Risky Side of Sears: Retailer Is Recast As a Hedge Fund

Under Lampert, Sears has spent far less on its retail business than competitors. Gone are the days of heavy television promotions such as the "softer side of Sears." The Sears Roebuck Foundation, the firm's charitable arm, has dried up in generosity, several Chicago-based institutions such as the Children's Museum report.

Hundreds of poor-performing stores are being allowed to deteriorate, according to analysts and interviews with store managers. A sign of this can be found in the company's financial statements. In 2005, Sears' first full year under Lampert, the firm recorded that its buildings and other assets lost $1.1 billion in value, but it spent only half that maintaining and upgrading its properties.

Meanwhile, Lampert has amassed a war chest worth about $3.3 billion in cash. Some Wall Street analysts speculate this kind of build-up is a prelude to making a huge acquisition. But others say Lampert will use the money for his financial trades.

It's hard to know for sure. Lampert is secretive about his company's direction. He has canceled investor conference calls and rarely grants interviews. He even obtained special permission from federal regulators to delay the reporting of trading activity -- a consent granted to a small number of investors.

Lampert, through a spokesman, declined comment for this story. Aylwin B. Lewis, Sears Holdings' chief executive, also declined comment. But in a letter to shareholders, Lampert played down the risks to his strategy. Without being specific, he stressed his intention to expand Sears slowly despite falling sales and limited capital spending.

"Some commentators have asserted that we want to shrink the company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not," he wrote.

Lampert has defied his detractors throughout his career. When he left Goldman Sachs in 1988 to start his own financial firm at age 26, some of his bosses thought he was reckless. But since then, Lampert's hedge funds have averaged close to a 30 percent return every year, a claim few traders can equal. With a net worth of $4.5 billion, he is estimated to be Connecticut's wealthiest man.

Lampert also has shown a steely resolve -- personally and professionally.

In the middle of negotiating the deal for Kmart in 2003, Lampert was kidnapped in the parking lot of his firm and held for a $5 million ransom. He talked his abductors into releasing him by promising them $40,000 but did not end up paying them a penny. Within days, he was back at work on the Kmart deal.

He tried to strong-arm stockholders of Sears Canada last year to sell their shares to him at a discount. The deal fell through when the Ontario Securities Commission ruled Lampert's tactics -- which included an illicit sweetheart deal to institutional investors -- violated securities laws.

At Sears, Lampert has been undeterred about cutting costs and focused on selling high-margin products. He has experimented with turning Kmart stores into new formats called Sears Grand, which offer items ranging from milk to appliances and are designed to compete with Target and Wal-Mart.

Ron Culp, a former Sears senior vice president, said drastic moves were needed at Sears because of intense competition from discounters. "Lampert's certainly ruined a lot of lives, but at the same time there was fat in the system that he was allowed to eliminate," he said.

But skeptics point to a downside to this strategy. On the day after Thanksgiving last year, the shopping day known as Black Friday, few customers visited the new Sears Grand outside Cleveland, analysts from Morgan Stanley reported. In his letter, Lampert acknowledged that the company has struggled to find the right product mix in the new stores.

The contrast in declining sales and soaring stock price has left those who devoted their careers to Sears with mixed feelings.

"Lampert is certainly not a merchant," said Ronald Olbrysh, chairman of Sears' 25,000-member retirement association. "He is doing extremely well for the shareholders, but whether or not the retail side survives is another question."