Hedge funds are walking away from Sears

Date: Sunday, September 9, 2007
Author: Chicago Business.com

 Fellow hedge fund managers are bailing out of Edward Lampert's Sears Holdings Corp. as eroding sales and profits dog the nation's largest department store chain.

Six of the 10 largest sellers of Sears shares during the second quarter were hedge funds, with four, including New York's Atticus Capital L.P. and Third Point Management LLC, selling out completely. The six unloaded a total of 3.1 million shares, according to U.S. Securities and Exchange Commission filings.

The sales suggest concern over the sluggish retail environment, as well as a lack of confidence in the ability of Mr. Lampert, Sears' chairman, to turn the retailer into an investment vehicle, analysts say. Shares of the Hoffman Estates-based company have tumbled 31% from a record $193.00 on April 17, ending Friday at $133.70.

Retailers aren't the only ones struggling, with many hedge funds stung by recent market turmoil and trying to boost cash reserves after the subprime mortgage blowup this summer.

Sears "is sort of a quasi-hedge fund that has become less attractive in a market with less liquidity and tighter credit," says David Keuler, managing director at Milwaukee-based Mason Street Advisors, which sold about 10,000 Sears shares in the last quarter. It still owns about 20,380 shares in its indexed funds. "It's not clear to me what they want to be as a retailer, and it's not clear to me what Eddie wants it to be beyond that."

Mr. Lampert declined to comment, as did spokespeople for the six hedge funds.

Since taking control of Sears in March 2005, Mr. Lampert, 45, has funneled cash into everything from foreign currency contracts to credit derivatives, a favorite among hedge funds. He's also repurchased more than $3 billion of the company's stock since 2005.

Mr. Lampert "has a good track record of allocating capital," says Kim Picciola, an analyst at Chicago-based Morningstar Inc. "Clearly the retail business continues to suffer, and it doesn't seem like there is any light at the end of the tunnel."

In August, Sears said second-quarter net income fell 40% from the year-earlier period to $176 million — the first quarterly decline in almost two years — while revenue dropped 4.3% to $12.2 billion.

Not all investors are running away from Sears or losing faith in Mr. Lampert. Four of the top 10 buyers of the company's shares during the second quarter were hedge funds, adding a combined 1.46 million shares. The largest buyer was Boston-based Fidelity Investments, as the world's biggest mutual fund company added 2.3 million shares to boost its total to almost 5.6 million, making it Sears' third-largest shareholder.

As an investor, "Lampert's record speaks for itself," says Howard Davidowitz, chairman of New York-based consulting firm Davidowitz & Associates Inc. As a retailer, "he's stuck, because his stewardship has resulted in the loss of massive marketshare. . . . The worst is yet to come."