Sears: The Retailer That Sold Its Own Bones

A courtroom in the Southern District of New York. October 15, 2018. Sears Holdings Corporation files for Chapter 11 protection. Sixty-nine hundred million in assets. Eleven point three billion in liabilities. The same day, a $134 million debt payment comes due that the company cannot make. Seven hundred stores are still open on filing day, out of the roughly 3,500 Sears and Kmart locations that operated on merger day thirteen years earlier.

The billionaire hedge fund manager who has run the company since 2005, Eddie Lampert, holds Sears equity worth roughly zero. He also holds approximately $2.5 billion of Sears debt through his hedge fund ESL Investments. Which makes him simultaneously the biggest shareholder losing everything and the biggest creditor in a position to buy the assets back cheap. Which is what happens next.

This is not a story about department stores losing to Amazon. That is the story everybody tells. The doctrine tells a different story.

This is the story of the 2015 real estate transaction that transferred 235 of the best Sears and Kmart properties out of the operating business, into a real estate investment trust that Eddie Lampert also controlled, at prices the operating business's own creditors would later allege undervalued the properties by hundreds of millions of dollars. It is the story of the lease terms that the operating business then signed with that REIT, which allowed the REIT to evict Sears from any location within a few years to re-lease it to a higher-paying tenant. And it is the story of the largest retailer in the world becoming the tenant of its own former real estate, at rents high enough that no amount of operating improvement could ever cover them.

To understand how Sears falls, you have to understand what the operating business owned when the story began, what it did not own by the time the story ended, and who the counterparty was on both sides of the transaction that made the ending inevitable.

This is the rise and fall of Sears.

The verdict. Sears did not die from Amazon. It did not die from failing to adapt to e-commerce, though the operating business also failed at that. It died from a 2015 real estate transaction that stripped the operating business of its most valuable assets, transferred them to a real estate investment trust controlled by the same person who controlled Sears itself, and then required the operating business to pay market rent on the same buildings it had owned outright for decades. This is the exact same doctrine failure that killed Red Lobster in 2024, executed at a scale that took Sears 25 years to die from. Golden Gate Capital did to Red Lobster in one transaction what Eddie Lampert did to Sears over a decade of transactions. The verdict is identical. A retailer cannot rent its own foundation and stay in business.

The Rise

Sears was not built by a retailer. It was built by a railroad clerk with a shipment of unwanted watches.

His name was Richard Warren Sears. Born in Stewartville, Minnesota in 1863. Went to work at the Minneapolis and St. Louis Railway as a young man. Assigned to a station in North Redwood, Minnesota in 1886. And that spring a Chicago jeweler shipped a case of pocket watches to a local retailer who refused to accept them. Rather than ship them back, Sears offered to buy the case at wholesale himself. He paid $12 per watch. He wrote letters to other station agents up and down the railway line offering the watches at $14. Within six months he had sold enough watches to fund what he called the R.W. Sears Watch Company, headquartered wherever he happened to be.

Sears understood something about American commerce in 1886 that most retailers of the era did not. The country was building railroads faster than it was building stores. In every small town along every rail line, there were customers with cash and no easy way to buy anything but the local general store's overpriced inventory. If you could deliver quality goods by rail at wholesale-plus prices, you could sell to the entire American interior from a single warehouse. Sears started with watches because they were high-value, low-weight, and easy to ship. But he saw the whole opportunity from the start.

In 1887 he moved to Chicago. He needed watch repair capacity to service returns, so he ran a classified ad in the Chicago Daily News looking for a watchmaker. A self-taught Indiana watchmaker named Alvah Curtis Roebuck answered the ad. Roebuck came to Chicago. The two men liked each other. And in 1893, after Sears returned to Chicago from a brief retirement, they formally incorporated Sears, Roebuck and Company.

The first Sears catalog was published in 1888, before the incorporation. It ran 80 pages. It sold watches and jewelry. Within a decade it was 500 pages. Within two decades it was over 1,000 pages. And it sold everything. Groceries. Sewing machines. Bicycles. Farm equipment. Musical instruments. Firearms. Buggy whips. Corsets. And starting in 1908, entire houses. Sears sold house kits, everything shipped by rail, that could be assembled by a competent carpenter into a permanent home. Roughly 70,000 Sears houses were built in America between 1908 and 1940. Many of them are still standing.

