Sears Holdings spent $5.8 billion buying back shares from 2005 to 2010, draining the company of resources.

CEO Eddie Lampert defended the buybacks as the most efficient use of capital, arguing that investment in stores wasn't necessary.

The company — considered the most vulnerable publicly traded retailer — is now selling off assets to stay afloat.

Sears has survived two world wars and the Great Depression. But after a decade under the control of a former Goldman Sachs executive turned hedge fund manager, the 124-year-old retailer is imploding.

Sales have been cut in half since 2009, and the company is burning through cash, closing hundreds of stores, and selling off assets in an attempt to stanch the bleeding. Executives are fleeing and store workers face a grim future.

A debt repayment from a $500 million loan facility is looming, and some suppliers are trying to cancel contracts and cut back on orders amid fears that the company could soon go bankrupt.

The man in charge of Sears, Edward S. Lampert, has blamed the company's decline on everything from shifts in consumer spending to the rise of e-commerce, and even — at times — the weather. More recently, he's taken to attacking the media, saying reports speculating on a Sears bankruptcy are thwarting his efforts to turn the business around.

"Every time people use the word bankruptcy, somebody who reads that doesn't get past that word," he told the Chicago Tribune in a recent interview. "It makes it very unfair for us, and it's a very uneven playing field for us."



While other retailers are also struggling, analysts take the demise of Sears, which owns Kmart, as a matter of when not if.

But what sets Sears apart from other suffering retailers is something that's not as obvious as the rise online shopping and falling foot traffic in shopping malls. It's the steps that Lampert took when he first acquired the company: putting shareholders like himself in front of everyone else, he drained the company of vital resources.



When Sears was flush with cash, this took the form of billions of dollars of share repurchases, even as the stores suffered years of underinvestment. Repurchases, or buybacks, are common among cash-rich companies, but also derided in some corners as a waste of a company's resources as they only serve to create the appearance of improving earnings.

No apologies

In the early days, Lampert was unapologetic about these. According to an executive at the company then, Lampert was genuine in his belief that Sears could be run differently than other retailers and that the shares were being acquired at a bargain price.



"Unless we believe we will receive an adequate return on investment," he wrote in a 2007 letter to investors, "we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do. If share repurchases or acquisitions appear to be more productive, then we will allocate capital to those options appropriately."

And for years Lampert concluded that share buybacks were the best use of the company's money. They continued even through the financial crisis and totaled $5.8 billion between 2005 and 2010, sometimes at prices as high as $170 per share. Sears' earnings in the same period were $3.8 billion.



Today the stock is trading for under $8.

Now that Sears is short on cash and faces mounting debt, Lampert has turned from buybacks to dismantling what was once America's largest and most successful retailer, said David Tawil, president of New York-based Maglan Capital. Tawil has spent his career working in corporate restructuring and bankruptcy proceedings. Sears spun off its Lands' End brand to investors in 2014 and is exploring "alternatives" that could include sales of Kenmore appliances and Craftsman tools.

"Eddie has orchestrated for himself, and for the benefit of shareholders, the most protracted liquidation in history," Tawil said in an interview with Business Insider.

A Sears spokesman, Howard Riefs, said last year that the spinoffs were meant to create shareholder value and to fund Sears' turnaround. He noted that the company has raised billions from the asset sales and other financing efforts, and those funds have "provided liquidity to help fund our transformation."

More recently, he pointed Business Insider to a blog post Lampert published on May 11, in which Lampert said the company is "fighting like hell" to overcome its challenges.

"We continue to do what is necessary to improve the near-term performance of our business," Lampert said in the post, noting that the company planned to cut $1.25 billion in costs this year.

Wall Street superstar

Lampert in 2002, before he acquired Sears. Associated Press Lampert got his start at Goldman Sachs, working in the New York-based bank's risk-arbitrage department. He left the bank after four years and in 1988 started a hedge fund, ESL Investments, at just 26 years old.

For a time he was a Wall Street superstar. BusinessWeek compared him to Warren Buffett because of his incredible track record as an investor. ESL Investments generated annualized returns of more than 20% per year for 20 years, marking one of the strongest long-term investment records in history, according to a 2013 Wall Street Journal article.

Through ESL, Lampert gained control of Kmart in 2003 and he combined it with Sears in 2005 to create Sears Holdings in an $11.5 billion deal. ESL, long one of Sears' largest shareholders, now owns about half of the company.

