The Big Store May Be On A Big RollKevin Kelly
Can you really blame anyone for responding with an emphatic ho-hum to news of Sears, Roebuck & Co.'s latest turnaround effort? What is this, the third, fourth, or fifth strategy in so many years? Remember the 1989 "everyday low prices" plan that drew lawsuits charging false advertising? That was quickly followed by "power formats," an abandoned attempt to break the stores into boutique-like departments. And what became of the brief foray into women's fashions two years back?
It's a sorry record. But Sears Merchandise Group CEO Arthur C. Martinez is out to prove that this time will be different. The former Saks Fifth Avenue executive, head of the Big Store for just a year, is plotting a new course. Unlike past efforts to revive the retailer, which were tentative and ultimately rejected, Martinez' strategy is broad and coordinated. Sure, he's doing some things Sears has tried before, such as targeting women and emphasizing apparel. But this time, he's pouring more resources into the effort, reshaping Sears into a highly focused organization. "We have a consistent strategic message," explains Martinez. "We will not flop around like a fish."
"NO QUESTION." Martinez has proved willing to sweep away outmoded Sears traditions. At a company long known for lifetime employment and homegrown management, he's recruiting outsiders into senior positions, including a group president's post. He has shuttered money-losing operations, including the venerable catalog business. And he's opening the doors to such radical notions as letting customers use other charge cards than Sears'.
The changes are already delivering results. During June and July, Sears posted double-digit increases in stores open a year or more, making it the only big retailer besides Wal-Mart Stores Inc. to log anything more than trivial gains (chart, page 84). During the second quarter, the merchandise group posted earnings of $162.5 million on sales of $6.8 billion, compared with $65.3 million on $7.6 billion in sales the year before. Although the company's Allstate Insurance Co. unit dwarfed those results, with $371.8 million in earnings, the improvement at the merchant is sparking talk of a revival. The stock reflects that chatter: At around 53, it has jumped some 36% in the past two months. Says PaineWebber Inc. retail industry analyst Margo McGlade: "There's no question it's a turnaround."
Martinez isn't willing to go that far. "We have a long journey ahead of us," he says. Although the company has completely revamped its women's apparel offerings and moved toward trendier fashions, it still isn't the first store most middle-income working mothers think of for a new suit or dress. And many baby boomers refuse to set foot in the stores, remembering the poor service or shabby presentation. "They have to overcome a big image problem," says Sid Doolittle, a Chicago retailing consultant.
And a big competition problem, too. Sears is besieged on all sides by rivals snatching pieces of its broad business lines. Aggressive discounters such as Circuit City Stores, Fretter, and Best Buy are eating into its consumer-electronics sales. Home Depot Inc. has grabbed customers from its home-improvement section, and an array of retailers, including a revived J.C. Penney Co., have captured the middle-class female shoppers Martinez covets.
This repair effort had better succeed, though, because the spotlight is on the Big Store as never before. It no longer has the profits of Sears' lucrative Dean Witter, Discover & Co. financial-services group or its Coldwell Banker Real Estate Group to fall back on. Dean Witter was spun off to the public and Sears shareholders earlier this year, and Coldwell Banker will be sold by yearend, partly to still the cries of investors who had grown increasingly angry at the merchandising group's never-ending drag on their stock.
The moves, along with the sale of 20% of Allstate, will raise more than $4 billion and are silencing shareholder activists--for the time being. Sears must now count on its long-ailing retail operation to produce growth and keep investors happy. That will be a challenge. The merchant, with $32 billion in sales last year, or 61% of the company's total, contributed only 12% of Sears' income before special charges, figures A.G. Edwards & Sons Inc. retail analyst Don Spindel.
Martinez, age 53, says the heat has been on all along. "I felt a sense of urgency even before the restructuring," he says. "We have to get this company turned around." After arriving from Saks, where he had come up through the finance side to become vice-chairman, he spent four months studying Sears' problems. Then he acted: In January, he announced the end of the 107-year-old Sears catalog, which had been losing over $100 million annually for the past five years. He also closed 113 unprofitable stores and cut 50,000 people from Sears' 350,000-strong payroll. An additional 3,400 senior staffers, including close to 400 of the 859 store managers, took advantage of a generous early-retirement program. All told, the restructuring is expected to save $300 million annually by 1994.
