Lampert can make money, but can he remake retail?

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It's make-or-break time for Eddie Lampert.

The 43-year-old chairman of Sears Holding Corp. is a self-made billionaire, one of the best hedge-fund managers ever, and a hot brand on Wall Street with ambitions to become the next Warren Buffet.

But the true test of his mettle is whether he can orchestrate the revival of two of America's once-great retailers, Sears and Kmart. "This is his opportunity to show he can go beyond M&A and can get to the core of what makes a retailer work," said Alexi L. Sarnevitz, a retail analyst with AMR Research of Boston.

Not only has Mr. Lampert banked his reputation on what some analysts consider an improbable outcome, he's also banked his own personal wealth-billions of it. Investors have flocked to Sears Holding stock since the merger, driving it as high as $163.50 a share. But shares aren't skyrocketing anymore, and instead have fallen 20% since mid-July.

High expectations

Yet it's still trading at a larger premium than other better-performing retailers, including Home Depot, Wal-Mart and Target, according to an analysis by equity research firm Applied Finance Group for Advertising Age (see chart). In other words, based on the stock price, investors expect better improvement in earnings from Sears than Wal-Mart.

"Is it the brand of Eddie more than the brands of Sears and Kmart?" said Louis Bevilacqua, a partner at law firm Cadwalader, Wickersham & Taft, a New York-based firm known for its M&A work. Some analysts have even called it a "faith stock."

The faith is being placed in Mr. Lampert by high-wealth individuals who invest millions in ESL Investments, the vehicle by which he raised the cash needed to orchestrate the takeover of Kmart-through which he turned millions into billions, enabling the $11 billion takeover of Sears.

A turnaround will add to the already colorful narrative of Mr. Lampert's life, including the 2003 story of his kidnapping in Greenwich, Connecticut, near the offices of ESL Investments. (Mr. Lampert reportedly negotiated his way out promising his captors $40,000.) Failure will result in an exodus of cash that will be quick and irreversible, said industry insiders.

That's why Mr. Lampert's unexpected strategy to direct the turnaround himself-down to the marketing and merchandising details-will in the end make him either a fearless visionary or a modern-day Icarus on Wall Street. "If he pulls this off, it would just be unbelievable," said one hedge-fund industry watcher.

So just who is Eddie Lampert?

Lacking an M.B.A. and simply riding a four-year degree from Yale, some hard-earned connections and a stint at Goldman Sachs & Co., he persuaded enough millionaires to put their faith and wealth in his hands 18 years ago, launching ESL Investments with just $25 million at the astoundingly young age of 25. (Note: That's the same age Mr. Buffet was when he started his first investment fund.) It now has an estimated $9.2 billion under management.

Even so, 2004 was a mediocre year for returns in other investments by ESL, although a rise in the Sears stock buffeted the fund's earnings so significantly that it catapulted Mr. Lampert to the enviable position of the world's highest-paid hedge fund manager. He raked in earnings of $1 billion, according to Institutional Investor, beating out a veritable field of hedge-fund legends, earning triple that of Wall Street legend George Soros.

Long way

Clearly, Mr. Lampert has come a long way. In a 1991 profile of the-then 28-year-old Mr. Lampert, The Wall Street Journal described his "bulldozing ambition" and "furious accumulation of mentors and connections" via Yale, including his relentless pursuit of Robert Rubin, who was then at Goldman Sachs, and gave Mr. Lampert his first job.

And despite the criticism of Mr. Lampert's power grab over marketing at Sears Holding, which other advertising or retail executive can say that at the age of 28 they were sitting on the board of directors of Saatchi & Saatchi telling the top brass how to run an advertising agency?

Mr. Lampert's confidence seems unflappable. After all, Sears Holdings' executive ranks have been so slimmed down that none of the top ranks prior to the merger remain. The leadership team, following the demotion of Sears CEO Alan Lacy, now essentially consists of two non-merchants: Mr. Lampert and his handpicked Sears CEO Alywin Lewis, a former fast-food executive.

