The Incredibly Shrinking Sears

Barbara Thau ,

 CONTRIBUTOR

Photographer: David Paul Morris/Bloomberg

Sears is half the retailer it used to be — literally.

The merchant announced yet another round of store closings, which will leave it with about 1,500 Sears and Kmart locations once those units go dark in June, confirmed a company spokesperson. That stands in stark contrast to its heft a decade ago, when Sears Holdings SHLD -2.87% boasted approximately 3,400 stores.

The retailer will shutter 68 Kmarts and 10 Sears units over the next few months, adding to the 50 stores it earmarked for closure in February. This follows store closures last year.

The latest slate of closings will “accelerate its transformation and its return to profitability,” said Eddie Lampert, chairman, CEO and majority shareholder, in a statement.

The long struggling retailer has posted over a decade of sales declines, failing to carve a meaningful niche in the retail landscape for the Sears brand amid department store brethren such as Kohl’s and J.C. Penney, and for Kmart in the mass merchant space, where Wal-Mart and Target TGT +0.33% dominate.

Lampert is banking on the store closures to generate substantial cash from the “liquidation of store inventory and from the sale or sublease of some of the related real estate.”

Indeed, selling assets for cash has been central to Sears’ strategy since hedge fund guru Lampert purchased the chain in 2004, merging Sears and Kmart.

Since then, Lampert has spearheaded the spin-off of various Sears’ assets to boost its liquidity – from its Hometown and Outlet Stores to part of Sears Canada — as it has sold off chunks of real estate. It’s a strategy that has taken precedence over investing in merchandising initiatives, critics say.

Lampert is now on a quest to transform the retailer into an omnichannel, service oriented operation by focusing on members of its Shop Your Wayloyalty program, which account for about three quarters of its sales.

It’s also betting big on what Lampert has dubbed its “Integrated Retail” initiative, which includes perks such as In-Vehicle Pickup, whereby customers retrieve their online purchases at any Sears store within five minutes of arrival from the comfort of their car, and Meet With An Expert, a service that connects shoppers considering a major appliance purchase with Sears product experts.

Yet according to Lampert, Sears has gotten little credit for these innovations while facing “unfair” criticism for its poor performance in recent years.

The “tectonic” shifts upending the retail industry have been felt by a cross section of retailers, from Wal-Mart to Nordstrom JWN +0.81%, Lampert said in his Chairman’s Letter in February. “Because of Sears and Kmart’s longstanding history and cultural impact, we are targeted for criticism when our results are poor,” he said. “But it is unfair to evaluate our approach through the rearview mirror without acknowledging the changing circumstances in our industry as well as our bold attempts to change the way we do business to meet this changing reality.”

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Sears Is Not A Retail Story, It's A Holding Company Holding A Fire Sale

It may be time to simply face the hard truth that journalists, analysts and shoppers have got Sears all wrong. This isn’t a retailer, not anymore.

Technically, it has stores and sells merchandise in the billions of dollars. But those sales have have been declining for a decade as have assets.

Sears has been closing stores and now looks to spin off more parts of its business. Stores are old and often untended, brand equity in flagship private labels is languishing and management has all but given up on finding a leader with real retail and merchandising expertise.

Sears isn’t really a retail company anymore. In fact, we should feel a little silly for even thinking of it that way.

Since hedge fund manager Eddie Lampert took control of Sears and merged it with Kmart to form Sears Holdings SHLD +0.22% in 2003, the company has become little more than way for Lampert to create equity for shareholders like himself. Lampert holds close to 60% of Sears Holding’s outstanding shares, and turning assets into cash benefits him directly. It doesn’t  build a better retailer.

There have been halfhearted attempts to add merchandise, mainly apparel brands from celebrities such as the Kardashian’s, Adam Levine and Sophia Vergara (for Kmart). Not all stores are stocked with the merchandise and the partnerships in many ways seem designed to get headlines and drive traffic to the Web site.

