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Income for Sears Holdings Corp. has steadily fallen during the tenure of CEO Eddie Lampert.


“Twin Titanics” or turnaround—which way are Sears and Kmart headed?

by Lauren Daniels
May 05, 2011


Sears State Street

Sears Holdings Corp.

As of January 29, Sears Holdings Corp. maintains 842 full-line stores, like this one on State Street in Chicago.

SEARS stock

Lauren Daniels/ MEDILL

The price of Sears Holdings Corp. shares has been volatile.

Edward “Eddie” Lampert, chairman of Sears Holdings Corp., has presided over consistent quarters of decline since merging Sears, Roebuck & Co. and Kmart Corp. in 2005.

The Hoffman Estates-based retailer saw income fall 4.3 percent to $133 million, or $1.19 per diluted share in 2010. Since 2005, the first year of results for the merged company, Sears Holdings’ income has plunged 84 percent from $858 million, or $6.17 per diluted share. It is clear that Sears is a company in decline.

The news for 2011 does not appear any better. Announced in advance of Wednesday’s annual shareholders meeting, Sears expects a loss of between $45 million and $195 million, or $1.35 and $1.81 per diluted share, for the first quarter ended April 30.

Same-store sales, a key metric that compares stores open at least one year, are expected to decrease 3.6 percent. Domestic Sears stores are expected to be the most adversely affected with comparable sales falling 5.2 percent.

After years of blaming everything from the weakened economy to bad weather for the deteriorating performance, Lampert finally acknowledged culpability may be found inside the organization. “In many of our businesses, even in a tough environment, we ought to be doing a lot better,” Lampert told shareholders.

In recent months, Sears has announced a flood of new initiatives aimed at boosting store performance.

New CEO Louis D’Ambrosio told shareholders that bolstering apparel performance is a priority. Clothing has long been a sore point for the retailer, which has struggled to find products that connect with consumers. This fall Sears will unveil clothing lines with sisters Kim, Kourtney and Khloe Kardashion and “Modern Family” star Sofia Vergara who hails from Colombia. Both lines aim to attract a more fashion-conscious audience to the retailer.

“They might really be on to something with the Kardashians and Sofia Vergara,” said Paula Rosenblum, managing partner at Retail Systems Research, a Miami-based consulting firm. “The Latino market is an underserved part of Sears’ customer. The Kardashians are a magnet; by putting their product in Sears they are giving their stamp of approval, something that Sears really needs because they have never been considered remotely cool. “

Partnerships like ones with the Kardashians and Vergara and the soon to be launched brand UK Style by French Connection join a long line of exclusive collaborations that Sears has hoped would pay off. But many of them have been short-lived. Deals with Benetton USA and Structure were lauded at the time of their announcement but failed to draw traffic into stores.

While announcing plans to focus on apparel, Lampert acknowledged Sears has more room for clothing than the retailer needs. Sears’ floor space allocated to apparel is greater than all three Gap Inc. formats combined but it produces far less in revenue, he said.

The company declined to comment on the specifics of square footage dedicated to fashion apparel.

How to handle its excess square footage has become a hot topic for Sears’ executives. Sears has tested leasing space within its stores to Whole Foods and fast-fashion retailer Forever XXI to reduce underperforming space. SHC Realty, a group of in-house realtors, is tasked with finding solutions for the vast amount of under-used real estate. According to the SHC Realty website, Sears currently has 3,776 opportunities available for leasing nation-wide.

“The challenge becomes always looking for things to fill it up,” said Rosenblum. “That is not how you want to run a retail chain. First, decide what to sell and then determine how many square feet you need to sell it in.”

Beyond apparel, Sears is adding beauty to appeal to the female shopper. Expanded beauty departments featuring national brand cosmetics such as CoverGirl, OPI and L’Oreal are rolling out to the 100 top–performing stores. The departments are designed to look more like upscale competitors with custom fixtures and sales staff to assist shoppers.

Sears’ re-launch of beauty comes 10 years after the company shuttered the private-label beauty brand Circle of Beauty and publicly back out of a deal with Avon Inc. to carry a new line known as beComing. The reversal of the deal cost Sears $80 million.

On the product side, Sears management is rolling out a new generation of Kenmore, including appliances that run when electricity is least expensive. The company also introduced Kenmore Connect, which allows consumers to use their smartphone to diagnose issues.

