Mark Cohen, who teaches at Columbia University’s business school in New York, is a former chairman and chief executive officer of Sears Canada. Don’t get him started on Eddie Lampert, the chief executive officer and majority owner of Sears Holdings Corp. (SHLD)
“Sears is slowly and steadily failing at the hands of a ruthless, methodical asset-stripper,” said Cohen, who was dismissed by previous management. “Lampert will come up with some cash every quarter or two to make sure the balance sheet is still viable. It’s a tragedy because Sears is a legacy brand that needed to be and could’ve been repositioned.”
Lampert says critics just don’t grasp his strategy.
“I understand what needs to be done here for us to be successful,” Lampert, who controls 55 percent of Sears, said in an interview last month.
Eight years after Lampert and his RBS Partners LP hedge fund merged Kmart and Sears, the Hoffman Estates, Illinois-based company has tried and abandoned multiple strategies under a revolving cast of chief executives. While Sears has made merchandising improvements, created solid inroads online and started a loyalty program with tens of millions of members, many analysts say Lampert, 50, has yet to articulate or follow a clear strategy for the two chains.
Sales have declined for six years in a row. Last month, the largest U.S. department-store chain posted a $279 million first-quarter loss and revenue fell 8.8 percent to $8.45 billion. Sears rose 0.5 percent to $47.06 at the close in New York. The shares have gained 14 percent this year, compared with a 16 percent rise for the Standard & Poor’s 500 Index.
With the business struggling, Sears has taken a number of steps to shore up cash. Last year, it sold 110 stores and spun off its smaller-format Hometown, Hardware and Outlet business, and a portion of its Canadian unit. In 2011, it spun off its stake in Orchard Supply Hardware Stores Corp. (OSHWQ), which filed for bankruptcy yesterday.
Last week, the company agreed to vacate two store leases in Canada in a deal that will raise another C$191 million ($187.5 million). Last month, Sears said it may put its warranty business on the block.
Sears is in no immediate danger of running out of cash. While the company would exhaust its hoard within five months at its current burn rate without raising more money, Sears has $7.3 billion that can easily be converted into cash, including $5 billion equity in its inventory and $1.75 billion in credit facilities.
Still, selling more assets will diminish the company’s ability to generate more cash, said Gary Balter, an analyst at Credit Suisse Group AG in New York. He likens the situation to a popular children’s game.
“Over the last few years, Mr. Lampert has been slowly dismembering the corporation, taking pieces out much as players pull out pieces of a Jenga game, hoping the overall structure does not collapse,” he wrote in May 24 note. Further asset sales “will weaken it even more.”
Balter rates the shares “underperform,” the equivalent of a sell.
In the telephone interview last month, Lampert, who became CEO earlier this year, rebutted analysts’ criticism.
“There are a lot of brilliant retail guys who haven’t done particularly well, either,” he said. “I’m pretty comfortable in the position I’m in. I know what the challenges are.”
Lampert has said he wants Sears to be a “membership” retailer. What that means isn’t entirely clear. While about 60 percent of the company sales come from Shop Your Way members, unlike Costco Wholesale Corp. (COST), which makes money from annual membership fees, Sears doesn’t charge customers to join.
Asked about the loyalty program, Lampert said: “It’s about serving people rather than selling products. It may seem like the same thing, but it’s different. The idea is that as a company, the direct reason for our existence becomes more explicit, which is that the reason a business exists is to provide products and services that people value.”
Kmart, once seen by analysts as a potential force in cities and among Hispanics, is struggling to compete. Kmart’s prices are more than 14 percent higher than its two larger competitors, Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), according to Bloomberg Industries data collected in May. Same-store sales slid 3.7 percent last year, compared with a 1.4 percent decrease for domestic Sears stores, after besting Sears in five of the previous six years.
At Sears Holdings’ annual meeting last month, investors asked Lampert whether Kmart should even exist. Yes, he said, arguing that moving to one brand would be “a very, very risky bet” and that the two chains still have distinct customer bases -- with Kmart catering to lower-income customers and shoppers seeking basic household items and Sears selling appliances and lawn and garden goods to homeowners.
Kmart “has a lot of relevance” in clothing and home goods, he told shareholders, and can use those areas to boost profit.
The chain has made progress. Its recently released “Ship My Pants” commercial touting its ship-to-home program went viral. Kmart is expanding its private Smart Sense line of food, pharmacy and household goods to be more competitive with other chains’ private brands.
Analysts have been calling for Sears to close hundreds of its 2,000-plus stores for years and plow the money back into the remaining ones.
First “we wanted to try and fix them,” Lampert said in the interview. “Now some of those stores are getting closed, so what people said we should do, we’re doing, but before we did it, we tried to fix them. I don’t think that that was a bad decision.”
With competition increasing from the Web and brick-and-mortar rivals, store closings are more important, said Matt McGinley, an analyst at International Strategy and Investment Group in New York. He urges Lampert to shutter the bottom-performing third of locations for both brands. This is easier said than done because in many cases it would require buying out leases, which Sears can ill afford.
In the meantime, analysts like Paul Swinand, at Morningstar Inc. (MORN) in Chicago, say the steps Sears has taken so far, such as loyalty programs, are not enough when a retailer is selling basic goods. While those programs can be positive, Swinand said, they’re not a strategy, and other retailers have them, too.
Besides, he added, “Eddie’s got the equation wrong. Loyalty only works when the customer wants stuff you have.”
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