Online is where Lampert and Co. have focused much attention. Building a marketplace meant to rival Amazon, with multiple sellers and storefronts. A nice strategy, but not one that reflects the company’s retail nameplates of Sears and Kmart.

“The mission for any company, including (Sears Holdings) is to generate returns, not to be a retailer for the sake of it,” tweeted one follower of the topic in response to this story about Sears looking to sell Lands End.

@lfheller @Forbes Laura, the mission for any company, including $SHLD, is to generate returns, not to be a retailer for the sake of it.

— David DeMateis (@CorpWarriorIL) October 30, 2013

But corporations do fall into categories and are evaluated by the parameters of the industries in which they operate. Evaluating Sears by the rules of retail yields some pretty dire conclusions. As a retailer, Sears is pretty much done.

All that’s left is to ravage the bones. Or, as Lampert is doing, sell off the parts.

Gone are Sears Hometown and Outlet stores. Gone is nearly half its ownership in Sears Canada with four more locations sold, including a flagship store in Toronto. Gone, soon, may be Lands End and Sears Auto Centers.

There hasn’t been an investment in Sears for years and stores are sad. But stores don’t matter to an investor that seeks returns in other ways.

Lampert can’t just come out and say this is not a retail story. That won’t get him anything but reduced asset value. But it may be time to face facts — Sears is not a retail story. It’s a holding company holding a fire sale.

Follow me on Twitter @lfheller

Sears Looking To Separate Lands End, Sells Stores

Sears is looking to to turn more assets into cash by possibly separating its Auto Centers and Lands End, and closing five locations in Canada, including its flagship Toronto store.

Desperate measures or savvy moves toward a more profitable future? The smart money is on desperate.

Sears revealed it is evaluating separating both the Lands’ End and Sears Auto Center businesses. Neither would be a sale, “but rather through a transaction that would allow existing shareholders the opportunity to benefit from the significant potential for value creation over the long term,” said the company in a statement.

Sears Canada is closing five stores and has already dispensed of the leases. This, at time when Target TGT -0.02% is expanding there and Macy's M +1.17% is rumored to be interested in the market.

Sears continues to close stores and re-evaluate locations while building an online marketplace and touting the Shop Your Way loyalty program. Online operations are critical for retailers, all retailers, but Sears continues neglect the physical space.

All this is financial maneuvering and window dressing, and not of the interesting holiday window display variety.

Because Sears has seen 26 quarters of negative sales — that’s seven straight years of declining sales.

Sears bought Lands End in 2002 for $1.9 billion and it’s been downhill ever since. Touted as a crown jewel in the retailer’s brand holdings, Lands End has lost cache and market share. Today, Lands End’s value is estimated to be less than what Sears initially paid to acquire the brand.

Sears merged with Kmart and formed Sears Holdings SHLD -3.11% in 2005, under the stewardship of hedge fund guru, Eddie Lampert. As manager of ESL Investments, Lampert grew an initial investment of $28 million into a hedge fund worth more than $9 billion as of 2012.

But Lampert, now CEO, Sears has squandered Sears’ brand equity at an alarming rate. Selling or spinning off Sears Auto Centers puts more distance between Sears and its DieHard brand, while Kenmore and Craftsman retain a lot of untapped potential.

The retailer has managed to grow sales of apparel in recent quarters, a small but notable feat. But what will happen to Sears’ apparel program without Lands End?

Nothing good.

Follow me on Twitter @lfheller

Sears Ignores The Invisible Band

By Jonathan Haidt and David Sloan Wilson

Imagine that a major league basketball team is bought by a hedge fund manager who is a firm believer in the value of competition. Not just competition across teams, but competition within teams. He implements a radical new policy: each player’s salary is determined exclusively by the number of points he scores. Crazy, right? Anyone can see that such a policy would ruin teamwork and destroy the team’s ability to compete with more cohesive teams.

