Lampert Cuts AutoZone as Clients Pull Money Amid Sears Losses

January 05, 2012, 12:07 AM EST By Miles Weiss and Katherine Burton

Jan. 4 (Bloomberg) -- Edward Lampert’s hedge fund slashed its stake in AutoZone Inc. in the final days of last year to meet client redemptions amid a series of setbacks at Sears Holdings Corp., one of its largest and highest profile investments.

ESL Investments Inc., the firm run by Lampert, distributed about $1.02 billion worth of AutoZone stock to investors in connection with the closing of one investment partnership and the restructuring of another, according to a regulatory filing. The Greenwich, Connecticut-based firm also used $351.4 million of shares in AutoZone and AutoNation Inc. as payment in kind to meet year-end redemptions from its main fund, ESL Partners LP, the filing showed.

Lampert has been selling AutoZone and AutoNation shares while holding onto his entire stake in Sears, a strategy that could leave his main hedge fund further concentrated in the Hoffman Estates, Illinois-based retailer. AutoZone rose 19 percent last year and AutoNation shares gained 31 percent, while Sears shares plummeted 56 percent.

Sears, the nation’s largest department store chain, announced last week that it would close as many as 120 locations after sales at stores open more than one year declined 5.2 percent during the eight weeks ended Dec. 25. The company said it would book as much as $2.4 billion in non-cash expenses to write down the value of good will and deferred tax assets, a step companies often take after determining that future profits will be insufficient to make use of such assets before they expire.

An ESL representative in Lampert’s office referred a telephone call to Steven Lipin, an outside spokesman, who declined to comment.

Fund Performance

Lampert formed ESL in 1988 after working on the merger arbitrage desk of Goldman Sachs Group Inc. under Robert Rubin, who would go on to become U.S. Treasury Secretary under former President Bill Clinton. While the firm doesn’t disclose assets under management, its primary fund, ESL Partners LP, has raised a total of $9.16 billion since 1989, according to a filing with the U.S. Securities and Exchange Commission.

ESL Partners produced average annual returns of about 25 percent during its first 14 years, according to two people familiar with the fund who requested anonymity because the information is confidential. It stumbled in 2007 and 2008 with declines of 27 percent and 33 percent, respectively, the people said.

The fund gained 55 percent in 2009 and 16 percent the following year, only to decline 4 percent during the first nine months of 2011, the people said. The benchmark Standard and Poor’s 500 Index fell about 8.7 percent, dividends included, over the first nine months of last year.

Shutters Acres Partners

Lampert’s firm held 4.95 million AutoZone shares, or 12.6 percent of the outstanding stock, according to an SEC filing dated Dec. 30. That’s down from 8.54 million shares, or 21.7 percent, in the previous filing a day earlier and 14.8 million, or 33.8 percent, in December of 2010.

The decline stemmed in part from the “restructuring” of ESL Investors LLC, which was formed in 1999, according to Delaware state records. As part of the restructuring, ESL Investors distributed 1.16 million AutoZone shares to its “investment member,” the filing said.

In addition, ESL disclosed it was shuttering Acres Partners LP, an investment partnership formed in 1996 that held about 1.98 million AutoZone shares. Acres distributed all of the shares on a pro-rata basis to its partners in connection with the closing.

Cuts Stake

ESL Partners, Lampert’s primary fund, distributed 450,484 AutoZone shares and 5.56 million AutoNation shares to “limited partners that elected in 2011 to redeem their interests” in the fund, according to the filings. The redemptions cut ESL’s stake in AutoNation to 52.5 percent from 56.4 percent of the auto retailer’s shares outstanding. The fund didn’t distribute any of its Sears shares to meet redemptions, according to a separate filing made yesterday.

AutoZone rose 2.2 percent to close at $326.96 in New York trading. AutoNation fell 6.8 percent to $33.26 in New York.

AutoZone, based in Memphis, Tennessee, and AutoNation, located in Fort Lauderdale, Florida, have boosted revenue from parts and services for aging U.S. cars as demand for new vehicles tumbled during the recession, according to Brian Sponheimer, an analyst at Gabelli & Co. in Rye, New York.

Auto Sales Rise

After bottoming at sales of 10.4 million vehicles in 2009, U.S. vehicle sales rose to an estimated 12.7 million last year and may reach 16 million over the next three or four years, Sponheimer said in a telephone interview today. Vehicles sales averaged about 16.5 million a year from 1997 through 2007, he said.

“As these cars have aged, it required more extensive repairs that helped companies like AutoZone increase their average ticket and comparable-store sales,” Sponheimer said. “AutoNation has done an outstanding job within their parts and service business, which constitutes well over 50 percent of a dealership’s gross profit on average.”

--With assistance from Chris Burritt in Greensboro. Editors: Steven Crabill, Christian Baumgaertel

To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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