It was soon after he took the reins at Sears, first as chairman, that Lampert began the share buybacks. In his annual letters to Sears shareholders, Lampert defends buybacks as a way to provide "liquidity" (or a buyer) for shareholders who are looking to sell and increase ownership of the company for investors who hold on.

But to critics, they are simply a financial maneuver to drive up per-share earnings and create the illusion that a company is doing better than it really is.

With the buybacks came cuts in spending on the retailer's stores, as well as reduced promotions and advertising, despite Lampert's promises to revive the company.

Never cheaper

Lampert, Aylwin Lewis, president of Kmart, and Alan Lacy, CEO of Sears, join hands during an announcement of a merger between Kmart and Sears. Peter Morgan/REuters Lampert "had a perspective that the retail industry as a whole was too sales-oriented and not enough profit-oriented," one former high-level Sears executive told Business Insider. The executive asked not to be identified discussing private matters.

"He wanted to demonstrate to the world that you could reduce advertising and inventory investment — and yes, sales would fall to some new normal — but you would have a more profitable business," the former executive said.

At the time, Lampert believed in the long-term success of Sears, according to the executive. When he was buying the stock at $170, more than $150 per share above where it is today, he thought it was a better capital investment than store upgrades, because it was his theory that the stock would never be cheaper. Lampert had high hopes for himself and for Sears.

"I want to be known as a great businessman," he said in 2006, shortly after the Sears acquisition. His greatest fear, he said, was that he wouldn't live long enough to complete all his goals.

"He was completely confident that he was going to be the next Warren Buffett," the former executive told Business Insider. "He felt that he had created a long-term winner in Sears and it would be his Berkshire Hathaway."

That is not how it has worked. Instead, the company has been unable to keep up with shoppers.

Serving the customer?

A Sears in Richmond, Virginia, May 2016. Sears "The retail industry is predicated on serving the customer, valuing the customer, listening to the customer, and ultimately giving the customer what she wants — and it’s the employees who deliver this. Anything less is a recipe for terminal illness, if not suicide," says Robin Lewis, a 40-year retail consultant and CEO of industry publication The Robin Report. "Clearly, in the case of Sears, Eddie Lampert has turned a completely blind eye to this truism, and has been bleeding the company to a long and slow but well-managed death for the sole benefit of major investors and himself."

Under Lampert, Sears failed to invest in major capital improvements, such as store maintenance or new store concepts. Fortune recounted a 2005 strategy session between Lampert and the top two-dozen executives of the company:

Once their presentations started, Lampert also began poking holes in virtually every idea. 'What's the benefit of that?' he asked again and again. 'What's the value?' He shot down a modest $2 million proposal to improve lighting in the stores. 'Why invest in that?' He skewered a plan to sell DVDs at a discounted price to better compete with Target and Wal-Mart. 'It doesn't matter what Target and Wal-Mart do,' he declared.

As Lampert slashed spending in-store improvements, "the stores began going down," a 41-year Kmart store employee who was laid off in February 2016 told Business Insider.

Don't talk about it

A Sears in Richmond, Virginia, May 2016. Sears When Lampert took over, company executives visited stores and told workers they were no longer allowed to discuss any problems the stores were having, according to the employee.

"When they quit asking and started telling you how it should be run according to corporate standards, the stores began to go down," the employee said. "There is no morale in any of the stores."

An employee of a Sears store in Elyria, Ohio, told Business Insider last year that his store is falling apart.

"The walls and floors in my store are all beat to hell ... the roof leaks, the escalator and the elevator break down frequently, but 'Fast Eddie' doesn't want to spend money on the stores," the employee said.

Sears spokesman Howard Riefs has denied that employees are discouraged from giving feedback.

"One of our cultural beliefs as a company is to embrace feedback," Riefs has told Business Insider. "We have a variety of ways that associates can give authentic feedback – even anonymously, so we would disagree with that suggestion."

Lampert, meanwhile, has defended his decisions.

"I was criticized for not investing enough in the stores," Lampert said in 2013. "My point of view is we couldn't invest in everything."

Losing investors

Investors bought into Lampert's strategy, at first. In 2006, Sears' stock rose roughly 45%, to $156.

Then quarterly sales started declining in early 2007, and the stock followed suit.

Many Sears executives were expecting Lampert to eventually refocus on investing in stores and advertising. When that didn't happen, some employees began to grow concerned.

"There was a feeling of, 'OK, now we have to invest and compete,' through some combination of advertising and promotion," the former Sears executive said. "But it became clear that he either didn’t know how or didn’t want to spend the money."

