It was Ross Perot who made the phrase "you’ll hear a great big sucking sound" famous when he said them during his Presidential debate with Messrs. Bush and Clinton – referring to the impact he felt NAFTA would have on employment as jobs transferred from the USA to Mexico.
I’ve borrowed it today to refer to the situation at Sears (see chart here.) Hard to believe that it’s only been 3 1/2 years since Ed Lampert used his control of KMart to purchase Sears. Today the combined company is valued the same as it was then – but it’s on a fast track lower. Since the acquisition, it’s all been sucking sound around the Chicago suburbs where Sears is headquartered. Now, the most recent headline from The Chicago Tribune (read article here) says it all "A giant continues to unravel."
The amazing thing was that anyone ever believed this acqisition was going to be good for anyone. KMart had gone bankrupt, and Mr. Lampert used real estate sales (many to Sears!) during the best real estate market in 80 years to fund his takeover of the company. Somehow, people translated that experience into a big win for the struggling, dying Sears chain. Sears had been getting trounced on all sides for over a decade when Lampert took over. And neither management at Sears, nor Mr. Lampert, had any idea what they were going to do to reverse fortunes.
Smart money initially talked that Mr. Lampert would quickly repackage the Sears real estate into trusts and unload them onto the super-hot real estate investors. But he didn’t. Instead, he said he would turn around the company’s profitability. But his plan to do that was effectively doing more of what KMart and Sears had always done, only with less advertising, less marketing, less spending on merchandising, lower pay for employees, fewer open stores and more limited product lines. Uh huh.
Very quickly Mr. Lampert’s cuts produced better margins. Sales declines happened, but not as fast as the cost cuts, producing a very short-term uptick in profits and cash flow. If you sell down inventory while lowering costs you generate cash. So then the smart money then said he was turning Sears into a vast private equity firm that would milk Sears oh so adroitly of its value and invest the money in extremely high return projects – after all Mr. Lampert previously made a fortune as a hedge fund manager. But, the world was awash in liquidity and there were more hedge funds and private equity firms than deals, so the profit of such projects was declining precipitously (even Warren Buffet complained about the prices money managers were paying to do deals as he sat on his cash hoard). Meanwhile, it was Lampert’s hedge fund that had bought KMart which then bought Sears – so in practicality it was Sears that was to make the hedge fund money – not be a hedge fund. Uh huh.
Now, everyone is wondering how anyone can win at Sears. Real estate markets stink. Retailing stinks. Sears revenue per store, and number of stores, has declined for 5 years along with cash flow and profits. Sears has finally made its way from the Swamp to the Whirlpool – and thus "the great big sucking sound" that is what you hear when the last water finally swirls into the drain.
There were lots of optimistic folks all along this journey for Sears. Jim Cramer of Mad Money television fame pumped and pumped his love of Mr. Lampert. To this day the article above quotes a money manager who has recently bought 500,000 Sears shares expecting a brilliant Lampert play (although he has no idea what it will be.) We love to be optimistic. But this game is over. Companies remain in the Swamp, fighting alligators and mosquitos while making no money for investors, creating no new jobs for employees and providing no new opportunities for suppliers, only so long as they have ample resources to fund the messy swamp fights. But due to low returns, and the ongoing sale of assets to preserve the losing battle, there is no way the business can ever return to success. Woolworth’s, S.S. Kresge and Montgomery Wards are just 3 retailers that learned this the hard way. Optimism feels great, but it is unwarranted as the business heads toward its inevitable demise.
When companies are in the Swamp they are just paddling around waiting for the event that opens the drain and sucks them into the Whirlpool. They never know what that event will be – in fact almost no one does. But inevitably some event occurs which simply requires more resources than the business has and in very short order – it’s sucked away. In Sears case I’m sure Mr. Lampert will blame President Bush, Congress and the Federal Reserve for a consumer-led recession which he could not have been expected to predict 3 years ago. He’ll say his problems are their fault. Uh huh.
But in reality, Mr. Lampert could have used Disruptions and White Space to turn around Sears. He just didn’t. He left management’s old Success Formulas, believing in the power of the Sears brands (Kenmore, Craftsman, etc.) and the store locations to save the company. Uh huh. And on top of that he had ultimate faith in his own Success Formula – his financial machination skills to bleed the company of cash or forever bamboozle investors with multiple complex deals – something no one has ever done successfully. Both of these Success Formulas were out of date, and would not work. And since Mr. Lampert did not believe in Disrupting them, and creating White Space to do radically new things, this venture never had any hope.
And it still doesn’t. If your optimistic about Sears open your window and listen – I think you’ll hear a great big sucking sound coming from the mall anchored by a Sears store down the street.