Why Did Sears Holdings’ Largest Outside Shareholder Suddenly Jump Overboard?

4th director to quit in 10 months. Bankruptcy prospects heat up. 

The board of directors of Sears Holdings keeps shrinking – and that makes sense: Who’d want to be a director as the retailer careens along its path to bankruptcy, it only being a question of when it’ll get there, and whether or not the company will make it through the holiday selling season.

Today the company announced that Bruce Berkowitz “has decided to step down” from the board of directors, effective October 31, 2017. He’d joined the board in February 2016. So that wasn’t long. No reason was given for the abrupt departure, which caused bankruptcy fears to flare up, and shares (SHLD) plunged 11.5% to $5.99.

Berkowitz is the fourth director to jump overboard over the past 10 months and none has been replaced. The other three:

  • Steven Mnuchin quit the board in December ahead of his appointment as Secretary of the Treasury. He’d been on the board for 12 years. The vacant slot has not been filled.
  • Alesia Haas quit the board in December 2016 after having joined in February 2016 – just long enough to get a look-see before bailing out. She’d been the CFO of OneWest Bank until it was acquired by CIT group.
  • Cesar Alvarez quit the board in March 2017. He’d joined in December 2013. At the time, he was co-chairman of the law firm Greenberg Traurig. His slot has not been filled.

This leaves only six directors, including CEO and hedge-fund manager Eddie Lampert, down from 10 in February 2016.

But Berkowitz is very special. He is the Chief Investment Officer of Fairholme Capital Management, the largest outside holder of Sears Holdings’ shares (insiders Lampert and his hedge fund ESL remain the largest owners). In its Form 13F filing with the SEC on August 14, Fairholme disclosed that it owned 28.86 million shares of Sears Holdings, or 27% of the total shares outstanding!

Fairholme Capital is a beaten-down investment fund. It had peaked in 2011 with $20 billion in assets. According to its Form 13F, filed in August, the fund’s equity positions were down to 9 holdings worth $982 million.

Among the nine positions were the following goodies:

Sears Holdings, 28.86 million shares, valued at the time at $255.7 million – or $172.9 million at today’s closing price.

Sears Holdings warrants, 6.7 million warrants to expire Dec. 15, 2020

Land’s End, 2.855 million shares. The company was spun off from Sears in 2014. At the time, those shares traded at $30.50. They’re now at $12.50.

Sears Canada, 21.56 million shares. The company is now in liquidation and its shares are worthless.

Sears Hometown & Outlet Stores, 77,850 shares, which plunged 9.5% today to $1.90. They’re down 95% since the summer of 2014.

Seritage Growth Properties 159,710 shares. The company owns 235 former Sears and Kmart properties. Its shares fell 3.4% today, on concerns that Sears was unraveling faster than expected, and that the math might not work out quite as well as expected.

What math?

Lampert is chairman of Seritage, which was spun off via a rights offering from Sears Holdings. The $2.6 billion deal transferred 235 Sears and Kmart properties from Sears Holdings to Seritage. The transaction closed in July 2015. Most of the stores were leased back to Sears Holdings. Since then, Sears Holdings closed a number of these, and Seritage leased the properties to new tenants at much higher rates.

The deal didn’t pass the smell test, with Lampert gallivanting around on both sides of it. Sears and Lampert were sued by individual investors who’d alleged that he controlled Seritage and had benefited from the deal by spinning off Sears’ most valuable locations for a pittance, to the detriment of Sears’ shareholders. In February 2017, Sears Holding and Lampert agreed to settle the suit for $40 million.

The fact that the Seritage deal closed in July 2015 puts it beyond the fraudulent conveyance provision in the bankruptcy code, which allows for a two-year claw-back period. So now Sears Holdings is free to file for bankruptcy anytime.

Sears Holdings continues to close Sears and Kmart stores. Its sales are plunging at a dizzying rate, down nearly 50% in three years, and on track to hit zero in three more years – if it could hang on this long, which it won’t.

So Berkowitz, whose fund has gotten crushed by Sears-related equity investments and owns part of the smelly Seritage deal, was the fourth director to jump overboard in 10 months. For whatever pressing reasons he did that — including the flexibility needed to shut down his failed fund and distribute the left-over holdings to its aggrieved investors — he certainly must have seen a hopeless scenario that pushes bankruptcy concerns several notches up the scale.