At that point, senior executives began leaving the company.

Since May 2007, Sears' shares have dropped 95%. Over the same period, sales have dropped from $50.7 billion in 2007 to $22.1 billion in 2016.

To raise money, the company started selling its real estate and spinning off brands like Sears Hometown and Outlet stores and Craftsman, which was sold to Stanley Black & Decker in January for about $900 million to be paid out over the next several years.

In one of its biggest transactions to date, Sears launched and spun off a real-estate investment trust, Seritage Growth Properties, to execute sale/lease-back agreements for 266 Sears and Kmart stores. The deal helped Sears raise about $2.7 billion, most of which was quickly burned through to pay off debt.

Seritage is in the process of recapturing the stores it bought from Sears and renting out the space to new tenants for as much as four times the rent that Sears paid. If it can profit from this, that's good for Lampert. He is Seritage's chairman and his hedge fund owns about 40% of the real estate investor's limited partnership, as well as 8.5% of the voting power in its common stock.

Starving the business

Meanwhile, Sears has been cutting costs by closing hundreds of stores and laying off hundreds of thousands of employees. In 2007, Sears had 3,418 stores and 315,000 employees in the US. The company now has fewer than 1,430 stores and 140,000 employees.

Lampert's strategy of underinvesting in stores and selling off assets "starved capital and management resources from the retail business, leaving it unable to respond and adapt to the needs of the evolving consumer and marketplace," Lewis said.

The stores are now shells of what they once were, with leaking ceilings, broken escalators, and sometimes no employees to work the registers, according to analysts, customers, and employees from the store level to corporate headquarters. In some stores, employees hang bedsheets to shield shoppers from sections that stand empty.

"The majority of stores now border on disgraceful and show a complete lack of retail standards and proper store management," Neil Saunders, the CEO of retail consulting firm GlobalData Retail, told Business Insider. "The impression is of a retailer that has completely given up, and this is something consumers notice."

But there was one party that was benefiting — at least for some time — from this strategy: shareholders.

Bruce Berkowitz of Fairholme Capital Management told The New York Times in 2013 that Lampert's spinoffs had helped deliver about $10 a share in assets to Sears shareholders, even as the stock price was tanking. At the time, Fairholme owned about 20% of Sears shares. Berkowitz and Fairholme own closer to 25% now.

Not working out

The losses eventually lost Lampert the support of many investors in his hedge fund, ESL Investments.

"Investors are heading for the exits, discouraged by the declining fortunes of Mr. Lampert’s signature stake in Sears Holdings," Randall Smith at the Times wrote in 2013.

The fund's assets are now down to $2 billion from $18 billion in 2007, according to a March 2017 regulatory filing.

Lampert says he is committed to restoring Sears to profitability and continuing retail operations online and through a smaller fleet of stores.

"I believe Sears Holdings can continue to operate as a very significant member-centric integrated retailer with a large number of stores as long as we receive the support of our vendors and other stakeholders," Lampert said in a blog post this week.

The company's window of opportunity for a turnaround is shrinking. It's falling deeper into debt and just lost its second chief financial officer in six months, just as it begins talks with lenders over its $500 million loan facility maturing in July.

Most vulnerable

In addition to its chief financial officer leaving, Sears has lost more than a quarter of its executive team in the last five months. The company posted a loss of $471 million in the first quarter, compared to a $303 million loss last year. Revenue declined to $5.39 billion from $5.88 billion.

Analysts say a turnaround is hard to imagine at this point.

S&P Global Market Intelligence in April identified Sears as the most vulnerable public retail company in the US, saying it has a 24% chance of default within a year.

Sears recently said that it's planning to cut more costs and that it's reviewing bids in excess of $700 million for more than 60 of its real estate properties.

Selling off real estate will give the company a much-needed cash infusion, but it also diminishes the company's lifeline as it struggles to staunch losses, according to Moody's vice president and senior analyst Christina Boni.

"Sears’ financial performance remains extremely weak which is prompting the acceleration of cost reductions by an additional $250 million," Boni said recently. "Its effort to sell real estate which has produced over $700 million of bids currently will enhance liquidity, but accelerates the timeline required to stem operating losses as it asset base diminishes."



Eventually, the company will run out of funding sources, according to Tawil.

"Normally businesses like this fail and get sold off in pieces in bankruptcy," Tawil said. "This has been the greatest out-of-court liquidation in the history of our nation."

*A version of this story was published in June 2016.