By 1920, Sears was the largest retailer in the United States. By 1930, it operated over 300 retail stores in addition to the catalog operation. The catalog itself was arriving in tens of millions of American homes every year. In rural America, the Sears catalog was a piece of household infrastructure. Farmers taught their children to read from it. Small-town churches used it to plan Sunday clothing budgets. The Sears Wish Book Christmas catalog became the most-anticipated commercial mailing in the country for three generations of American children.

In 1969, Sears began construction on what would become, for a brief period, the tallest building in the world. The Sears Tower, at 110 stories and 1,451 feet, opened in 1973. It housed 6,000 Sears employees. It represented the peak of a business that had spent 87 years building itself into the retailer of the American century.

And underneath the entire empire was one thing that mattered more than the catalog, more than the stores, more than the tower, more than the brand. Real estate. Sears owned, outright, the buildings and land under a large percentage of its 800-plus American retail stores. Anchor positions in nearly every major mall in the country. Regional distribution centers at critical logistics nodes. Warehouses in urban markets where the underlying land had appreciated for decades. By the 1990s, most industry analysts agreed that the value of Sears's real estate portfolio was worth more than the value of Sears as an operating retail business. The operating business was declining. The real estate was appreciating.

That gap between operating value and real estate value is the story of what happened next.

The Fracture

To understand what killed Sears, you have to understand who Eddie Lampert is and how he thinks about businesses.

Edward Scott Lampert was born in Roslyn, New York in 1962. Yale graduate. Goldman Sachs risk arbitrage desk in his twenties, mentored by Robert Rubin. Founded ESL Investments in 1988 at age 25. Built a reputation as a value investor who identified undervalued businesses and bought them cheap. By the early 2000s, Lampert had produced returns so consistently strong that the financial press was calling him the next Warren Buffett. Institutional Investor named him hedge fund manager of the year multiple times. His personal net worth was estimated at over $3 billion by 2005.

In 2003, Lampert acquired a controlling stake in Kmart during the Kmart bankruptcy process. He purchased Kmart's debt at deep discounts, converted it to equity in the reorganization, and took operational control of a company that most industry observers had already written off. Within a year, Lampert did something with Kmart's real estate that made the entire market pay attention. He sold Kmart's leases on 50 stores to Sears for $576 million and another 24 stores to Home Depot for $271 million. Kmart's stock, which Lampert had acquired at deep discount, rose from $30 to over $100 per share on the strength of those real estate transactions alone. Lampert's original Kmart investment was suddenly worth more than $4 billion.

That transaction taught Lampert something specific about American retail that he would apply to Sears for the next 15 years. The real estate under a struggling retailer is worth more than the retailer itself. And a hedge fund manager who controls both the retailer and the real estate can extract value from the real estate faster than the operating business declines.

On November 17, 2004, Kmart Holdings announced it would acquire Sears, Roebuck and Company for $11 billion. The transaction closed on March 24, 2005. The combined entity became Sears Holdings Corporation. Lampert became chairman. He would eventually add CEO to his title in 2013 when he could not find anyone else who would take the job. The stock, which had traded around $30 before the merger, ran to over $100 by 2007. Lampert's paper wealth exceeded $10 billion.

Then the operating business started dying, and the real estate transactions started coming.

2012. Sears spun off Sears Hometown and Outlet Stores as a separate publicly traded company. Lampert and ESL retained substantial ownership.

2014. Sears spun off Lands' End as a separate publicly traded company. The bankruptcy trustee would later allege that a competing bid from Tommy Hilfiger and Leonard Green valuing Lands' End at $1.6 billion was rejected as a "non-starter" so that Lampert and ESL could take the business at a lower valuation for themselves.

And then, in July 2015, came the transaction that made the ending mathematically inevitable.

Sears spun off 235 of its most valuable retail properties, plus interests in 31 joint venture properties, into a new publicly traded real estate investment trust called Seritage Growth Properties. Seritage paid Sears $2.7 billion for the real estate. Sears then signed long-term leases with Seritage to continue operating in those same buildings, at market rents that were higher than Sears had ever paid before, because as owner it had paid no rent at all. Lampert became chairman of Seritage. His hedge fund became a large shareholder of Seritage. His personal ownership stake in Seritage was substantial.

