SEARS' TURNAROUND IS FOR REAL--FOR NOW
Who was the honoree at the retail industry's annual black-tie dinner at the New York Hilton in May? Sears, Roebuck & Co. Merchandise Group Chief Executive Arthur C. Martinez, of course. After all, since coming on board in September 1992, Martinez has put the long-troubled retail giant back in the black by closing 113 poorly performing stores, abandoning the money-losing catalog, and rebuilding Sears' battered image with better apparel and a series of jazzy ads. The only tough choice for the dinner's organizers was whether the theme song for Martinez's introduction should be Buster Poindexter's Hot, Hot, Hot or Tony Bennett's The Best is Yet to Come. Bennett won out.
But making the song come true will be tough. Martinez now must improve on the higher base of performance he helped create rather than on the dismal numbers he inherited. Already the pace has slackened somewhat. In June--the first month not buoyed by the closing of the underperforming stores--sales at stores open a year or more were 8.4% higher than they were the previous year. That's an impressive gain, but it was below the double-digit increases recorded most months since early 1993. Now, with the approach of the Christmas selling season, when Sears racks up 40% of its revenue, skeptics are watching closely. "We'll see if he can beat his own numbers," says retail consultant Alan Millstein. "Then we'll see whether it's a fluke or a trend."
For the time being, the signs are good. Last year, the Merchandise Group posted net income of $752 million on sales of $26.2 billion, compared with a loss of $2.98 billion in 1993 (chart). Retail-industry analyst Jeffrey M. Feiner of Salomon Brothers Inc. says the merchant's earnings are on course to rise 18% this year, to $888.4 million.
PARTWAY HOME. Still, even Martinez isn't convinced Sears has rebounded yet. He says he has more reforms to come, including putting more high-margin brands in the stores, continuing to cut costs, and expanding Sears' women's apparel business. "The turnaround is only 35% complete," Martinez says.
It's easy to see why he thinks he's only partway home. Just 145 stores out of 800 have been renovated so far, and the remaining, sometimes-dilapidated outlets risk turning off shoppers lured back by Sears' catchy $40 million apparel ad campaign, "The Softer Side of Sears." Female shoppers may also be disappointed because the company is still struggling to sign up well-known women's apparel makers, such as Bernard Chaus Inc. and Koret Inc. And the rivalry is heating up in the middle market Sears is aiming for: Such discounters as Target Stores are upgrading apparel offerings, while such upscale department stores as Marshall Field & Co. are slashing prices.
Martinez must also battle Sears' stodgy culture. The company's buyers, he says, remain too friendly with longtime suppliers, allowing them to charge high prices that Sears can't pass along--a sharp contrast to Wal-Mart Stores Inc.'s supplier-crunching buying practices. Service in the stores, while improved, is still below what shoppers have come to expect from such other retailers as J.C. Penney Co., say industry analysts. And Martinez believes success may have lulled some employees into a false sense of security. "Part of my job is to keep a vague sense of unease percolating through the entire company," he says. "The minute you say the job is done, you're dead."
SEARS UNIVERSITY. Martinez and his staff are working hard to make sure the turnaround takes hold. Buyers, for instance, are being sent back to school at the company-run "Sears University" to learn the art of negotiating. And Martinez forced the company to combine its half-dozen disparate databases to find out who really was shopping at Sears. The surprising answer: The biggest shoppers aren't guys in Craftsman tool belts but women aged 25 to 50 who buy everything from blouses to appliances.
Since apparel is where the retailer gets almost 60% of operating profits, Martinez decided to add 30% more space, or 12 million square feet, to the women's clothing departments over the next three years. He also decided to expand offerings and nudge up prices. Instead of promoting $29.99 dresses, Sears is more likely to push career outfits that "go all the way up to $100," says Robert L. Mettler, chief of apparel and home-fashions merchandising. Customers are responding. At the Sears store in upscale Bloomingdale, Ill.--one of 200 stores testing women's suits--suits are now 7.8% of all dress sales, compared with 1.7% for all Sears stores.
But Martinez knows that to get baby boomers into the store their parents revered, he needs big-name brands. Mettler says he has spent the past year trying to lure manufacturers of 14 key brands. Half, he says, will be in Sears by yearend, including Sperry Topsiders in shoes and Arrow shirts for men.
It's been a tougher sell with women's apparel. Many clothing manufacturers aren't convinced of Sears' commitment to quality clothing. After all, the retailer has changed strategies over a half-dozen times in the past decade. "Sears has come a long way, but their image isn't up to department-store standards," sniffs an executive at a well-known women's apparel maker. "It would be difficult for us to sell to them." Worse, rival retailers are putting a hammerlock on key brands, industry sources say, threatening to banish them if they go into Sears. For now, suppliers are politely listening to Sears' pitch, but few contracts have materialized.
COMPLETE OVERHAUL. Sears isn't the first retailer to run into such resistance. A similar cold shoulder spurred Penney to initiate its now-successful private-label apparel lines, a strategy Sears is also pursuing. But it could easily take five years for Sears to develop the six private-label lines Martinez envisions. And he figures he only has about three years before the customer interest stirred up by Sears' changes begins to fade.
Martinez isn't relying solely on clothing to attract female shoppers. In April, Sears said it will develop a new cosmetics line, which will be featured in 200 new cosmetics departments around the country by fall 1995. Sears stopped selling cosmetics 10 years ago, after customers switched to the flashier cosmetics departments at rival stores. This time, Sears' cosmetics department will feature makeup experts like those found in more upscale department chains.
Outside events may also give Martinez a lift. The merger of R.H. Macy & Co. and Federated Department Stores Inc. will create a big rival--but it could be a boon, too, as Sears scoops up suppliers and store sites that shake out. Sears is interested in acquiring up to 10 redundant store sites in the New York-New Jersey area.
Sears is also making forays back into the catalog business. Under the direction of John H. Costello, a PepsiCo Inc. marketing hotshot Martinez recruited last year, Sears launched 12 narrowly targeted catalogs in 1993 offering everything from workwear for big and tall men to camping gear. Costello is also testing infomercials. Still, Costello admits there's "not a lot of money" for such frills; the most important priority is Sears' stores.
So far, that's paying dividends. But Martinez can't claim all the credit for Sears' recent success. While management's attention has been fastened on apparel, the appliance and tool businesses are going like gangbusters, posting sales gains that outstrip apparel's robust 15% growth rate. Those parts of the store were completely overhauled five years ago. If Martinez can replicate the results in Sears' softer side, then the best may, indeed, be yet to come.Susan Chandler in Chicago