Sears Looks to Engineer a Makeover

Jan 20, 07:24 AM

By Gary McWilliams

The Wall Street Journal

Sears Holdings Corp., the storied retailer that helped civilize the American frontier with its catalog sales and later defined the modern department store, is searching for a new compass.

Last week, the retailer warned that results for its fiscal fourth quarter and year would fall well below its expectations, continuing a sharp slide in sales and profit. Even during the best two months of the year, sales at stores open at least a year fell 3.5 percent compared with a year ago, the company said. The stock is off more than 50 percent in the past year.

With a potential recession on the horizon, retail experts say it is now clear Chairman Edward Lampert must engineer a radical makeover of the 121-year-old retailer to prove it can thrive alongside bigger rivals. To halt the sales and profit declines, the company's Sears and Kmart stores must forge new roles for themselves that will distinguish them in customers' eyes from competitors such as Kohl's Corp., J.C. Penney Co. Inc., Target Corp. and Wal-Mart Stores Inc.

"Sears and Kmart can't continue in the format they now do," said Love Goel, chairman of Minnesota retail investment group Growth Ventures Group and a former consultant to the retailer. "The time to fix strategy and execution issues has passed; it's an existential issue now," he said. A Sears spokesman said executives weren't available to comment.

Lampert, a 45-year-old billionaire whose ESL Investments Inc. acquired Sears in 2005 through a merger with discounter Kmart, hoped to rejuvenate the retailer with a prescription of financial fixes. But he is now having to recognize the limitations of that approach.

Early on, Lampert stepped into a direct role in operations, overseeing marketing and strategy, and putting finance, until just recently, under his hedge-fund colleague at ESL Investments, William C. Crowley. Lampert has top Sears executives fly to Connecticut twice a month to brief him and his ESL colleagues. Lampert and Crowley's direct involvement left Aylwin B. Lewis, the company's chief executive, to oversee store operations, focusing on revitalizing a store culture that seemed disillusioned and exhausted amid steady sales declines.

While Lampert was at first successful in raising profit by cutting costs, rivals chipped away at Sears' clothing, appliance and home-products businesses.

Of course, many retailers were hurt by lackluster holiday spending. Retail Metrics Inc.'s holiday-sales index reported a scant 1.7 percent gain for the industry in same-store sales, the index's worst showing in five years. But some of Sears' woes are the result of its own missteps.

The company's Sears.com Web site failed sporadically on the Friday after Thanksgiving, and a revolving door among its executive team continued into the holidays. Peter Whitsett, the senior vice president of merchandising at Kmart, last month joined former Kmart CEO Julian C. Day at RadioShack Corp.

In the past year, the retailer named two new chief financial officers, a chief customer officer, and marketers atop Sears and Kmart. Lampert, who shuns the spotlight and communicates largely through shareholder letters, launched all-new marketing campaigns for Sears and Kmart. His most recent note to investors, sent Nov. 30, asked for patience. "We will take the actions we believe are necessary to drive value over the long term," he wrote.

Keeping Sears and Kmart as separate units will no longer work to carry a turnaround at either, says Growth Ventures' Goel. Kmart has lost too many customers to Target and Wal-Mart and would be better off converted to Sears' brand, he said. Craftsman tools, Kenmore appliances and Diehard automotive lines have consumer trust and distinct identities that could make for standalone operations in a future revamping, he said.

A recession this year could add to Sears' troubles as its cash cushion shrinks. Sears, based in Hoffman Estates, Ill., spent some $2.9 billion this fiscal year on share repurchases. It forecast cash and equivalents at Feb. 2 of about $1 billion, down from about $4 billion a year ago.

The company forecast income for the quarter ending Feb. 2 of between $350 million and $470 million, or $2.59 a share to $3.48 a share. Sears earned $820 million, or $5.33 a share, on sales of $16.29 billion in the same period last year. It must disclose full results for the fiscal year by March 28.

Lampert and his ESL funds own nearly 48 percent of Sears shares, according to the most recent securities filings. The retailer's slide was a big reason ESL was down more than 20 percent last year. But Sears isn't his only big setback lately. ESL has almost 22 percent of its cash in shares of Autozone Inc., the auto-parts retailer that has dropped more than 13 percent in the past year, according to FactSet Research Systems Inc. He also invested more than 7 percent of ESL's portfolio in Citigroup Inc., raising the hedge fund's stake for the past year, even as Citigroup has lost 44 percent of its value.

Sears, which was founded in 1886 and produced its first catalog in 1888, has a rich history of reinventing itself. Its original "Book of Bargains" catalog paved the way to a global company that by the 1940s had stores in Europe and Latin America, as well as the United States. The Sears Tower in Chicago - then the company's headquarters - was the tallest building in the world when it opened it 1973.

Sears has about 3,800 stores in the United States and Canada. Last month, it offered $270 million for shares of home-goods retailer Restoration Hardware Inc. that it doesn't already own. But its record in acquisitions has been dismal. In 2002, it paid $3 billion for mail-order firm Lands' End, a business that has declined since the deal.

The retailer's Kenmore brand has dominated the home-appliance market for years, but Sears' share of major U.S. appliance sales dropped. Only recently has Sears tried to stop the losses with a new marketing and services push.

slowing down

Despite a few holiday crowds like this one, Sears was stung by lackluster holiday sales that added to another poor quarter. the latest

According to a Wall Street Journal report Saturday, Sears Holdings Corp. plans to reorganize into several companies in a bid to pull the retailer out the doldrums.

The restructuring could create separate units to manage Sears real-estate holdings and run brands such as Diehard and Craftsman, the Wall Street Journal reported.

Spokeswoman Kimberly Freely issued a short statement Saturday confirming Sears Holdings is "introducing an organizational structure that provides operating businesses with greater control, authority and autonomy." She declined to comment further.

- The Associated Press

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