Read that sentence structure twice.

The same man who was chairman and CEO of Sears was also chairman and a substantial shareholder of the REIT that had just purchased 235 of Sears's best properties. Sears would now be paying rent to a landlord Sears's chairman also controlled. And the lease terms Sears signed with that landlord included provisions allowing the landlord to evict Sears from any specific location on relatively short notice, to re-let the space to higher-paying tenants. Sears had transferred 235 of its most valuable properties to a landlord it did not control, but its chairman did, at a purchase price its own creditors would later allege undervalued the real estate by at least $649 million. And Sears had signed lease terms that guaranteed the landlord could kick Sears out of any of those buildings whenever a better tenant appeared.

The Sears operating business, which had been declining every year for a decade before 2015, now had to service hundreds of millions of dollars per year of new lease expense that had not existed before the Seritage spinoff. Every dollar of that rent came out of gross margin. Every dollar reduced operating income. Every dollar accelerated the decline the transaction was supposed to have relieved.

On October 15, 2018, Sears filed for Chapter 11 in the Southern District of New York.

The Doctrine Overlay

Which capacity broke. Fixed Cost Capacity, structurally, in a way that could not be reversed. Before the Seritage spinoff, Sears owned the real estate under 235 of its most valuable stores. Fixed cost on those stores was operating expense only. After the Seritage spinoff, Sears paid market rent on the same 235 stores. Fixed cost on those stores now included both operating expense and the rent expense that had not existed before. The rent expense was contractual and could not flex down as sales declined. And the Sears operating business was declining. Every quarter, the same rent obligation had to be serviced from a smaller gross margin dollar base. That is the definition of Fixed Cost Capacity ratio collapse expressed through real estate financialization.

Which layer of the cake collapsed. Layer 4, Overhead, absorbed the entire rent obligation immediately and then began cascading down through Layer 3, Gross Margin, as the operating business raised prices in a failed attempt to cover the new fixed cost. Layer 3 collapsed because higher prices in a declining department store category accelerate customer loss. When Layer 3 collapsed enough that gross margin dollars could not cover Layer 4, Layer 5 Debt Service could not be paid without new borrowing. New borrowing came from Lampert's own hedge fund at rates that added to Layer 5. Which drove Sears further into the same cycle. By 2018, all four upper layers had collapsed in sequence.

Which sub-layer of Minimum Mandatory Profit got starved. All five, catastrophically, over 13 years. Debt Service was consumed by the ESL loans. Working Capital was consumed by inventory buildup at underperforming stores. Reinvestment was consumed by the strategic diversion of capital to shareholder-favorable spinoffs (Lands' End, Sears Hometown, Sears Canada) at the expense of the operating business. Owner Compensation, in the form of returns to ESL and other insiders through the various spinoffs and the Seritage transaction, was substantial and consistent. Exit Strategy was resolved by the 2019 bankruptcy auction in which ESL, as the largest creditor, acquired Sears's remaining assets for $5.2 billion through a credit bid that used ESL's own outstanding Sears debt as consideration. The operating business's own shareholders received almost nothing.

Where the diagnostic would have flashed. July 2015, on the day the Seritage spinoff closed. The RTO diagnostic would have run the pro forma Fixed Cost Capacity calculation for Sears assuming the new lease obligations and produced one sentence. This business cannot generate enough gross margin dollars to cover the pro forma rent obligation at any realistic sales level, and the trajectory of same-store sales suggests the gap will widen every year. The doctrine would have identified the transaction as an asset-stripping operation rather than a value-realizing operation, on the specific grounds that the counterparty on the other side of the transaction was controlled by the same person controlling Sears. And the doctrine would have flagged the lease terms, particularly the eviction clauses, as terminal to the operating business's ability to build long-term customer loyalty at any of the 235 affected locations.