Yet this is exactly what is now happening at Sears. Five years ago, Eddie Lampert, the chairman of Sears Holdings SHLD +7.02% after Sears merged with Kmart, reorganized the company so that each business unit functions like an autonomous company, with its own president, board of directors, and profit-and-loss statement.  According to a recent profile of Lampert by Mina Kimes in Bloomberg Businessweek:

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Lampert runs Sears like a hedge fund portfolio, with dozens of autonomous businesses competing for his attention and money. An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.

The results have been disastrous, in part because Lampert was ideologically committed to the metaphor of the invisible hand and the associated idea that people are purely selfish. Ideology is a lens – it makes some things more visible, others less so. Lampert’s ideology prevented him from seeing that he was destroying the invisible band – the bond that forms around groups that can trust each other and work together toward shared goals. Evolution is a different lens – one that we believe brings unparalleled focus and resolution when examining complex human systems. A brief look through the evolutionary lens would have made it obvious how dysfunctional Lampert’s reorganization was likely to be.

Welcome to the Darwin’s Business blog, where we’ll analyze trends, news stories, and new ideas in the business world from an evolutionary perspective. Over the next few posts we’ll explain what it means to look through the lens of evolution, and we’ll say more about ourselves–Jonathan Haidt and David Sloan Wilson. But the Lampert story is just so juicy that in this first post we want to jump back into it and show you how helpful evolutionary thinking can be.

Evolution is all about competition, and the dramatic effects that competition has on the structure and behavior of organisms over time. But here’s the key idea: competition occurs at multiple levels simultaneously, and the winner at any one level generally succeeds by suppressing destructive forms of competition at the level below. Just look at our cells: each one contains mitochondria, each of which has its own DNA because mitochondria used to be free-living organisms. But somehow, various bacteria-like organisms found a way to incorporate each other and cooperate, and the result was the eukaryotic cell, which spread like wildfire over a billion years ago because it was able to harvest the benefits of division of labor.

Eukaryotic cells then found a way to cooperate with each other to form multi-cellular animals and plants, which spread like wildfire because they too were able to reap the benefits of the division of labor: some cells became leg muscles; others became adrenal glands or brain cells, and the diversified body was able to do things like run after other animals, kill them, and eat them.

But individual organisms are not the highest level of organization. In a few species – such as bees, ants, and humans – evolution created innovations that allow groups of thousands or millions of individuals to work together toward common goals and build gigantic corporate entities, such as beehives, ant nests, and… corporations such as Sears, which thrive and cover the earth because they reap the benefits of the division of labor.

This is the point that Lampert seems not to have grasped: cooperation and trust generate extraordinary value, yet they are fragile and easily undermined by competition at the next-lower level. It’s as though there’s an invisible band, which ties all the members together and motivates them to work for the common good. But if you tell everyone to be selfish and then you reward selfishness, the band dissolves and you lose the benefits of cooperation and division of labor.

Kimes describes how the culture of Sears changed in response to Lampert’s reorganization:

The divisions turned against each other—and Sears and Kmart, the overarching brands, suffered. Interviews with more than 40 former executives, many of whom sat at the highest levels of the company, paint a picture of a business that’s ravaged by infighting as its divisions battle over fewer resources….  [one former executive said it created a] “warring tribes” culture. “If you were in a different business unit, we were in two competing companies,” he says. “Cooperation and collaboration aren’t there.”

For example, no division was willing to lose revenue to create loss-leaders, which would drive traffic into the store, thereby helping all divisions. Another example: the appliance division found it could make more profit from selling Samsung appliances than from selling Sears’ Kenmore brand, so they gave more and better floor space to Samsung.

So the next time someone suggests changing the organizational chart, incentives, or culture of your company to “align incentives” or appeal to selfish interests, ask them if they have thought about the full range of motives evolution has bequeathed to our complex species.  People are not just selfish. It might make Ayn Rand roll over in her grave to put it this way, but corporations and capitalism depend on the invisible band, as well as the invisible hand.

For more about business from an evolutionary perspective, visit theBUSINESS section of the online evolution magazine This View of Life. 

