Is The End Drawing Near for Sears?

The Wall Street Journal reports today that Edward Lampert, whose hedge fund ESL Investments Inc. controls over 50% of Sears' shares, will be taking over as the CEO of the company.   Lampert merged Sears and K-Mart several years ago, and he has been Chairman of the company since that time.  He succeeds a former IBM executive who ran the company for the past two years.  Before that, Sears had an interim CEO for three years.   Hmmm... That's a pretty long period of instability at the top, and now we will be continuing with a person at the helm who lacks retail industry experience.   Can Lampert turn this ship around, or is it too late?

Same-store sales have decreased for six straight years.  Sear lost $441 million through the end of the third quarter, and it expects to lose roughly $300 million in this quarter. Concerns have been raised about liquidity at Sears.  The firm is clearly in rough shape.

What should they do now?   I think Sears really has to think long and hard about what assets it has that are truly valuable and distinctive.  It's future must rest on building around those assets.   What is valuable and distinctive?  Craftsman and Kenmore appear to fit the bill.  Perhaps Lands End does as well.  After that, it's not clear that the firm has a future.  So, if I were thinking about the future strategy, I would be thinking about those three brands, rather than trying to preserve the entire traditional department store business.  Maybe the future is in small stores and/or an online retail presence that just sell Craftsman, Kenmore, and related brands, with Lands End sold off to another clothing catalog retailer.  For certain, the future does not seem to bright for the traditional brick-and-mortar business that they have been trying to preserve for years, amidst a clear and tragic decline. 

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Sears Spinning Off Hardware Stores

Sears continues to struggle.  Yesterday, it reported a net loss for the last quarter of $2.4 billion. Same store sales declined during the quarter as well.   The firm announced that it will be bolstering its balance sheet by selling off its Sears Hardware stores (along with several other moves designed to increase cash).  I understand the move, given the liquidity concerns about the company.  However, I found one item in Chairman Lampert's letter to shareholders rather puzzling.  He described the third pillar of the company's strategy:

With regard to our third pillar, we still have a long way to go but Kenmore and Craftsman have held up relatively well, despite our overall company performance and housing builds and turnover continuing at relatively low levels.  In the fourth quarter of 2011, Kenmore maintained its market leadership in appliances, while Craftsman, too, gained market share.  But, market share alone is not enough.  When we think about brands, we think about brands like Nike and Apple, and we aspire to have Kenmore and Craftsman be the Nike and Apple of the appliances, tools, and lawn and garden industries.

If a key pillar of the strategy is to build the Kenmore and Craftsman brands, then why sell off the hardware stores?   Is Sears more known for and appealing to customers with regard to apparel or hardware?  Sears already had announced the intent to sell Kenmore and Craftsman products at other retailers.  Will the brands thrive if the hardware stores are spun off entirely?  Are there synergies that will be lost as a result of the sale of the hardware stores?  I don't know the answers to these questions, but I think management must address these issues and explain their thinking to investors. 

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Can Sears be Saved?

The Wall Street Journal reports that Sears has hired Brookstone CEO Ron Boire as its new chief merchandising officer and president of the Sears and Kmart store formats.   Boire told the newspaper, "My focus will really be on creating more and better theater in the stores."  He also will attempt to better integrate Sears's stores, website and mobile-phone application.  ,He has a major challenge ahead of him.  According to the Wall Street Journal, "Sales at stores open at least a year have declined every single year since Mr. Lampert created the Hoffman Estates, Ill., company by merging Sears and Kmart in 2005."

What can and should Boire do to reverse Sears' fortunes?   Rather than proposing a specific answer, I would recommend an approach that might be fruitful.  I don't think Sears will turn itself around simply by making changes in the store experience, or in its ability to appeal to cross-channel shoppers more effectively.  Sears needs to take a top-to-bottom look at its entire business model.  Such an analysis would ask some fundamental questions to begin:


1.  Do Sears and Kmart belong together?   Do they help each other?  Are they truly more valuable together than apart? 


2.   Does Sears belong in all the product categories in which it competes?  Which categories are money-makers and which are money-losers?   What products still draw people into Sears stores?  (consider tools, appliances, etc.) 


3.  How many stores does Sears want/need in its network?  What's the optimal size of its store network?


4.  What's the optimal size/layout of a Sears store? 


5.  What are the right kinds of locations for Sears stores?  Does its mall-based strategy work effectively or not?


These kinds of questions must be addressed if Sears is to survive.  The firm has been on a long-term downward trajectory for years.  Minor adjustments won't save the company.  

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Could Sears Become a Product Company?

The Wall Street Journal reports today about Sears' moves to expand the sales of its Kenmore line of appliances to other retailers, such as Costco. A decision to move in this direction offers peril and promise. On the one hand, Kenmore is a strong brand likely to sell at other retailers. On the other hand, every sale at another retailer diminishes foot traffic and associated sales at a Sears store.

The decision raises a broader long term strategic question though. Sears has struggled mightily in recent years. Some question whether it can ever reverse this slide. If that is true, perhaps Sears could gradually be transforming itself from a retailer into a product company. It already sells Craftsman and Diehard branded products at other retailers. Could Sears one day no longer be a retailer at all, but instead be a home and garden products firm with a stable of strong brands (Kenmore, Diehard, Craftsman, etc)? As the retail business continues to decline, this may not be so far fetched.

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