The bankruptcy lawsuit against Lampert. On April 18, 2019, six months into the Chapter 11 case, Sears Holdings sued Eddie Lampert, ESL Investments, and multiple other parties including then-Treasury Secretary Steven Mnuchin, who had served on Sears's board. The complaint alleged that Lampert and ESL had illegally siphoned billions of dollars of assets from Sears through the various transactions between 2012 and 2018. The complaint specifically alleged that the Seritage spinoff had undervalued the real estate by at least $649 million and had stuck Sears with hundreds of millions of dollars per year of rent and fees. The complaint alleged that the Lands' End spinoff had been structured to reject a $1.6 billion market offer in favor of a lower valuation that benefited Lampert. The complaint used the word "looted" repeatedly. Lampert denied all allegations. The case was eventually settled in 2022 for terms that were largely confidential. But the specific mechanism, a controlling shareholder engineering transactions between businesses he controlled at prices favorable to his own economic interest, has entered the American corporate governance record as one of the textbook examples of insider self-dealing.

The pattern that connects Red Lobster and Sears. Golden Gate Capital's 2014 real estate strip of Red Lobster and Eddie Lampert's 2015 real estate strip of Sears are the same doctrine failure executed at different scales. In both cases, a controlling investor with a fiduciary conflict of interest engineered a real estate transaction that transferred the most valuable assets of an operating business to a separate entity that the same investor also controlled. In both cases, the operating business was then required to pay market rent on properties it had previously owned. In both cases, the rent obligation exceeded what the operating business could sustainably generate. In both cases, the operating business eventually filed for bankruptcy. And in both cases, the controlling investor extracted substantial value from the real estate side of the transaction while the operating business shareholders and employees absorbed the losses. Red Lobster died in ten years. Sears died in three. The scale of the transaction determined the speed of the death. The mechanism was identical.

The Intervention

There were three specific moments where the doctrine could have caught this. Only one of them was structural enough to actually save the business.

The first was July 2015, before the Seritage spinoff closed. If Sears's independent board members had commissioned a fair-value analysis from a truly independent third party, and if that analysis had concluded that the $2.7 billion purchase price undervalued the properties by hundreds of millions of dollars, the board could have voted to block the transaction. The board did not vote to block it. Independent directors on a board controlled by a dominant shareholder rarely block transactions that dominant shareholder wants to complete. The doctrine's read is that the corporate governance structure that allowed the transaction to happen was the fundamental failure, and no amount of downstream intervention could correct for it.

The second was 2016, one year after the Seritage close, when the operating impact of the new rent obligations became clear in the quarterly financial statements. Same-store sales continued to decline. Gross margin dollars continued to compress. Fixed cost, driven by the new rent, did not compress. At that point, the operating business had one honest option, which was to file Chapter 11 immediately, use the bankruptcy process to reject the Seritage leases as fraudulent transfers, and either recover the real estate for the operating business or negotiate lease terms that reflected what the operating business could actually pay. Sears did not do this. Sears continued to operate under the Seritage leases for another two and a half years, absorbing hundreds of millions of dollars of rent per year that the business could not afford, before the eventual 2018 filing.

The third was October 2018, when the Chapter 11 was finally filed. If the bankruptcy court had rejected ESL's credit bid for the assets on conflict-of-interest grounds, the operating business might have been sold to a third-party operator with a genuine business rehabilitation plan. Instead, ESL's $5.2 billion credit bid was approved in early 2019. ESL created Transformco to hold the residual assets. Store count continued to decline. The last Sears full-line store closed for reasons the company described as pandemic-related in 2020, though industry analysts widely believed the underlying decline had never actually reversed. As of this writing, Transformco operates a small number of hardware and appliance stores under the Sears name. The 132-year-old business that once had 3,500 locations and had built the American middle-class shopping experience has effectively ceased to exist as a mainstream retailer.

The Lesson For SMB Owners

Sears is not a story about the death of department stores. It is a story about the same doctrine failure Red Lobster suffered, at a scale that took a quarter-century to play out.

If you own a business and you own the real estate under that business, that real estate is a part of your operating balance sheet whether it appears on the balance sheet or not. Selling it to yourself under a different corporate structure does not create value. It transfers value from the operating business, where it protects operations against downturns, to a separate entity, where it collects rent. If you are the counterparty on both sides of that transaction, you are picking your own pocket in slow motion. And the doctrine reads that pattern as one of the most common and most fatal failures in American small business ownership.