Sears Struggles Continue, Lampert 'Disappointed' In Weak Quarter

Billionaire Eddie Lampert firmed up his control of Sears Holdings SHLD -8.4% by taking the CEO job in January, but if second-quarter earnings are any indication the money manager’s bid to turn around the struggling retailer from the corner office has yet to bear fruit.

Sears missed expectations for profits and revenues by wide margins in the May-July quarter, recording a wider loss than a year ago and flagging sales in its flagship department store as well as Kmart.

Lampert tried to sound an upbeat tone in the release, touting “meaningful progress this quarter in our transformation to a member-centric company.” That refers to the Sears “Shop Your Way” program, which continued to gain traction.

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The program, which tries to lure members with the promise of reward points and other benefits, accounted for 65% of revenues at domestic Sears stores and Kmart, up from 55% a year ago, but the wrinkle in that metric is that percentage is out of a shrinking pie and comes at the cost of shrinking margins.

Comparable store sales fell 0.8% at U.S. Sears locations in the second quarter, 2.5% at Sears Canada and 2.1% at Kmart. At the former a decrease in home appliance sales was the main culprit, but apparel showed a positive comparable sales result. The companies online business grew 20%. Overall, revenue fell 6.3% to $8.9 billion. Gross margin was down 210 basis points compared to the prior year at 24.6%.

Lampert did not ignore the overall disappointment. “[W]e recognize how important it is to improve the profitability of our company and I am disappointed that we did not deliver a better result,” he said.

Sears reported a net loss of $194 million, $1.83 per share, 47% worse than the $132 million it lost a year ago. Adjusted earnings before interest, taxes, depreciation and amortization came in at a loss of $55 million, versus a profit of $116 million in 2012. The adjusted loss per share of $1.46 was 40 cents worse than a year ago.

Department stores like Sears have been scuffling of late, with its report following similar rocky quarters and outlooks from the likes of Macy's M +0.18%and JC Penney JCP -0.75%. That contrasts with strong reports from Home DepotHD +0.23% and Lowe’s, signalling that while consumers may be opening up their wallets, spending is concentrated in certain areas, like home improvement.

Sears does say it has a flexible financial position, with $681 million in cash on hand at the close of the second quarter ($298 of which is at Sears Canada), helped in part by the asset sales. The company also has $1.6 billion in credit available and $4.8 billion in net inventory.

CFO Rob Schriesheim said the company continues to make progress in raising $500 million of liquidity this year, partially by cutting peak domestic inventory and cutting fixed costs.

Shares of Sears dropped nearly 9% in the first few minutes of trading Thursday.

Sears' New Internet Strategy: Late to the Party....Again

I do not think Sears’s management ever looks at the past. Recently they created a Market Place – similar to Amazon, Best Buy and Walmart, where small and midsize vendors offer their wares at good prices. The company uses their powerful Internet search engines for third party vendors to offer fashion and hardlines merchandise. Purchases will be shipped directly to customers. It sounds great, except the company does not police or guarantee the offerings, and any complaint that buyers may have must be handled directly with the seller.

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Sears has a history of trying new ideas. At one time it had a true leadership role in the retail industry. I recall the early catalogue days – during and after World War II when Sears sold houses. It was a simple – utilitarian – two floor house that was prefabricated and put up quickly and cheaply. More recently, I personally watched Sears introduce the Cheryl Tiegs clothing line. Cheryl Tiegs was a renowned, attractive model, who had been on covers of magazines like Glamour, Seventeen, Sports Illustrated and Elle. She was on the cover of Time magazine (which she autographed for me) and for a 9 year period from 1981 to 1989 Sears sold a Cheryl Tiegs signature line of clothing, footwear and accessories. Nearly $1 Billion of merchandise was sold in the first supermodel venture. But the merchandise and the manufacturer changed and the line no longer had the same appeal so it was dropped.

