Hedge-Fund Ownership Cost Sears Workers Their Jobs. Now They’re Fighting Back.

Hedge-Fund Ownership Cost Sears Workers Their Jobs. Now They’re Fighting Back.


Bruce Miller got a job at a Sears in Tom’s River, New Jersey, ”fresh out of high school,” he said. He didn’t have any experience other than repairing cars in his backyard, but a friend who worked in the maintenance department knew he was looking for work and recommended him. That was the beginning of a 36-year career with the company. “Everyone I had talked to said, ‘Get into Sears. Stick with them. They’re a great company. They’ll take care of you,’” he recalled. “I just kept my eyes open and my nose clean and worked my way up.” He eventually became an auto mechanic.

In 2005, the hedge fund ESL Investments Inc., owned by Eddie Lampert, took over the company. In the 1990s, Sears struggled to keep up with big-box competitors Walmart and Kmart and to compete with online retailers. When Lampert took over, he focused on reducing costs and increasing shareholder returns. Miller immediately noticed the difference that made to the quality of service and offerings in the stores. “We went from the top of retail to the bottom of the barrel,” he said. His pay was changed from an hourly rate to commission-based, which meant he and his co-workers started competing with one another. It also meant that when sales declined, as customers fled the dilapidated stores, his income did, too. When he started, Miller said, a slow day in his department meant repairing 100 cars—at its peak, 185 daily. But toward the end, “We were lucky to get 10 cars a day.”

Benefits changed as well. The company took away five personal days. Sick days disappeared. And though he had worked a steady schedule Tuesday through Saturday from 8 am to 4:30 pm, the company started asking him to work at all hours, he said, adding that some days he worked until midnight and then had to be back at 7 the next morning.

Lampert bought Kmart in 2003 and merged the two companies in 2005. He came into ownership of both with basically no experience in retail; his background was in risk arbitrage at Goldman Sachs. To buy Sears and Kmart, Lampert, through his hedge fund, used the private-equity model of a leveraged buyout: He financed the purchase of those companies by saddling them with debt and using little of his own capital. Once he became a retail CEO, he stuck with the Wall Street playbook. He sold off Sears’s most valuable assets, such as the Lands’ End clothing and Craftsman tool brands. Many business lines ended up in separate companies that he has invested in through his hedge fund and profited from as Sears withered. Lands’ End, for instance, is now worth more than Sears. He also sold off a cluster of Sears stores for $2.7 billion to Seritage, a real-estate company that he headed as chairman. Sears then had to pay rent at many of those locations.

Meanwhile, Lampert’s hedge fund loaded the company up with debt through loans it issued itself, making money off commissions and interest. ESL and its affiliates lent Sears some $2.6 billion—about half the total debt it had as of September—earning $400 million in interest and fees. All those losses, all that debt, and all the rent it was paying on its stores left the company little to invest to keep up with Walmart and Amazon.

From the perspective of Sears and Kmart employees, the strategy failed miserably. Sears lost about $5.8 billion over the last five years and closed more than 1,000 stores over a decade. During that time, 175,000 employees lost their jobs. Then, on October 15, 2018, the company filed for bankruptcy protection. At the time, it said it had $11.3 billion in liabilities, including $5.6 billion in debt, and just $7 billion in assets. But Lampert and his hedge fund will make out just fine: The loss of ESL’s stake in the company has been offset by the gains he made from interest and fees on the company’s debt over the years and his investments in the spun-off businesses.

Typically, retailers keep their debt levels low and own their locations so that they have cash to spare for inevitable industry disruptions, like a recession or Amazon. The Wall Street model does the exact opposite, affording these companies no cushion. Bankruptcies often follow. Nine of the 10 largest retail bankruptcies in 2017 were backed by private-equity firms, as were 40 percent of the largest ones from 2015 to early 2017. A third of retail job losses in 2016 and 2017 can be pinned on private-equity ownership.

