It was a few days after Christmas when Sears announced plans to close up to 120 Sears and Kmart locations. The year was 2011. With a market cap of only $3.45 billion, Sears looked like a good candidate for a takeover, but there were no takers. As Dan Primack observed at the time, Sears debt was higher than its market cap.

The company was a good candidate for a turnaround. True, many of Sears’ stores were in downwardly mobile neighborhoods. But that didn’t stop Dollar General and Dollar Tree from succeeding. Sears owned high-quality brands — Kenmore appliances, Craftsman tools, and apparel maker Lands’ End. It had mastered “online” retailing before the web and email, back when that meant ordering from a catalog. As for logistics, Sears had figured out how to deliver everything a family needed to build its own house!

What Sears needed was a President that understood retailing and could make much needed changes in the company’s business model. What it got instead was Eddie Lampert, a billionaire hedge fund manager who knows how to make money, but not so much apparently about how to improve retail operations. Same-store sales declined every year from the time his hedge fund first invested in the chain to 2011, when it first announced major store closings. Between 2011 and 2016, revenues at the retail chain fell by almost half, with the company losing $8.2 billion in 2016.

Edward S. Lampert was a Wall Street wunderkind who founded his hedge fund, ESL, in 1988 at the age of 25. He attracted a who’s who of investors – among them Robert Rubin, David Geffen (billionaire entertainment chief), and Steven Mnuchin, who became Donald Trump’s Treasury Secretary. Mnuchin, who was on the Sears Board for 12 years before joining the Trump administration, disclosed in 2016 that he held an investment of $26 million in ESL, which he later divested. In its early years, ESL racked up spectacular annual returns. In 2006, Lampert was ranked number 67 on Forbes’ list of the 400 richest Americans — ahead of Jeff Bezos of Amazon.

Sears has been on a downward trajectory that accelerated after Lampert took control of the company up to its bankruptcy announcement today. In 2006, shortly after Lampert took the reins at Sears, its stock traded at $162 a share; by 2017, it traded at under $10, and in August 2018 was trading at a little over $1. But while the retail giant has lost money, closed stores, and laid off workers — over the past decade it has closed more than 1,000 stores and reduced employment by 175,000 workers, Lampert and his hedge fund are doing just fine.

Borrowing from the private equity playbook, Lampert loaded Sears up with debt and sold off many of its most valuable assets. In 2015, when it was already obvious that Sears’ days as a going concern were numbered, Lampert’s hedge fund created a publicly traded real estate investment trust called Seritage Growth Properties. Lampert then had Sears sell 266 Sears and Kmart properties to Seritage for $3 billion. The retail chain then paid the trust a total of $135 million in rent in the first year of the lease agreement for stores it had previously owned, with guaranteed rent hikes in following years. What made the sale suspect is that Lampert was Sears’ chief executive and largest shareholder and, at the same time, was chairman of Seritage’s board of trustees.

While Seritage continued to collect rent from still open Sear stores, it was simultaneously converting the prime real estate of now-defunct stores to expensive new uses. In Santa Monica, CA, it converted the Sears store into office spaces suitable for the area’s burgeoning high tech sector. On Long Island, NY, it is considering redeveloping the Sears site into a 600 unit apartment complex. In Aventura, FL, it has begun construction of a luxury shopping center. Observers labeled it an “audacious feat of financial engineering.” Seritage’s share price has soared as Sears’ shares have turned into penny stocks. But as major shareholders of Seritage, Lampert and ESL stand to do just fine.

Lampert is not only Sears’ largest shareholder, his hedge fund also holds a large part of Sears’ debt, and collects interest and fees on loans it has made to keep Sears operating. The debt guarantees that Lampert will have a seat at the table when the terms of today’s bankruptcy are worked out; lenders take precedence over shareholders in bankruptcy court proceedings, and big lenders over smaller ones. Lampert has already given a hint as to what he will push for: At the end of September, he proposed having Sears pay off certain loans and swap other debt for new debt that converts to equity. Because his hedge fund owns debt in the category to be repaid, Lampert and ESL could recoup more than $1 billion under this plan. The losers would be smaller debt holders whose debt would be converted to nearly worthless equity in Sears.

The biggest losers in this, as in other retail bankruptcies, are the workers thrown out of work as stores close. There are also about 100,000 retirees who will face cuts in retirement income if Sears can offload their pensions to the Pension Benefit Guaranty Corporation in the bankruptcy. Whatever happens, Lampert is likely to come out of this a winner.

The advent of e-commerce is not the first disruptive technology that Sears has had to adapt to in the 125 years since it was founded. The invention of the automobile challenged its catalog business because ordinary working people could get to stores and didn’t need to rely on mail order for purchases. Sears rose to the challenge, invested in hundreds of brick and mortar stores, and became the largest retailer in the post-War years. But under Lampert’s leadership, Sears has not demonstrated the same level of innovation. While most commentary on Sears’ bankruptcy has chalked it up to competition from Walmart and Amazon, a better explanation may be that Lampert focused on his personal bottom line and neglected to make the investments in innovation necessary to navigate the new realities of competition in the retail sector.

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