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The shotgun marriage between Sears and Kmart is the brainchild of Kmart chairman and maverick investor Edward Lampert. A billionaire finance whiz who counts David Geffen and Michael Dell as clients and Warren Buffett as his idol, Lampert took control of Kmart when it came out of bankruptcy 18 months ago. Since then Lampert, 42, who also happened to be Sears' largest single shareholder through his ESL Investments, has turned Kmart into a cash cow, albeit a shrinking one. Although critics describe his moves as short-term fixes, he reduced inventory, slashed costs, limited discounts and sold off some of Kmart's lucrative real estate to the likes of Home Depot and, yes, even Sears.
It's no wonder that so many skeptics think Lampert's latest gambit is more about real estate than retail, part of a long-term liquidation plan to unload billions of dollars' worth of property, as well as perhaps some valuable brands, to the highest bidders. But it's a notion that the notoriously reticent Lampert took pains to reject last week. While acknowledging that some underperforming stores would continue to be disposed of, he told investors, "I don't think any retailer should aspire to have its real estate be worth more than its operating business."
Lampert may have no operational merchandising experience--after Yale, he worked at Goldman, Sachs under the tutelage of Robert Rubin, and went off to start his own fund at age 25 with the help of legendary Texas investor Richard Rainwater. But Lampert does have ideas about how to run a retailer, such as an unwillingness to throw money at updating stores without clear evidence of a return, and a firm refusal to play the short-term, quarterly-earnings game that Wall Street so often demands. In April, he brought in a design team led by former Gap executives to freshen up Kmart's clothing lines. "Eddie is relentless and a harder-nosed operator than most people want to believe," says Henry Miller, a leading business-restructuring adviser who worked with Kmart during its bankruptcy. "In point of fact, he is a retailer, in his mind. He will fight for a nickel, and mind every penny." (If anybody doubted how good a dealmaker or student of risk Lampert was, he proved it in January of last year, when he was kidnapped. He talked his captors, who were holding him for a $1 million ransom, into letting him go with the promise he would pay them $40,000 a few days later.)
Over the past couple of decades, both Sears and Kmart have become mere shadows of themselves, plagued by aging, poorly stocked stores; management turmoil; outdated merchandise; and a lack of sophisticated IT systems--or, for that matter, a clear identity. Whereas Kmart has failed miserably to compete on price with Wal-Mart or on style with Target, Sears has found it harder and harder to stay relevant at its aging 870 mall locations, about the same number of stores it had back in 1970. It has tried everything from financial services (its "socks and stocks" period) to home improvement (the Great Indoors experiment) to returning to its catalog roots, with the purchase of the upscale Lands' End catalog, which has proved to have less broad appeal than Sears had hoped.