Then came the Toys “R” Us bankruptcy. The company, owned by the private-equity firms KKR and Bain Capital and the real-estate firm Vornado Realty Trust, declared bankruptcy toward the end of 2017, liquidated all of its stores, and laid off about 30,000 people. “You have to ask yourself: Why is it that Toys ‘R’ Us [and] Sears did not invest, did not try to compete? What stopped them?” said Eileen Appelbaum, a co-director of the Center for Economic and Policy Research. “The answer is, they don’t have any resources.”

But bankruptcies and mass layoffs are not necessarily a problem for private-equity firms or hedge-fund owners. They’re not in it for the long run; the plan is usually to hold a company for a few years and try to have it go public again. If it works, they make a killing. If it doesn’t, they’ve still accrued all that money along the way. “The house never loses,” Appelbaum said.

Miller learned Sears was declaring bankruptcy by reading the news on his phone. “I was shocked,” he said. “It’s an outrage that a hedge-fund billionaire could get away with stripping Sears for parts and treating my job like crap.” In April of last year, his store closed, along with 141 others. He got eight weeks of severance pay. Two weeks after it ran out, he lost his house. His health insurance ended around the same time, and he’s still uninsured. He is now 56. He hasn’t been able to find a new full-time job, instead doing “little odd jobs here and there.”

About two months ago, he joined a burgeoning campaign called Rise Up Retail. Launched just last year by the workers’-rights organization United for Respect, it aims to secure better benefits and more economic stability for retail employees. It began by organizing Toys “R” Us workers, who were laid off without severance pay. With Rise Up Retail’s help, former Toys “R” Us workers demanded a $75 million hardship fund from KKR and Bain. They got $20 million. Miller, who joined Rise Up Retail after learning about the organization on Facebook, said he doesn’t know if he’ll be able to get any more money from Sears. But he added that he hopes the effort will make things better for retail
employees in bankruptcies to come.

In early February, Miller told his story at a press conference in a small room in the New Jersey Senate building, alongside former Babies “R” Us employee Joseph Ryan (as part of the Toys “R” Us bankruptcy, Babies “R” Us also closed stores), in support of the first-in-the-nation legislation backed by United for Respect. The bill, introduced by State Senator Joseph Cryan, a Democrat, aims to bolster financial security for employees in the state by making them less disposable. Currently, there is no law anywhere in the country that guarantees severance for workers after a layoff. His bill would mandate that laid-off employees of large companies in the state be paid a severance equal to one week of wages for each full year of employment. “It is critical for holding Wall Street accountable…to the retail employees they take over,” Ryan told assembled media and lawmakers, sporting a purple vest with the Babies “R” Us logo stitched in yellow.

The bill would also require companies to give employees more notice before layoffs, including at least 15 days’ warning ahead of a bankruptcy filing or change in ownership, and would prohibit mass firings for 180 days after such an upheaval. It would ensure that Wall Street firms—like KKR, Bain, and Eddie Lampert’s hedge fund—are responsible for severance claims by classifying them as joint employers along with the executives who run their portfolio companies, and would classify severance as wages so that such payments would get top preference in the bankruptcy process alongside creditor claims.

“The genesis point for this legislation,” Cryan said, “was me standing with hundreds of Toys ‘R’ Us workers, listening to stories of folks who dedicated 27, 28, 31, 32 years and were basically getting nothing.” Democratic State Senator Nellie Pou, who backs the bill, noted that when Toys “R” Us laid off employees with little to no warning and refused to give them severance, it wasn’t “doing anything technically illegal, but they did something I believe to be reprehensible.”

The measure would be “game-changing,” said Carrie Gleason, the policy director of United for Respect. It would mean more than giving workers money to help after a layoff. It could change the calculation that companies make when deciding to cut workers in the first place, by putting a price on it. Right now, it’s “virtually costless” to fire employees, Appelbaum said. Private-equity firms in particular tend to turn to layoffs quickly after taking over a company. “Squeezing labor is the fastest way to increase cash flow to be able to make payments on the debt,” Appelbaum explained. This measure could “cause companies to think twice about whether laying off workers is their go-to solution for every problem that they face.”

