Sears’s double whammy

by Alexandra Biesada, January 25th, 2008, 6:09 am

Sears Holdings, the underwhelming retail force created by the combination of Kmart and ailing Sears, Roebuck in 2005, is on the skids. Following an impressive post-merger run up, Sears’s shares have slid from a 52-week high of $195-plus-change to less than $85 last week. How’s that for a bumpy ride in the stock market?

Investors, awed by the financial prowess of the mastermind behind the merger of Sears and Kmart, Edward S. Lampert (whose hedge fund ESL Investments owns 48% of Sears Holdings), are losing patience — and money — waiting for the long-promised turnaround. While Lampert’s financial magic worked to improve Sears Holdings’s financial performance for a while, its retail operations remained stubbornly in the dumps. I’m willing to bet that most recent visitors, myself included, to Sears’s stores have come away unimpressed. (The extent of my activity at the company’s stores is limited to two quick trips to a nearby Sears to purchase white T-shirts for my kids’ school projects.)

With investors balking and shoppers avoiding its stores, Sears Holdings last week announced an organizational shakeup. The retailer is restructuring around five business units in a bid to give each unit’s management team “greater control, authority and autonomy.” The new structure includes business units to manage Sears’s real estate holdings, its brands (such as Craftsman, Diehard and Kenmore), and the online operations.

Skeptics, who have long wondered how Lampert aimed to turnaround the country’s fourth-largest retailer without investing in its stores, view the new structure as designed to facilitate a breakup of the company by making it easier to spin off or close business units. But those who viewed Lampert’s interest in tired Sears and third-tier discounter Kmart as a real estate play from the start — and were “OK with that” while the US commercial property market was booming — now face the prospect of Sears selling property in a softening market.

While Lampert and Sears have been mum on the fate of its real estate holdings, the popularity of sale-and-leaseback deals (where a retailer sells its stores to raise capital and then leases them back from the buyer) has grown with rising commercial property values. But the current credit crisis may crash that party.

Under Lampert, Sears Holdings has shown it can weather a retail slump. But piling on a real estate slide would put the double whammy on the 121-year-old business.