But don’t blame our American consumers. They’re hanging in there, though they didn’t suddenly perform a miracle. Read… What the Headlines Got Wrong about Retail Sales

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  44 comments for “Why Did Sears Holdings’ Largest Outside Shareholder Suddenly Jump Overboard?

  1. Petunia says:

    We just replaced the Sears BBQ grill we bought just 16 months ago. I would never shop there again, not even the going out of business sale.

    • michael says:

      The version I bought is made by Weber a couple of years ago is holding up just fine. Just like their tools you must chose carefully.

      • Haus-Targaryen says:

        Looking forward to the T2 & T3 mall waterfell effect when Sears liquidates.

        Many malls in second and third tier locations will lose their last anchor-tenant or go to just one, which will be the death nail for the smaller retailers in these properties who rely on traffic generated by anchors.

        You’re going to have massive cash flows dry up for the holders of these properties and the knock-on effects of other mall anchors will be interesting to watch, such as Dillards, Macy’s and the like. What sense does it make to keep a Macy’s open in a location that was borderline to begin with when Macy’s is the only open store in an entire complex?

        I have little sympathy for Sears. Let mother nature of supply and demand take its course.

        • Petunia says:

          Lampert stripped out the real estate holdings hoping that in the end he would retain the most valuable piece of the business. But I am not so sure he will walk away with a big smile. CRE is in trouble because the economy has never really recovered and a Sears location has the added burden, of being considered a bad retail location, due to Lampert’s own mismanagement of Sears. I hope his plans are to convert them to other uses because as a retail location every Sears store is a giant doodoo pile.

    • Kevin Beck says:

      The “going out of business sale”? HA! Sears has been a slow-motion going out of business sale for the past 15 years.

      I don’t know how many K-Mart stores still exist, but they used to have six locations within 30 miles of Tulsa at the turn of the century. Now, there are none. They closed one of their two Tulsa locations last year, after remodeling and downsizing the location two years earlier. Three of their Hometown Stores locations have closed in that 30-mile radius within the past three years.

      I’m satisfied that I sold the company short 12 years ago. I’ve held the short position all these years, so that I don’t have to pay the taxes when I cover. Maybe Bruce bought those shares; he’s been buying regularly over the past decade to try to support the stock. Unfortunately for him, value wins out in the long run. And Sears probably has no value left.

  2. T says:

    At 68 years old, I can recall how reliable and trustworthy a retailer Sears was. I find its passing sadness producing.

    • Dave P says:

      Used to buy most of my tools from them. What is really sad though is what the employees are going through. When I was an assistant manager for a grocery store in FL that went belly up it was very stressful. Most people in the retail field have no degree. When you lose a management position you often end up taking a low paying position to “prove yourself” to the new company.

      For the regular employees it has to suck as well, hours cut. low morale and fighting for another crappy retail job with all the other displaced citizens in this country.

      I wish somehow the people who caused all this could feel the pain they are inflicting upon those below them.

      • Kent says:

        Walked through a local Sears on my way to a movie last weekend. Must have been all of 4 employees in the store. None actually working. I think they’re just biding their time for a small paycheck.

        Compensating the C-Suite based on share price valuation has destroyed any interest the higher ups have on the folks actually doing the work.

    • nancy lesicka says:

      Totally agree with you T.

  3. bkennedy says:

    It just careens from bad to worse

  4. Dave says:

    Forty year ago, I went thru a divorce. Sears cancelled my credit card even though I had never missed a payment. I vowed never to set foot in the door again. I never missed them to this day.

  5. raxadian says:

    The monopoly is comming. But will brick and mortar store chains still exist after this crisis is over or it will all be like Amazon spyware madness plans?

    • Suzie Alcatrez says:

      The era of the big box store is ending. Even mighty Walmart is feeling the pinch of the dollar stores.

      Only well run brick and mortar businesses will survive.

  6. MF says:

    What, Lampert’s Lord of the Flies management style ended with Sears’ head on a stick? Geez. Who could have predicted it?

  7. akiddy111 says:

    Bruce Berkowitz is part of the 87% of Equity Fund Managers that under performed the S&P 500 over the last 5 years. Actually, his 5 yr performance ranks in the bottom 1%, so he’s neck and neck with John Hussman. Two completely different investing philosophies but they ended up in the same place at the end of the day.

    I do not think Sears and Bruce can save each other at this point.

  8. d says:

    Unless sears gets completely liquidated lampert the fraudster will control it again any way.

  9. Kent says:

    I didn’t know Steve Mnuchin was a Sears director. And now he’s running the US Treasury Department? Sounds about right.

