To: Eddie Lampert
From: Jack Flack
Subject: Know When to Fold'em

I'm writing you this Rescue Memo because of two big assumptions.

 

Assumption #1: Reality.

Sears can't be saved, at least as traditionally conceived. In a struggling economy that shows no signs of rejuvenation, you've tethered together two of the weakest players in a sector notorious for its ruthless economics.

Your flacks are already having to defend the idea that Sears will be solvent next year, and you've provided no credible plan for fixing an operating model that is now widely presumed to be completely broken.

 

Assumption #2: Perception.

Your golden reputation as an investor can be easily salvaged. Your reputation as an ops guy probably can't. And your reputation as a retailer was burnt to an acrid crisp long ago.

Thus, you must refocus your story back on to the character of Eddie the Magical Investor. Here's how you can do it.

1. Go back to who you really are. You're a tremendous finance guy, who the business press used to love to call the next Warren Buffett. That was heady stuff, but your track record at the time actually made it somewhat credible.
   
   The bad news is that you're a lousy merchant.
   
   Great merchants tend to have a talent for making the old retired guy who now greets shoppers at the door feel like he's doing brilliant work at the most important job in the world. You, on the other hand, have a talent for making veteran retail executives painfully aware that you're much smarter than they are, which tends to demoralize.
   
   No turnaround, particularly in retail, was ever fueled by demoralization. Hedge funds and investor activism, however, require exactly the kind of ice-cold Prestone that flows through your veins, and you need to confine yourself to environments where your fundamental nature is a huge competitive advantage, not an impediment.
   
   I'm still not sure why you felt the need to want to operate a business. But just as Michael Jordan cleanly walked away from the baseball diamond before it became embarrassingly obvious that he was never, ever going to be able to hit a Major League cutter, you must do the same at Sears.
   
   If you get stubborn and cling to this episode in your career, it will end up overshadowing everything you've done in the past, and provide a poisonous prologue to whatever you decide to do next.



2. Embrace reality. I'm not the first to point out that your troubles come from the fact that you violated two of Buffett's most important rules:
   
   You bought companies with anemic core propositions, and then you insisted on managing them yourself. Even the Oracle of Omaha loses when he violates his own rules, but he also knows how to cut his losses and move on.
   
   You can debate the projections of financial implosion, but your core operations are deteriorating at a rate that will not allow you to wait for the economy to turn.
   
   In fact, each month you wait significantly weakens your hand, and you must now focus on the optimal way to fold while you still have some flexibility.



3. End the interim. Quickly announce that Johnson is now your actual C.E.O., not just a placeholder. It will allow you to stop searching for a candidate who simply does not exist—that is, someone who is both qualified and interested.
   
   Even more important, it will eliminate a huge internal uncertainty, and allow your people to get on with business.



4. Take it private. I'm sure you've already done the math in your head. The real estate is worth X, and the brands are worth Y. As your stock price continues to track your operational decline, it won't take many quarters before the math of a leveraged buyout will make sense.
   
   On the day that happens, make a sales call on Miller, Berkowitz, and Ackman. With the support of your biggest shareholders, you should be able to carry the vote easily, and with limited lawsuits.
   
   With that strategy in mind, you may want to drag your feet on the share repurchase you just announced, keeping cash freed up and not artificially supporting the stock price.
   
   Going private will get you out of the fishbowl, where every move will be highly scrutinized. That will be important, as you...



5. Sell the real estate. You excel at transactions, and I have no doubt that you won't leave any panic money on the table, even in this environment.
   
   This will effectively take you out of traditional retailing, a brutal sector where you are heavily disadvantaged. But it will allow you to recast Sears into a far superior business model, as you...



6. Become the brands. In other words, as you shed the real estate assets, you will turn Sears back into what it started as, a trusted consumer-products company.
   
   The fact that Craftsman, Kenmore, DieHard, and Lands' End remain solid brands despite being starved of support in recent years says much about their underlying strength.
   
   Drag your feet on the stock repurchase program you announced, and actually start investing meaningfully in your brands.



7. Properly contextualize the events. The media will want to cast this story as one of Midas losing his touch, personalizing events specifically to you. You've got to pull the camera back, reminding everyone of just how dire the presumed fate was for both Kmart and Sears before you came on the scene.
   
   Here are the core messages that you must repeat until your mouth gets sore:
   
   

   "I own half the company, and nobody takes the future of Sears more seriously than I do. It's painful, but we are doing what's required to make sure Sears survives.
   
   "At a very challenging point in history, we made a bold move to try to save two American icons. We're proud of what we accomplished, but we probably underestimated the challenge.
   
   "We're saving Sears by taking it back to its original roots as the provider of great products that Americans can count on."




8. Emulate your idol, especially in acknowledging problems. I know you want your shareholder letters to be as notable as Buffett's, but that will never really happen unless you stop complaining about how unfair things are, particularly how the media treats you.
   
   Notice that Buffett almost always personally embraces accountability for poor performance, which then gives him permission to make big changes without losing face. It's called manufacturing your own Teflon as you go.
   
   That means you probably need to get yourself a fortysomething version of Loomis. If you can't find somebody who will stand up to you enough to steer you clear of disastrous conceits, give me a call. I'll give it my best. But if we can't make it work, then I can brag that I got fired by Eddie Lampert.

After all, minimizing your defeats by embracing them is often the real key to a lifetime reputation.