Why Sears’ Last Great Hope Was a Promise That Never Materialized

A decade after an investment firm was created to help save Sears from its inevitable demise, both are now in their last gasps.

Five Sears stores are still operating in the country, but they won’t be around much longer, industry experts predict.

Neither will Seritage Growth Properties, the real estate investment trust created to cash in on the value of the retailer’s properties. It abandoned its somewhat audacious plan to turn Sears’ rich real estate holdings into dazzling mixed-use properties. Today, Seritage is offloading the last of its assets as it pays down a $1.6 billion term loan from Warren Buffett’s Berkshire Hathaway.

“The goal is to sell the remaining Seritage assets as quickly and profitably as possible, but we are also very open to an alternative transaction that could enhance shareholder value,” Adam Metz, CEO of Seritage, said in an interview.

The winding down of both companies in tandem brings to an end a two-decade saga that hedge fund magnate Edward S. Lampert started when he bought Sears in 2005.

When Lampert combined Sears with Kmart, which he had bought out of bankruptcy in 2003, investors were betting that the retailers would be better off dead and their land repurposed. At the time, Sears owned most of its more than 3,400 stores. Sears’ market value soared past $20 billion in those early days of Lampert’s ownership as the company slashed costs and investors anticipated cashing in on its valuable holdings.

Within a decade, though, Sears was flailing and Lampert had embarked on a plan to sell hundreds of stores to Seritage. The fund’s shares, now trading at less than $4, hit more than $50 in the years after Seritage was formed.

So what went wrong with Lampert’s big promise?

Bad timing and an egregious conflict of interest involving Lampert at the helm of both entities are to blame, industry experts say. Through Lampert’s hedge fund, ESL Investments, which was a major lender to Sears, he was the retailer’s biggest creditor and shareholder. Over the years, he was also Sears’ chairperson and CEO, and until 2022 was chairperson of Seritage. This unusual setup put him on both sides of transactions and led to accusations that he prioritized his fund’s interests over Sears’ financial health, something that prompted lawsuits by Sears’ creditors after the company filed for bankruptcy.

Lampert and his hedge fund had stakes in the businesses that were spun off, and he collected hundreds of millions of dollars in interest and fees from the retailer.

Early Red Flags

Lampert’s formation of Seritage in 2015 was promising enough to attract prominent backers, including Buffett, who took an 8% stake in the company and later lent it almost $2 billion to fund the redevelopments. Lampert’s success at ESL Investments, including a big win with AutoZone, had made him something of an investing legend and once even prompted comparisons to Buffett.

There were red flags from the beginning, though. Sears’ “finances were more fragile than they let on,” said Victor Rodriguez, senior director of market analytics at CoStar Group, a commercial real estate data and analytics firm. And Seritage’s fortunes were too closely tied to those of Sears, once the country’s leading retailer.

The retailer was hemorrhaging cash after years of struggling to compete against larger rivals like Walmart and Home Depot. Lampert sold or spun off assets, including its Lands’ End clothing brand, to stanch the losses. The explosion of online shopping would put Sears even further behind as it fought to stay relevant.

Lampert’s effort to revive Sears included programs like online ordering, in-store pickup and a loyalty program. Many former executives said Lampert’s strategy was to compete with Amazon.

The problem with that plan, though, was that most Sears customers still preferred shopping in person, but the stores were poorly maintained as the company was spending little on upkeep.

Neither Lampert nor Transformco, the company that currently operates Sears, responded to requests for comment.

Bankruptcy Beckoned

In 2015, Sears said it was selling about 250 stores to Seritage for $2.7 billion. Most of those would be leased back to Sears, and the rent would provide an income stream for Lampert’s plan to redevelop stores. The new developments would then command higher rents — and more revenue for Seritage.

But Seritage couldn’t depend on Sears’ rent payments; the retailer’s continued troubles led to the closing of hundreds of stores.

“Seritage was in a very tough spot — you have all your income tied to dying retailers,” said Vince Tibone, a managing director at Green Street, a commercial real estate research and consulting firm. “They just couldn’t replace the lost income from Sears fast enough.”

Sears filed for bankruptcy in 2018, with more than $11 billion in losses and about 700 stores remaining — roughly one-fifth of its size at the time Lampert bought it.

Lampert started Transformco, another ESL-controlled entity, to buy Sears’ assets out of bankruptcy.

The Sears estate and the company’s creditors sued Lampert and Sears Holdings’ directors, including former Treasury Secretary Steven Mnuchin, as the bankruptcy played out, accusing them of stripping $2 billion in assets in a series of insider deals while lacking a realistic plan to turn Sears around. In one legal filing, creditors accused Lampert of plundering the company by selling and spinning off assets in a yearslong “Shakespearean tragedy.”

The suit was settled in 2022 with a $175 million payment.

Today, the handful of remaining operating Sears stores are under Transformco’s ownership, which is also selling and redeveloping old stores.

The Last Stores

More recently, Seritage has been able to take advantage of higher real estate values amid a scarcity of land and construction, said Brandon Svec, national director of U.S. retail analytics at CoStar.

Still, it serves as an example of a real estate strategy gone wrong.

Sponsored

“By the time Seritage got started, it was a decade too late to extract the most value possible for these assets,” Svec said. Rents for retail space peaked around the time Seritage was created, Tibone of Green Street said, before a wave of bankruptcies and store closures curbed demand.

In hindsight, it may have been better to split Seritage into two businesses — one concentrating on smaller and simpler projects requiring less investment, such as renovating and re-leasing old Sears stores, Tibone said. The other could have navigated the longer-term, large-scale, capital-intensive projects that are difficult to execute even in the best of times.

Recent visits to two Sears stores and the last operating U.S. Kmart, in Florida, revealed sites almost devoid of shoppers. Julio Guzman and his family were the only shoppers at a Sears store on a recent weekday at the otherwise lively Florida Mall in Orlando. Guzman said he was delighted to discover a Sears that was still operating after he moved to the area this year.

“It was very convenient to have Sears almost around the corner,” said Guzman, who said he had been a loyal customer for 30 years, relying on the merchant for electronics, appliances and tools. “Unfortunately, our kids are not going to remember.”