“It’s not an easy fix. On the apparel side they are trying to keep up with Target, on the other side their trying to keep up with Walmart,” warned Rosenblum.

D’Ambrosio, who has no retail background, joined Sears as the first permanent CEO since 2008. He was selected to lead the company after a lengthy search to replace interim CEO Bruce Johnson.

Prior to joining Sears, he was CEO of Avaya Inc., a telecommunications company. Before that, he spent 16 years at IBM.

D’Ambrosio’s strength in technology may serve Sears well. An area of growth for the company is e-commerce. During the quarter ended April 30, sales shipped directly to consumers on sears.com and kmart.com increased 22.4 percent. Starting with the first quarter, Sears plans to include sales of direct shipped goods in its same-store sales results.

Expanding on multi-channel opportunities, Sears also is experimenting with home delivery of groceries through the MyGofer website. Lampert touted the success of the Marketplace, an Amazon.com-like site that allows third-party sellers to give customers access to 18 million products.

But some doubters predict it won’t be enough.

“You can’t turn around Sears with online sales,” asserted Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm New York. “All of the investment is in retail.”

Shareholders have heard lofty promises from Lampert before. Lampert, the billionaire hedge fund manager with no retail experience, proclaimed he would return both Sears and Kmart to their former prominence as great American retailers. At the time, many thought Lampert would use his massive real-estate knowledge to capitalize on Sears’ expansive landholdings. Six years of disappointing results, failed initiatives and management turnovers have left Wall Street less than impressed.

Following the lowered first quarter outlook, Sears Holdings shares fell nearly 10 percent as investors headed for the exits.

Sears Holdings shares current trade at a price/earnings ratio of 65.61, nearly three times the current Standard & Poor's ratio of 23.59. Its stock is also more expensive than Sears’ competitors J.C. Penney Co. Inc., which trades at a ratio of 22.9, and Kohl’s Corp., which trades at 14.46.

At close of market Thursday, the volatile stock regained some of  its recent losses, closing at $78.08. That falls between its 52-week low of $52.91 and its high of $117.04. At their all-time high in April 2007, Sears Holdings shares reached $193.

Analysts surveyed by Bloomberg LP remain bearish on the stock, many expecting the stock to underperform in the coming 12 months.

The current performance of Sears is a barely recognizable to the Sears of the past. At its strongest, Sears was the nation’s most prominent retailer; accounting for 1 percent of the gross national product. Sears powered past competitors on the strength of its private-label business in both hard and soft lines. Exclusive lines such as Craftsman tools, DieHard batteries  Canyon River Blues denim brought a point-of-difference to the retailer.

As other retailers have exited the recession and begun spending on capital improvements to better the shopping experience, Lampert has continued to cut costs. Target Corp. is spending billions on its remodeling program, expanding food and consumables and remodeling its stores.

At Sears, management is using cash to buy back stock. In 2010, Sears repurchased 5.5 million common shares at a cost of $394 million. During the first quarter, the company repurchased an additional 1.2 million common shares, costing $101 million. As of April 30, $86 million of remaining authorization is available under the common share repurchase program.

Continued cost cutting and stock buybacks have come at the cost of in-store experience, Sears’ critics say.

“The customer could care less if you buy back stock,” said Davidowitz. “Buying back stock does not affect the customer experience. The future of Sears involves appealing to the customer. Bottom line in the retail business: buying back stock cannot be your top priority.”

Missing from the flurry of announcements and initiatives is how to implement the changes that would save the business. Robin Lewis, author of the “New Rules of Retail” and close follower of Sears, pointed out the lack of cohesive strategy attached to the directives from Lampert or any of his executives.

“Does Lampert really want to turn Sears around?,” questioned Lewis. “We have seen no investment into the core of the business, the retail sector.”

Lewis believes Lampert is deleveraging the brands for a soft landing instead of a quick collapse like Borders Group Inc. and Linens ‘n Things.

“The overarching strategy has been cash management, to gently lower the ‘Twin Titanics’ into the ocean,” argued Lewis. “The way to do that is to give the public and Wall Street the impression of action.”

Some are willing to give Lampert and the management team more time to execute the proposed changes.

“On paper it all sounds really good, better than leasing space to Whole Foods,” said Rosenblum. “That’s thinking like a real estate guy, not like a retailer. A real estate guy says, “How am I going to fill-up the space?’ A retailer thinks about ‘How I am going to please my customer?’”