GRUNGE AND BELLS. At the same time, Martinez began moving to revamp Sears' retailing strategy. He accelerated a five-year, $4 billion store-refurbishing effort aimed at the 500 of Sears' remaining 798 stores that need face-lifts. The effort will be funded entirely from the merchandise group's cash flow. He aims to increase the space devoted to apparel by 20%, mainly by moving Sears' furniture offerings into a new chain of shops dubbed Homelife. Clothing accounted for only 26% of retail sales last year but produced 64% of the megamerchant's operating profits. And with profit margins in the company's traditional hard-goods lines, such as consumer electronics, being heavily battered by discounters, Martinez spies an opportunity to make up the difference with skirts and blouses.
So far this year, for example, Sears' junior apparel business has logged sales increases of 30%. Under the guidance of Group Vice-President Dorrit Bern, an industry hotshot the retailer lured from Federated Department Stores Inc.'s Bon March chain six years ago, the company added name brands such as Union Bay and ventured into fashion trends such as grunge and bell-bottoms. Similarly, Vice-President Janice E. Page has spiffed up Sears' once-dull lingerie offerings.
There's certainly room for Sears to do more. It stocks almost no petite sizes for women, a line that analyst McGlade believes could generate as much as $400 million in sales over the next five years. Large sizes have received similarly short shrift. But Sears still has a central problem to overcome with its women customers, concedes apparel group President Robert L. Mettler: "They don't think of us for fashions."
That's particularly galling to Martinez, because the typical Sears shopper is a woman from 35 to 64 years old with a median household income of $33,000. Martinez says women make 88% of the purchases in home fashions, 70% in Brand Central, the store's consumer-electronics department, and 40% in home improvement. Unfortunately, they're usually walking past Sears' clothing displays. To catch their attention this fall, Martinez will unveil a print and television ad campaign designed to entice women into the revived fashion departments. To fund this effort, Martinez boosted the 1993 apparel ad budget 20%, to $190 million.
If the ads draw more shoppers into the stores, Martinez wants to make sure they'll be treated well when they get there. He has stepped up the training of salespeople, teaching them such basics as how to greet shoppers, offer help, and close sales. The company is also freeing salespeople to serve customers by shifting such tasks as restocking shelves to nonsales staff. The result? "We've seen noticeable improvement" in consumer attitudes towards Sears in recent months, says Christopher Ohlinger, president of Service Industry Research Systems Inc., which tracks customer feelings toward retailers.
COLOR-COORDINATED. To help with his makeover of Sears' hidebound culture, Martinez has been aggressively recruiting fresh talent. He set aside for outsiders 100 of the store-manager positions vacated through the early-retirement program, and two of seven regional-manager posts as well. He recruited apparel chief Mettler from May Department Stores Cos.' Robinson's stores, where he was chief executive. Already, Mettler has pushed the store into women's petite sizes and developed a system to make Sears stores more attractive by emphasizing a color-coordinated approach to displaying clothes.
The new regime has also begun to put its stamp on the company's traditional hard lines. To make the retailer more competitive, Martinez slashed consumer-electronics prices by as much as 10% last year and trimmed some home-improvement prices as well. The cuts helped boost home-improvement sales, for instance, by more than 17% this year. Over in the furniture department, Martinez has decided to move the $1 billion business out of the stores. He argues that the 9,000 square feet typically devoted to furniture in each store is simply too small to generate healthy returns. So he'll shift those lines into a planned chain of 25,000-square-foot stores during the next five years.
He's also tackling the company's troubled automotive business. Last year, the division was hit by allegations that it sold customers unneeded repairs. The accusations drove customers away and cost the company $100 million in earnings. Martinez has discontinued most services, such as transmission repair, while concentrating on sales of tires, batteries, and shocks. The move allowed Sears to shed 11,000 repair personnel, for a saving of up to $110 million annually. And it focused the division on selling and servicing those parts that have almost always been money-makers. The result: Thanks to price cuts and better marketing efforts, tire sales jumped 19% in June and 15% more in July, while most of the industry was flat.
So is Sears finally on a roll? Bear Stearns & Co. analyst Steven Kernkraut predicts that the U.S. merchandise group will earn $232 million from continuing operations this year, up from $38 million in 1992. And he expects net income will jump an additional 36% in 1994, to $315 million. Martinez says numbers like that would start to fit his definition of a turnaround. So give him a year or two. Maybe by then, he'll be ready to join the ranks of the true believers in Sears' revival.
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