The specific version of this at SMB scale is the owner who forms a real estate LLC, transfers the operating business's building into it, and then has the operating business pay market rent to the real estate LLC. The stated reason is usually asset protection, or estate planning, or capital access. Sometimes those are real considerations and the structure makes sense on those grounds. But the doctrine has one non-negotiable rule for any structure like this. The rent the real estate LLC charges the operating business must be a rent the operating business can afford at every plausible revenue scenario. Not just the good years. Every year. Including recession years. Including the years where a large customer walks. Including the years where a new competitor undercuts the operating business's pricing.

If the operating business cannot afford the market rent, then the market rent is not the right rent. The operating business's ability to pay is the ceiling, not the market. And if the owner wants a market return on the real estate anyway, the honest answer is that the real estate should be sold to a third party, not rented to the operating business. Because a rent obligation that the operating business cannot sustain is a Fixed Cost Capacity trap regardless of what corporate structure sits behind it.

The second lesson is about controlling shareholders and fiduciary conflict. Every Sears transaction between 2012 and 2018 was, in some form, a transaction between businesses Eddie Lampert controlled. That does not automatically make the transactions wrong. What made them wrong was the failure of the Sears board to insist on genuinely independent valuation and structuring on Sears's side of every transaction. In SMB context, this is the pattern of an owner who runs personal expenses through the business, or who has the business buy assets from the owner personally at prices the owner sets, or who has the business pay the owner's family members for services at rates the owner sets. Every one of these is defensible if the pricing is fair. Every one of these is fatal to the operating business if the pricing is not.

The move this week. If your business rents from a real estate entity you also own, write down two numbers. The rent you currently pay per month. And the rent the operating business could pay at 70 percent of its current revenue. If those two numbers are not close, you have set the rent at a level the operating business cannot sustain through a normal downturn. Adjust the rent to a level that survives a 30 percent revenue decline. If the real estate LLC cannot service its own debt at that lower rent, the problem is not the operating business. The problem is that the real estate transaction was structured for good times only. Which is what Eddie Lampert did with Seritage. Which is why Sears is not a mainstream retailer anymore.

Run Return to Owner on your actual numbers. Read your Fixed Cost Capacity biomarker with any owner-controlled rent obligation included at its current level, then rerun it at a stress-tested revenue scenario. And ask yourself the question Sears's board never asked with any real independence. If my operating business could not pay this rent to a third-party landlord, why is it paying it to me.

Postscript

Seritage Growth Properties, the REIT that acquired the 235 Sears and Kmart properties in 2015, continues to operate. It has redeveloped many of the former Sears locations into mixed-use retail, office, and residential properties. The redevelopment strategy has produced varying results across different markets. Warren Buffett's Berkshire Hathaway held a large stake in Seritage after 2015 that it later reduced. Seritage remains publicly traded as of this writing, at a market capitalization substantially below its post-spinoff peak, though above zero.

Eddie Lampert stepped down as CEO of Sears Holdings in October 2018 on the day of the bankruptcy filing. His ESL Investments credit bid acquired the remaining Sears assets for $5.2 billion in February 2019. He continues to control Transformco, the successor entity that operates the residual Sears and Kmart stores. His public profile has diminished substantially since 2018. He rarely gives interviews. He is no longer described in the financial press as the next Warren Buffett.

The Sears Tower in Chicago, which was the tallest building in the world when it opened in 1973, was renamed the Willis Tower in 2009. Sears itself had vacated the building years earlier. The last surviving Sears full-line store closed during the pandemic. The Sears catalog, which arrived in tens of millions of American homes every year for nearly a century, was discontinued in 1993 for reasons that had nothing to do with Amazon and everything to do with the operating business's inability to fund its ongoing cost. Amazon did not kill Sears. Sears was killed by transactions that transferred its real estate to a controlled counterparty at prices that undervalued the real estate, followed by leases that required the operating business to pay market rent it could not sustain. Amazon happened to be watching.

Richard Sears, the railroad clerk who started the whole thing with a shipment of unwanted watches in 1886, died in 1914. Alvah Roebuck sold his stake and left the company in 1895, then returned decades later as a promotional figure. Neither of them lived to see what happened to the business they built. Which is another way of saying that the founders of American commerce almost never see how their businesses end, and the people who do see the end are rarely the same people who built the beginning.