It could also make creditors hesitate to liquidate companies like Sears in bankruptcy if the cost of paying out severance would outweigh the cost of restructuring and continuing to operate. “We want solutions that ultimately protect people’s jobs, not just give them support after they face unemployment,” Gleason said.

Gabe Maguire started working at a Kmart seven years ago, nine years after Lampert bought the business. Even then, they witnessed decline. (Maguire uses gender-neutral pronouns.) Staff cuts meant that eight people ran the store for an entire shift. The store, which was built decades ago, was aging. The heating and cooling system malfunctioned, making it uncomfortably hot. Ordering new products and supplies became more and more difficult. “People have been asking for a long time if we’re going out of business,” Maguire said, “because our shelves looked bare a lot of the time.” Even so, Maguire said, they and their fellow employees thought the location might stage a comeback. Then, two days after this past Christmas, the store’s employees were told it would be closing. “As the store slowly empties, it’s kind of sad, really,” Maguire said. “These are people you see 40-plus hours a week. They’re kind of like family.”

Maguire has poured that emotion into organizing with Rise Up Retail, which they found out about after stumbling across videos of Toys “R” Us workers on social media sharing their stories and demanding hardship pay. Maguire messaged Rise Up Retail and asked to get involved. Before that, it felt like “screaming into the void,” they said. But organizing is “very empowering.” Toys “R” Us workers are “guiding us and leading the way and showing how it’s done,” Maguire said. “It was really inspiring to see the people who got a little bit of justice out of their actions supporting us.” Maguire plans to stay involved, “until we see justice for our co-workers, for Sears and Kmart employees, and then in the future to improve conditions for fellow retail employees.” That solidarity is one of Rise Up Retail’s key assets as it seeks to organize workers. “What’s really amazing to see [is] the mentoring and the mutual support [among] Toys ‘R’ Us and Sears workers,” said Lily Wang, the Wall Street campaign manager at United for Respect. “Toys ‘R’ Us workers are saying, ‘We know what it’s like to not only lose your job, your benefits, and this community you’ve been part of…. We also know what it’s like to fight back and win, and this is how we’re going to do it.’”

When former Toys “R” Us employee Giovanna del Rosa heard about what was happening at Sears and Kmart, she knew she had to get involved. “I was very motivated to be there for them, because Rise Up Retail was there for me when I had no idea what was going to happen with my life,” she said. She started at Toys “R” Us three weeks after her 18th birthday and stayed for 20 years, working her way up from a summer cashier job to assistant manager. In March of last year, she found out that all Toys “R” Us locations would close. The news was devastating. “It was a mourning process,” del Rosa said. She had frequent panic attacks, many at work. “For a lot of people, it’s just another store that closed, but there’s so many of us that that was our life.” Then, two weeks before the company filed for bankruptcy, she found out that the severance plan was being eliminated. “I was like, ‘Twenty years of my life is going to be worth nothing.’ These companies never thought twice about taking my job and my livelihood and my medical insurance.” Working with Rise Up Retail “started my healing process,” del Rosa said. Her first major action was speaking at a board meeting of CalSTRS, a pension fund that invests in KKR and Bain, asking the fund to reconsider its investments in private-equity firms that had cost so many their jobs.

Twenty-nine years ago, Kathy Cagle got a job at a Sears store in Newark, New Jersey, through an aunt who worked there. She started out in clothing and moved up to selling appliances. “I was able to make a living,” Cagle said. She took vacations, paid off her condo, and helped pay for her daughter’s college education.

But after Lampert took control, Cagle’s commissions plummeted. Her hours were cut. She had to take on extra work, like dog walking, to make ends meet. “It gradually got worse and worse,” she recalled. “I feel like [Lampert] just ran it down to profit himself and h
e didn’t care about the employees at all.”

When she was told at the end of June 2018 that her store would be closing, management said that as long as employees stayed till the very end, they would receive severance pay. Cagle was due eight weeks of pay—which would have come to about $5,600, she estimated—plus 10 weeks of health and dental coverage. On the final day of the store’s operation, she and her co-workers got paperwork to apply for severance, which they were told to fax in the following Monday, October 15. Two weeks later, no one had gotten a response. Cagle tried to make a doctor’s appointment and found out that her health insurance, which also covered her daughter, had been cut off.