Even prior to his demotion of Mr. Lacy earlier this month, Mr. Lampert had quietly launched a takeover of marketing and merchandising at Sears. Months ago, in fact, he began heading Saturday-morning meetings-a standard of the retail industry-with top executives at Sears' headquarters in Hoffman Estates. And immediately following his takeover of marketing and merchandising, he led a series of in-depth meetings with senior management to "build better relationships," according to one insider.

He's also spent time in recent weeks in both Sears and Kmart stores, talking to associates, browsing the floors and observing customers-at times drilling down into the minutiae of the prices on merchandise for a liquidation sale at a soon-to-be shuttered Kmart.

Despite evidence of such micro-managing, Mr. Lampert is not considered abrasive. Indeed, some insiders argue that despite initial rumors he would storm into Sears in a ruthless rampage of irrational cost-cutting, he has instead positioned himself as a rational and respectable leader among employees. "In meetings, he's direct, he's engaged. He's also a quick study and he catches on, although he always seems to know his facts going in," said one vendor who has attended a handful of meetings led by Mr. Lampert since the merger.

That's not to say his style isn't tough and borderline adversarial: "If he asks a question, he already knows the answer and is just checking whether you do, too. If anybody is trying to pull the wool over his eyes, he picks right up on that. He seems to want you to say you don't know the answer rather than pretend you do."


Besides being tough, Mr. Lampert is also known for being extremely secretive. He's literally shut down the entire investor-relations department at Sears, ceased all earnings calls with analysts and communicates through SEC filings and his own, although often lengthy, "chairman letters" aimed at investors. Even third-party vendors must sign nondisclosure agreements, including specific forms about not talking to the press: "They are pretty adamant about not wanting any information getting out about what they are doing," said one current merchandising consultant to Kmart.

In keeping with this pattern, Sears declined to make Mr. Lampert available for comment for this story, but did allow Lisa Schultz, senior VP-chief creative officer for Kmart, to comment on Mr. Lampert's management style.

"Eddie is very smart and very thoughtful and he looks at things many different ways," she said. "He's got great focus, he isn't flippant and he doesn't shoot from the hip ... he always probes further and does the research. It's never, `we've got to do this because Target does this or another competitor. "'

Ms. Schultz, recruited from the Gap following the takeover of Kmart, also defended Mr. Lampert's takeover of merchandising and marketing and said he's attended at least six presentations on new collections for both the home and apparel divisions of Kmart since the merger.

But when asked how well the integration between the two brands is progressing almost a year after the merger was announced, she said only two areas are coming under "one mind-set," as she put it, information technology and sourcing. And as far as merchandising and marketing is concerned? "We are starting to share ideas and talk a lot," she said, but offered no further details.

Whether skepticism about Mr. Lampert's true intentions for the Kmart/Sears merger will persist, there is a parallel with Warren Buffet's own career that is illustrative.

When the legendary investor began buying into big brands in the `60s and slowly building the empire of wealth that remains to this day, he did, at times take a hands-on approach. In a way, Mr. Lampert's strategy at Sears mirrors that of Mr. Buffet, who eventually made huge returns because of that hands-on approach.

Unlike Mr. Lampert, though, Mr. Buffet shed his hedge-fund manager image early in his career. He used cash raised through the hedge fund to acquire then-textile company Berkshire-Hathaway, using the structure and cash flow to acquire insurance companies and create a financial empire that went way beyond hedge-fund status. That may well be the strategy with Sears.

"One day the Sears brand could become synonymous as an umbrella company of great investments, not as a retailer," said one hedge fund manager. "One option for Eddie is to run all his investment through Sears."

Lampert's life

Hometown: Rosyln, N.Y.

1984: Yale University, B.S., economics.

1984-1988: Works in arbitrage department at Goldman Sachs.

1988: Launches hedge fund ESL Investments, after his own initials, at 25.

2002: Buys bankrupt Kmart for less than $1 billion.

2004: Launches $11 billion takeover of Sears.

2005: In early September, expands chairman role at Sears Holding Corp. and takes over marketing and merchandising.

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