    There’s a best-seller book somewhere in this Sears thing. The writer needs to be someone who has followed it for awhile. Should have a strong finance background. Good researcher. Hmmm…

  10. Begbie says:

    Just the smell of newness when walking through the door, brings me back 45 years ago to school shopping in the big city. The world is not as friendly

  11. DK says:

    I remember back in 2014 that many financial analysts were saying Sears would be dead in 6 months. Amazing how long they can drag these things out.

  12. Bob Smith says:

    It died in the 1980’s–Wall Street did everything they could to keep the zombie moving.

  13. wratfink says:

    China killed Sears.

    I own many Craftsman tools from long ago, but when Harbor Freight opened their doors, I bought my needed tools there. They were cheap to buy and, for me, the shadetree mechanic/handyman, if I got several uses out of them and they broke, I was still ahead pricewise.

    Possibly another factor was that Sears failed to adapt to the online model. Poor vision. They were, after all, the top mail order business at one time so the model was essentially already there. You could buy a Craftsman house or a kit with a hypodermic needle and two doses of heroin through their catalog at one time.

  14. martin says:

    Financial asset stripping, rape and pillage of investors and employees…
    No legal price to be paid for the perpetrators…
    Token legal fines for the middle, that represent a tiny fraction of the profit.
    If you are part of the economic elite, what’s not to like?
    The sheep even seem to like being “trimmed” every few months or years.
    Sadly, the Ponzi, Finance economy reduces capital available for real growth and productive investments.

  15. There a couple things that might save Sears, which was doing what Amazon does now a hundred years ago. I have a friend who lives in a house bought from Sears. One would be an end to the global exploitation of labor, materials and finance. (WeToo?) Another might be the flameout of Amazon and Walmart and other internet retailers. The internet is the most vulnerable of the phone based technologies. Another problem rests in the rise of untested goofball technologies, like Bitcoin, and driverless cars, such events are not necessarily sudden. All technologies create new problems which require more technology to solve. At some point societies ability to find these new technologies can’t keep up. Even a fifty year reset in the way retail works would put companies like Sears back in the game. Sometimes the race goes to the tortoise.

    • George McDuffee says:

      RE: Even a fifty year reset in the way retail works would put companies like Sears back in the game. Sometimes the race goes to the tortoise.
      Perhaps if “honest” Darwinian “Free Market” forces applied, however Sears appears to be yet another investor fraud.

      IMNSHO a few of the major changes required include criminal sanctions against officers/directors for borrowing money to pay dividends and/or stock buy-backs, and the creation of a new Federal felony of “careless and reckless operation of a corporation,” analogous to the existing state felony of “careless and reckless operation of a motor vehicle.”

      • If they can’t get Donald Trump for “careless and reckless operation of a country,” they sure can’t get these guys. It’s end stage mania corruption, the fruit is heavy, so are your eyelids. Buy stock

  16. TheDona says:

    Lambert’s hedge fund just Loaned Sears 100 million with another 100M in line for December. Sears had to pledge more RE as collateral. This is a run on Sears RE pure and simple. If you recall Sears owned Allstate, Discovery Card, Dean Wittier and Coldwell Banker at one time. When Sears sold them off, did they keep the RE? It is possible that Sears is sitting on a massive portfolio of RE that we have no idea about.

    In a conference call in June, Berkowitz noted the importance of Sears’ vast real estate holdings to his firm’s investment.

    Perhaps Berkowitz is distancing himself before the bone picking begins.

    • fozzie says:

      “In a conference call in June, Berkowitz noted the importance of Sears’ vast real estate holdings to his firm’s investment.”

      Berkowitz was either trying his best to keep his fund afloat and lied or he saw what happened to Sears Canada and realized his RE thesis as far as the value of SHLD equity was wrong.

      Eddie’s loans to Sears are getting smaller and smaller while the interest charged grows. My WAG – If Sears can make it through Christmas I expect bankruptcy soon after.

  17. Cricket says:

    Sears was the best place to shop even a decade ago for tools, shoes, appliances and clothes and the layout was nice at my store. It still is a go-to place for most of that for me.

    Got blind sided by the Internet, I suppose….

  18. Martin says:

    There is no point to a Sears bankruptcy or any version of continuing on unless they change out what they are not selling for things that will sell. All the financial tap-dancing in the world can’t help an overwhelming lack of demand for what they sell now. Being a 50th clothing store in a Mall won’t cut it.

