Nov. 14 (Bloomberg) -- Edward Lampert is remaking Sears Holdings Corp. to be quite unlike the department store Americans have known since 1893.
Billionaire chairman Lampert is lessening his company’s dependence on full-size locations, where sales have fallen. In his latest attempt to turn around the largest U.S. chain of its kind, Lampert is turning to smaller store formats, Web sales and the lure of its brands to re-ignite growth.
Sears has closed 171 of its large U.S. stores since Lampert merged the chain with Kmart in 2005. It’s accelerating franchising efforts -- including the Sears Hometown and Sears Auto stores. It’s leasing space to such retailers as Forever 21. And departing from a strategy that has prevailed for most of Sears’s history, it’s allowing other retailers to sell the popular DieHard, Craftsman and Kenmore products and licensing those brands.
The brands “still have equity, they still resonate” with consumers, said Robert Passikoff, president of Brand Keys, a New York brand-equity consulting firm. He has a proposition more radical than the company’s current strategy: “Close down the stores and just license the heck out of the brands.”
When Lampert merged Sears with Kmart in 2005, he said the new entity would have the geographic reach and scale to compete with Wal-Mart Stores Inc. Sears service and products are “every bit as good as any of the competition,” Lampert said when announcing his plan to buy Sears in November 2004.
Lampert, who along with his hedge fund owns about 60 percent of Sears, has since presided over 18 consecutive quarters of declining sales. The chain is on its fourth chief executive officer. While the shares soared in the first few months, the company’s market value has since tumbled to about $7.7 billion, a 37 percent drop from the $12.3 billion acquisition price. The shares fell 2.8 percent to $72.25 at 4 p.m. in New York.
Few retailers have tried and abandoned as many initiatives in so short a time. An initial push involved converting 400 Kmart stores to a format called Sears Essentials that featured grocery and convenience items. Sears Grand, another concept, hewed to a superstore model. Now it’s the franchised Hometown outlets, which sell tools, appliances and outdoor goods.
“I don’t know how they could materially turn this around in a way that could make Sears a viable retailer over the long term,” said Matthew McGinley, a managing director at New York-based International Strategy & Investment Group, which recommends selling the shares. “It’s almost too late now.”
Analysts are predicting a decline in sales and an adjusted loss of $1.28 a share excluding some items in the current quarter. The company, which is scheduled to report earnings Nov. 17, has posted losses in five of the past six quarters. Cash had dwindled to $658 million at the end of the last quarter, compared with $1.2 billion a year earlier. Sears earned $133 million last year.
“We have assets no other retailer can claim,” including “award-winning online service,” spokesman Chris Brathwaite said in an e-mail. “We will continue to seek to bridge the digital and physical worlds to create the most positive shopping experience for our customers.”
In his last two annual investor letters, Lampert identified the smaller Hometown and Sears Outlet stores as sources of growth and profit. The company opened 122 of those “specialty” stores last year, he said in his 2011 letter, and now has 945 -- less than a quarter of the total.
Meantime, many of the larger stores are languishing. Sears owns or occupies about 2 percent of existing retail space in the U.S., McGinley estimates, and missed the opportunity to cash in by selling locations when the economy was stronger. Now, with retailers such as J.C. Penney Co. and Macy’s Inc. slowing or halting expansion, “that ship has completely sailed,” he said.
The company doesn’t have the funds to shut stores, which requires payments to landlords for truncating agreements and severance costs to employees, he said. Instead, Sears can wait a decade or more until leases run out.
Many of those stores are dimly lit and have old fixtures and broken flooring, according to McGinley, who estimates Sears is spending less than a quarter of the $8 a square foot that retailers typically invest to maintain stores. Since 2005, Sears has plowed $6 billion into buying back shares, or twice what it has spent on capital improvements, according to his firm.
An August report from his firm puts Sears and Kmart at the bottom of the list of a dozen retailers ranked by sales per square foot and operating profitability.
McGinley estimates that about a quarter of the company’s full-size stores are consuming cash, and predicts that the company’s cash use will accelerate to $500 to $750 million this year, from $300 million last year.
Brathwaite said the company has added scheduled and surprise visits by executives to check store appearance and conditions, and introduced a new scorecard to track customers’ experiences. Sears has also put money into sprucing up restrooms, lighting, flooring and other elements, and is testing or adding new fixtures and signage to several merchandising areas, he said.
Sears’s best assets may be its DieHard, Craftsman and Kenmore brands. The latter two continue to lead their categories. Craftsman has lost market share to private-label rivals, while Sears as a whole has ceded some appliance sales to the likes of Home Depot Inc., although it remains the leader.
Sears has cut deals with such retailers as Costco Wholesale Corp. and Ace Hardware to sell Craftsman tools in their stores. And it has circulated a proposal for third parties to pay Sears a fee to use its brand names on products, a person familiar with the situation said in October.
New CEO Lou D’Ambrosio, hired in February, is ramping up Web operations. Lampert cited D’Ambrosio’s technology background after recruiting him. Still, D’Ambrosio has no retail experience, unlike J.C. Penney’s new CEO, former Apple Inc. retail chief, Ron Johnson.
Online sales via Sears’s various websites grew 30 percent year-over-year in the second quarter of this year, and 22 percent in the first quarter. To jog that growth, Sears has given salesmen in 450 of its stores more than 5,000 iPads and 11,000 iPod Touches to help them track inventory and customer orders, and added free wireless access.
Sears is finding its footing, including boosting Web sales, less clearance inventory in stores and efforts to leverage its valuable brands, said Paul Swinand, an analyst at Morningstar Inc. in Chicago.
With competitors such as Home Depot closing stores, Sears can build on its position as the leading appliance seller when the economy improves, Swinand said.
“They actually have a shot at turning the retail business around,” he said. That said, he added, “I can’t point to anything that’s the key that’s going to turn it around.”
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