to an art form. What it is significant is they get away with it, with no onedenouncing their rapacious behavior.

“Those who ignore History are bound to repeat it,” Santaya dixit. We are moving in thatdirection….and fast.


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11 of 24 11/13/2013 12:17 PM

JohnBayport, NY

The Kenmore microwaves are made by various outside vendors such as GE and Samsung, so let's bepractical, if you're wise to this, or you ask a Rep. in Sears who makes the one you're looking at, you canundoubtedly find a better deal at Amazon, and then take Amazon's price into Best Buy and get it therewith a much easier return, if necessary. And instead of these "store warranties", you're better off goingwith Square Trade. Get on their Facebook and website and they'll usually give you a discount.

Oct. 30, 2013 at 6:37 p.m.

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NewTemplarWashington

"Zombie retailer" is so true for Sears. I think it is unfair to compare Sears to JC Penney, as while Searshas obviously lost their way and underinvested in their stores and quality of merchandise (appliancesexcepted), Penney's continues to invest in clean, organized stores with name-brand merchandise. Theissue for Penney's is value vs. price when compared to competition. The issue for Sears is that "thedoors have fallen off" and their leadership seems miscast and truly bringing out the zombie.

Oct. 30, 2013 at 5:36 p.m.

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Lee TrevinoSan Antonio, Texas

It's a terrible shame, all because of poor management and not updating the stores like Macy's andDillard's. Sears paid for a good portion of my college tuition as I was a stock boy for them both in undergraduate and graduate school. They did have excellent products especially tools and garden equipment.Their auto centers and tires, and appliances have always been very reliable, but the routine clothinglines and shoes, stink. They're as generic as Chinese noodles. I'm very sorry to see this happen. The lastthree CEOs need to return their salaries back, they did an absolutely lousy job.


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12 of 24 11/13/2013 12:17 PM

JamesPPalatine, IL

Sears was once the world's largest retailer, they lost that title to Walmart in the later 20th century andit's been downhill ever since. I was never much of a Sears shopper but their devotees claimed youwould hand down a Craftsmen tool or a Kenmore appliance to your grandchildren.

As an aside: Macy's 'upmarket'? They sell 6-piece luggage sets for $59 and diamond earrings for $99 inmy neck of the woods and their results are compared to those of JCPenney and Kohl's. Not sure whereor when that was considered upmarket.


Paul Gottliebeast brunswick, nj

Some of the Macy's stores are "upmarket" at least in clothing-somewhat like Bloomingdales,which Macy's acquired. These stores offer designers such as Ralph Lauren for women- Coach,The North Face, Other Macy's stores are more like Stern's, which was also acquired by Macy's;these stores are stocked with the budget lines.


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Eric WeisblattAlexandria, Virginia

" Mr. Lampert took control of Kmart while it was in bankruptcy." And for whatever reason myinvestment in Kmart stock was reduced to zero when Kmart exited bankruptcy. No one ever explainedto me whether that was required by law or done for greed. No matter. Since that day I have not steppedfoot in Kmart or Sears and will never buy from any company associated with Mr. Lampert. So asSears/Kmart sink into oblivion, my hope is that Mr. Lampert's money is along for the ride.


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13 of 24 11/13/2013 12:17 PM

Grumpy Dirt LawyerSoFla

Eric -- Bankruptcies occur when debt exceeds equity (greatly simplified). Creditors have to bepaid before owners. If there's no money left, the shareholders lose their investment and thecreditors or new lenders end up owning the company.

Does Coshocton Ohio ring a bell...last Weisblatt there died in 1970's.

Oct. 31, 2013 at 9:26 p.m.

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gilbertovelasquezjrHouston, TX

For years I have worked as a B2B and a B2C marketing consultant. I have been the hired gun forclosing stores down, opening them up, or converting places to wholesalers, etc. This is a sad state ofaffairs led by a slice-n-dice firm that would rather kill than build.

That being said, the reality is in the article - Sears never modernized.


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JAQNJ

I'm really baffled by what Sears allowed to happen in their stores. I was in the market for a lower-endnetbook a few months back, and I stopped by Sears to see what they had in stock. Their electronicssections were shocking. I've seen dollar stores with better organization and better displays.


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14 of 24 11/13/2013 12:17 PM

RobSouthern CA

I sell appliances at Sears and I can tell you that morale is at an all time low. Our commissions are beingcut and we get "hit" for the loss of our dwindling commissions if the delivery or installation team screwup. Kenmore products are still among the best made. The problem is that ALL appliance manufacturersare cutting the quality of their products. It's ALL about the top making more at the expense of theworkers. When we complain we are told if we are not happy, we can look for another job. Sears spentMUCHO on the i-pads we now use to make us "look" like we are using the latest technology.Unfortunately after a year, new glitches show up every day. Had they put this $ into fixing the stores,this would have gone a long way to helping make us look and feel better in the stores. Basically, Searsis placing its hope in Sears.com. They often offer lower prices on line than in the store, so we appeardeceptive when someone comes in the store and then sees it cheaper on line. If I match that price,which I can, my commission is reduced between 25 and 50%. There ARE some managers who careabout their employees and they are just as frustrated. I work with someone who has been sellingappliances for over 20 years with Sears and he makes about 60% less today that when he started, not tomention cutting benefits. I'd change jobs if I could, but the problem is that this is just not a problem atSears. It's endemic to the entire retail community. I'm worried!


JJPSarasota, FL

No surprise here, that's what buyout firms do. They take every dime out of a company, get more moneyby borrowing money on the company which they pay to themselves. The only winner is the buy outcompany and the losers, of course, are all of the people who work for the company and any otherstockholders. Sears is just he latest victim.


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Terry OlbryshPhoenix

In hedge fund managers we trust -- not to run companies.


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15 of 24 11/13/2013 12:17 PM

JoeEast Patchogue

The last time I went into a Sears store was to pick up a once excellent Craftsman drill that I had left forrepair. It needed new brushes. I paid a $70 deposit when I left. When I went to pick it up, expecting topay the balance, I was told that Sears no longer repaired that item. Why they didn't tell me that when Ibrought it in was not addressed. Furthermore they would not give me back my $70 because it was a"non-refundable" deposit. Am I surprised that they are going belly up? No. But I am surprised that ittook so long.


Rob E.New York City

C'mon, you didn't get your $70 back? They would have had to call the police if that was me. I'dthreaten them with small claims court.


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For Once-Mighty Sears, Pictures of Decay - NYTimes.com