In response to The Butcher of Sears Holdings It is Showtime writes

I could write a whole history of retailers failing due to leverage and / or being run by financial gurus, if I thought anyone would read them.

I was a senior in high school when the Haft Family made its early push for Dayton Hudson / TGT. I left for college the next year and never really moved back to MN. That was 1987. My earliest memories of tagging along on store visits with my dad (he worked for Dayton’s) are mixed in with Ali – Foreman which puts them in 1974 and 5. By that math “Asshole Bankers Don’t Understand Retail” was the final lesson of a 12 and a half year live-in retail apprenticeship under the guy who was central to the creation of the modern Target.

Which is nothing I did. I was just lucky as hell to be raised by (and get along with) a very unusual guy who was certainly one of the top 10 merchants from 1950-2000. He’s wildly underrated but I’ll argue his placing with anyone.

(Forgive the digression. Quite a bit of coffee is involved in these Sunday morning columns and visits to the comment section.)

Ken’s problem with retail LBOs was the debt. He wasn’t afraid of the risk. He loved risk. What he hated were cheap, dirty stores. Or empty cash stands when there was a line. Or flimsy displays… Wow, did Ken Macke hate flimsy displays. You end up with all of those when you lever up retailers whether it’s to do an LBO or buyback or dividend.

Retail margins are terrible. 10% is about your cap. There’s no room to add excessive debt payments without cutting spending. Cutting spending leads to sloppy execution which becomes a messy store. So help me God if a Target store was dirty my dad would grab the nearest flimsy display and use it as a staff to Smite the store manager dead like Ken was Moses himself (I may be conflating that memory… I was a kid).

The Haft family ended up crapping out of Daytons. The Hafts had been front-running their own press clipping. They’d get long, announce a bid then sell down the position in the ensuing ramp. (Did you honestly think Ackman invented the idea?) Lather-rinse-repeat. In the summer of 87 the Hafts were out. By the time of the article, October 15 1987, the Hafts were long up to 4.9% at $50. They’d bought huge in the fall of 1987.

Which means the Hafts were levered long into about $300m of DH right into the crash of 87. The stock fell somewhere around 40%. So Endeth the lesson on mixing leverage and actual business.

(Another funny point on the article… Check the part where it says Daytons sent a “tersely worded 2 page fax”. The original draft of the fax was 2 words. “F— you”. The lawyer wouldn’t let Ken send it. I was listening to my dad on the call when he complained “Which part of ‘f*** you’ do you think the Hafts won’t understand?”)

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