A few years later Sears tried again to appeal to the female consumer. It started an advertising campaign called “The Softer Side of Sears” which featured fashion merchandise. Created by ad man John Costello, the multiyear ad campaign, which launched in 1993, was supposed to attract more female customers. It had attractive commercials and catchy songs. After about four years it was dropped since the effort did not result in more profits. Sears went back to its hard line roots featuring the trusted names of Kenmore, Craftsman and Die Hard batteries in its ads believing this was the key to success with loyal core customers. However, in the meantime, stores like Home Depot and Lowe’s were growing rapidly and taking away some of Sears’ customer traffic.

Now Sears wants to go upscale on the Internet. The Sears Marketplace is supposed to carry anything a customer may want – famous name watches, Channel handbags, Bongo jeans, and anything else the third party vendors might want to sell. Small retailers need an outlet for their wares. The list of goods for sale is long, it includes fashion and fashion accessories, home furnishing, building materials etc. However, similar to my horrible experience with the Ford Motor Company which does not back up their suppliers, Sears will not back up anything their third party vendors sell in the Marketplace.

The trust that customer have in  eBay’s transaction, or in merchandise sold by Amazon that also insures that everything is to  customer’s satisfaction is lacking here. I think Eddie Lampert, the CEO and Chairman of the company does not understand that customers build up trust in a company – in this case, over many year’s. Sears had build up confidence by selling high quality reliable products under brand names such as Die Hard batteries, Kenmore appliances and Craftsman tools. These names were exclusive to Sears until Eddie Lampert allowed some of the brands’ products to be sold at Home Depot and other retailers.

The truth is that Sears is losing its franchise with its core customer, and has been for a long time. The last time I was in a Sears store I saw quite a lot of Lands’ End merchandise – which l liked, but it was poorly displayed and therefore unappealing. The home areas were in disarray, with signs not placed properly on appliances while salesmen stood talking with one another in a corner.

The theory is that Sears is a company with very valuable real estate – but is there value if the customer traffic is non-existent and the sales productivity is low?  To me, it takes more than the Sears name on the door to create value, in real estate, or otherwise.

Billionaire Eddie Lampert Is Running Sears Like The Coliseum, And It's A Disaster

Five years ago, Sears Chairman Eddie Lampert broke the company into 30 plus autonomous businesses, each with its own president, chief marketing officer, board, and separately measured profit and loss.

His idea was to harness the power of the free market, and to produce better and deeper data than anyone else.

But the radical restructuring went horribly wrong, as divisions engaged in cutthroat competition against each other, reports Mina Kimes at Bloomberg Businessweek. Some highlights from her report:

In order for a division to get help from the IT or HR departments, it had to write up a formal agreement or use a contractor. Since each company had its own board of directors, some executives were on five or six of them and spent all day in meetings.

Executive bonuses were based on individual unit performance, so people tried to boost their own division's profit at the expense of others.

Kenmore, a brand sold exclusively by Sears, is its own unit. Sears's separate appliance unit found it could make more money selling other company's products, however, and therefore it gave outside merchandise more prominent placement than one of the company's signature products.

It got to the point where execs started bringing laptops with screen protectors to meetings.

We recommend reading Kimes's full nightmare report at Bloomberg Businessweek.

What went wrong? Lampert, who also manages hedge fund ESL investments, appears to have chosen fundamentally bad incentives, encouraging internal rivalries while ignoring external competition and their own customers. Creating major internal divisions blocked internal synergy. Even attempt to generate better data was corrupted by internal machinations.

Although only been CEO since January, Lampert has been the chairman and dominant power at Sears since spearheading Kmart's takeover of the company in 2005.

While Sears has been suffering since the early 90s, the retailer has cratered since Lampert took over, with sales down $10 billion and the stock down 64%. Even in a retail industry under significant pressure that's major failure.

Despite all of that, according to Kimes, the divisions are still in place today.

Most public companies wouldn't be so patient — just look how quickly JCPenney abandoned former CEO Ron Johnson and his flailing turnaround plan.

Read more: http://www.businessinsider.com/eddie-lamperts-sears-strategy-disaster-2013-7#ixzz2YqS5l97U