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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Sears Shares Plunge on Store Closings

December 28, 2011, 3:54 AM EST By Cotten Timberlake

(Updates shares price in fifth paragraph.)

Dec. 27 (Bloomberg) -- Sears Holdings Corp. tumbled the most in 8 1/2 years after saying it will close as many as 120 stores, with a deeper-than-expected sales decline casting doubt on Chairman Edward Lampert’s efforts to turn around the chain.

Lampert has tried several strategies since merging Sears with Kmart in 2005, none of which have reversed falling sales. His latest push involves moving toward smaller stores and licensing the Craftsman, DieHard and Kenmore brands. As a result, the larger stores have received less investment and prompted customers to shop elsewhere, according to Gary Balter, an analyst with Credit Suisse Group AG in New York.

Same-store sales at the largest U.S. department store chain fell 5.2 percent in the eight weeks ended Dec. 25, Sears said today. By contrast, such sales in the department-store sector as a whole will climb an estimated 4 percent in November and December, compared with the same period a year ago, according to the International Council of Shopping Centers, a New York-based trade group.

“Results were much worse than anticipated,” Balter said. The share price also was artificially high because of a very limited number of shares outstanding, he said. Today’s news also “scares” investors who are long on the stock, said Balter, who rates the shares “underperform.”

Sears fell 27 percent to $33.38 at the close in New York, the biggest decline since April 29, 2003. The shares have fallen 55 percent this year.

Bond Prices

The chain’s $987.4 million of 6.625 percent notes due in October 2018 declined 4.6 cents to 76 cents on the dollar to yield 11.9 percent today in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. That’s the lowest price since the notes were issued in exchange for other debt in August, Bloomberg and Trace data show.

Closing the Kmart and Sears stores will generate $140 million to $170 million of cash from inventory sales and leasing or sales of the locations, the Hoffman Estates, Illinois-based company said today in a statement. Sears will incur non-cash expenses of as much as $2.4 billion in the fourth quarter to write down the value of potential tax benefits and goodwill.

The company plans to reduce fixed costs by $100 million to $200 million, according to the statement.

“There is not enough value in the real estate to do much with,” Balter said. “Who is going to buy the stores? There are no buyers. There is no one growing in U.S. retail.”

Hedge Fund

Lampert, who along with his hedge fund owns 60 percent of Sears, has presided over 18 consecutive quarters of declining sales. Before today’s announcement, Sears had closed 171 of its large U.S. stores since 2005. Besides turning to smaller stores and franchising, Lampert also has been leasing space to other retailers and trying to boost Web sales.

Instead of reviving growth, Sears has lost customers and market share to discounters such as Wal-Mart Stores Inc. and Target Corp., which are attracting budget-minded consumers.

Earnings before interest, depreciation and amortization in the fourth quarter will be less than half of last year’s $933 million, Sears said.

“There is this philosophy that you don’t need to make as much of an investment in the stores if you have a brand,” Balter said in a telephone interview. “That has not worked.”

Sears didn’t identify which stores will be closed. In his annual investor letters, Lampert has identified the smaller Hometown and Sears Outlet stores as sources of growth and profit. The company opened 122 of those “specialty” stores last year, he said in his 2011 letter, and now has 945 -- less than a quarter of the total.

Biggest Exposure

Landlords with the biggest exposure to Sears are Simon Property Group Inc., which has Sears as a tenant at 137 of its 190 malls, and General Growth Properties Inc., with Sears as a tenant at 110 of its 167 malls, according to Andrew Johns, an analyst at Green Street Advisors Inc. in Newport Beach, California.

“Generally, when Sears decides to close, it’s the lower productivity stores with lower sales per square foot,” Johns said in a telephone interview. “Sears has good real estate at some malls.”

The company is allowing other retailers to sell its DieHard, Craftsman and Kenmore products. Sears has also cut deals with such retailers as Costco Wholesale Corp. and Ace Hardware to sell Craftsman tools in their stores.

“If they can just create enough cash flow to get through the downturn, at some point there is going to be a huge uptick in appliance sales,” Paul Swinand, an analyst with Morningstar Inc. in Chicago, said in a telephone interview. “They just have to make sure that when that happens they are not cut off at the knees, and that it doesn’t all go to Home Depot and Best Buy.”

Sears is to report fourth-quarter earnings on Feb. 23.

“The market is assuming there’s more bad news to come,” Swinand said.

--With assistance from Lauren Coleman-Lochner and Tim Catts in New York, and Daniel Taub in Los Angeles. Editors: James Callan, Robin Ajello

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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