The promised severance never materialized. “They never paid us, didn’t call us, didn’t write to us,” Cagle said. “They dropped my health and dental without telling me at all.” She and her co-workers didn’t get an answer until they wrote the company a letter; in response, the company told them that because it had filed for bankruptcy on October 15, no one in their store would be getting severance. That was the same day that Cagle and her co-workers were told to send in their paperwork. “They must have known they were going to file for bankruptcy, but they still led us to believe that if you stayed until the end, they would give you this package,” Cagle said. “I feel like they tricked people because they didn’t want people to leave the company.”

Losing out on severance meant that she couldn’t afford Christmas gifts. She’s getting unemployment benefits, but they don’t compare with what she would have made. “It’s been hard to pay my bills,” Cagle said. She’s had to borrow money from family and cut down on expenses. “I just mostly drink water. I don’t buy soda or stuff like that. I don’t eat as much. I can’t really enjoy life as much.

“Sears was like a second home to me. I really loved that company,” she continued. “For me to be dedicated to them for 29 years and then to just end it with nothing, no reward or anything for it… I felt really angry, and I felt sad, depressed.” Cagle’s plan had been to take time off to visit her daughter in Washington, DC, while she got severance pay and then work for a different Sears location that hadn’t closed yet, but now she feels too burned to work for the company again. “I feel like they really tricked me and cheated me,” she said. She never took the trip.

Sears and Toys “R” Us employees are no longer just seeking severance pay or hardship funds for themselves. “Across companies, we’ve heard consistently people expressing a frustration with the current economy, where they feel like they’re the casualties of Wall Street firms and their profit-making schemes,” Wang said. Sears and Kmart workers are calling for representation on the new company’s board, which will restructure with 223 Sears locations and 202 Kmart stores now that Eddie Lampert put in a winning bid for what remains of the companies during the bankruptcy process. And workers also want a seat at the creditors’ table when companies go into bankruptcy. United for Respect is supporting a bill sponsored by Senator Tammy Baldwin (D-WI) that would give employees of public companies the right to directly elect one-third of the board of directors. When the bill was introduced last year, it didn’t even get a committee hearing, but three 2020 presidential candidates—Senators Kirsten Gillibrand, Bernie Sanders, and Elizabeth Warren—are now co-sponsors. Warren has championed a similar idea on the campaign trail, calling for a requirement that workers elect 40 percent of corporate board members. United for Respect is also looking at whether state unemployment systems can be better funded to ensure more adequate payments for retail employees who lose their jobs. And it supports recent efforts to curb stock buybacks, a means by which money that could be invested in companies and their employees is used to enrich shareholders instead.

Employees at Charlotte RusseGymboreeNine West, and Payless ShoeSource—all private-equity-backed retailers that have been going through bankruptcy—have joined Rise Up Retail’s online communities. This “broader movement,” as Gleason calls it, may even start to examine private equity’s signature practice of the leveraged buyout. “It’s a fundamentally flawed business model that isn’t really set up to support a thriving economy or create good jobs,” Gleason said. “The real owners don’t really care if the business does well or not.” For Kathy Cagle, the goal is clear: “They should change the rules so that Wall Street companies can’t keep playing games with hardworking people’s lives.”


Bryce Covert is a contributor at The Nation and a contributing op-ed writer at The New York Times.

Co-published with The Nation.

Save An Endangered Species: Journalists

Bryce Covert is an independent journalist writing about the economy. She is a reporter in residence at the Omidyar Network and a contributing writer at The Nation. Her writing has appeared in the New York Times, Time Magazine, the Washington Post, New York Magazine, Wired, the New Republic, Slate and others. She won a 2016 Exceptional Merit in Media Award from the National Women’s Political Caucus and the John Swett Merit Certificate from the California Teachers Association in both 2019 and 2022. She has appeared on ABC, CBS, MSNBC, NPR and other outlets.

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