  19. bill says:

    Bruce’s annual letter says that all is peachy with Sears:http://www.fairholmefundsinc.com/Letters/Funds2017SemiAnnualLetter.PDF

  20. Bobby Dale says:

    I actually wrote a letter to Lampert several years ago pointing out that he has what the Grand Benevolent Great Mighty Wizard of AmAZon wants, perfectly located distribution centers across the country. My suggestion was to use a small portion of the stores for showroom and the large remainder for distribution center using Uber/Lyft and proceeding to drone delivery.
    Never heard back from anyone at Sears. Hate to see them go but it is now a foregone conclusion.

    • NoRush says:

      Perhaps it will be Alibaba who comes in to pick up their distribution system. That would shake up the retail world.

    • chris Hauser says:

      locations good, buildings obsolete. beyond obsolete, useless. get the concrete crusher there, turn into tilt-up.

      mnuchin on the board for 12 years. huh.

      one west on the board. huh.

      ah, never mind.

  21. Ryan T says:

    Sears acquired the Craftsman brand in 1927 for $500 bucks and they sold in Jan 2017 for $900 million to Stanley. The dominos are falling and they are all in a row. I remember in 2000 my roommate in college was a sales associate at Sears in the Sears Craftsman / Tools department. He made pretty decent money and there was a lot of foot traffic. I was in a Sears store a few months ago and it was a ghost town. Sears is done unfortunately. They didn’t adapt and see the marketplace changing and unfortunately it is what it is.

  22. d says:

    The demise of sears due to blatant Asset stripping more than simply bad management may Just may be “the straw that breaks Ect” which could antagonise congress into action. Against these Blatant Asset strips, which ultimately defraud the shareholder and the TAX dept.

    Admittedly that is a hopeful may.

    At a guess Berkowitz simply want some put some space between him and the putrid pile at sears before it hits the fan.

    Sears seems to have avoided the pre consumer-fest Supplier Credit trap Toys R Us fell into, so next year for the chapter 11fililing.

    I still believe they will run sears as long as they can to attempt to gloss over the asset strip.

    Time, between the crime and the trial, is the criminals friend. Any good defense lawyer will tell you that.

  23. TheDona says:

    In the late 70s and early 80s, 75% of Sears profits were from services, not retail. That was the beginning of the end of Sears. Some of the former CEOs tried to capitalize on asset stripping to keep profits up as the retail arm was tanking. But they were CEOs thinking short term, not a hedge fund manager thinking long term.

    Eddie owns the majority in Sears Canada. Sears Canada has a long history of mergers and buy outs of first in class stores, rather like Campeau did in the 80s. I imagine there are a lot of cheap long term leases, prime properties, and vacant land that are low valued for tax purposes that will now enter the Eddie side of the balance sheet.

    Same will happen to the US properties. According to Bloomberg, Sears has over 2,500 properties including vacant land. Yes some of them are stinkers and will take a loss, but in the long term big picture they are worth a lot.

    Seritage is releasing some properties at a nice profit, re-developing others, and has several Joint ventures to re-capture value. Interestingly it’s main JV partner is GGP who bought out Sears development arm (which included malls owned by Sears), Homart.

    There are so many moving parts to this. All of Sears subsidiaries have subsidiaries so who knows what is really behind the curtain.

    • bill says:

      There’s a story in Forbes that Warren owns 8% of Seritage.

      • d says:

        Untill they start to strip the “Assets” out of it again. Its good stock, short-term. Perhaps he is waiting for eddie to experience a cash crunch then take it over.

        Eddie is a minnow compared to warren. Minnows are food..

  24. Bin says:

    Got my Sears card in 1994. I was 18 and it just showed up in the mail. I ran out and maxxed out my $1000 limit with a nice rack stereo system. They made a lot off me since. Just bought a chainsaw earlier this year at the last location near me which closed last month.

    I guess it’s online only if I do any business with them anymore.

  25. mvojy says:

    The Sears in my town is probably going to close since the town has plans on file to convert the lower level into a Stew Leonard’s and the upper floor will be a 10-screen movie theater. Retail is dying out and is being replaced by entertainment. I heard the Sears Auto will convert into a Sears appliance store. Sad but old companies are going extinct due to online retail, failure to modernize fast enough and just poor or greedy management. A&P was the oldest company in America until their management ruined the company by purchasing Pathmark and thinking that we all wanted to check ourselves out.

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