More of the Same at Sears, Except…
Sears Holdings reported its second quarter financial results and Morningstar analyst Kim Picciola had this to say: “It’s more of the same – declining same-store sales but improving profitability. They’re still struggling to give customers a compelling reason to shop at their stores.”
Aylwin Lewis, Sears Holdings CEO and president, said the company is working to create more reasons for consumers to shop at its stores and “must continue to focus on our customers, improve the shopability of our stores and continue to give our customers reasons to shop our stores more frequently.”
Howard Davidowitz, chairman of Davidowitz & Associates, is among the many who believe Mr. Lewis and his boss, Sears Holdings Chairman Edward Lampert, need to do something quickly if they hope to continue having a retail business to operate.
“No retailer in history has ever survived losing this amount of market share and comp (comparable) store sales,” Mr. Davidowitz told The Associated Press. “When the quarter comes and earnings flatten out and sales keep going down, we’re looking at the Titanic.”
While the words of the Ms. Picciola and Messrs. Lewis and Davidowitz are eerily similar to what has been said by analysts and Sears Holdings before, the latest financial report came with an interesting switch. Sears Holdings is looking, by all indications, to make a deal to acquire another company.
In a released statement from the company, Mr. Lampert said, “Our strong financial position and cash flow generation provide us with the flexibility to capitalize on a wide range of market opportunities as they arise. In addition to investing in our business and acquiring our shares, we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities which have the potential for returns we believe appropriately compensate the company for the associated risks.”
One deal Sears Holdings has not given up on is its proposed $908 million buyout of Sears Canada. The Globe and Mail reports Sears Holdings plans to attempt to overturn on appeal a ruling by Ontario Securities Commission, which found its offer of $18 a share for Sears Canada was “coercive and abusive of the minority shareholders.”
Discussion Questions: Where would you look for Sears
Holdings to make an acquisition? What would an acquisition likely mean for Sears
Holdings current businesses including Sears, Kmart and Lands’ End?
While there are no guarantees Edward Lampert will look
to acquire another retail company, one possibility that has surfaced on investment
blogs is BJ’s Wholesale Club. The number-three warehouse membership club is
looking at “strategic alternatives” for its business.
Acquisitions are sometimes used as a stalling tactic for management teams that can’t think of another way to silence analysts. Buy something and you can spend months — maybe even years — talking about how you’re rationalizing the acquisition; achieving previously unheard of economies of scale; and honing a new market offering dynamically positioned against the new consumer. Sometimes it even works. Sometimes, it’s just lipstick on a pig.
I’m betting on RadioShack. Mr. Lampert is already loading its top end with his own people and it is definitely vulnerable with a lot of low hanging fruit to be plucked in much the same manner that Kmart and Sears were “harvested.”
I think the fact that same store sales declines have actually increased under Mr. Lampert’s leadership would indicate that, other than total slash and burn cost cutting, he has no plan for returning those chains to any kind of RETAIL profitability and increased profit on decreasing revenues is not a sustainable strategy simply because of the law of diminishing returns.
The talk about using the cash reserves to acquire other companies instead of reinvesting it in the current companies in an attempt to regain the sales and market share Sears has dumped over the past six years or so would seem to indicate that he’s reached the point where diminishing returns is about to become a key factor in the current operation and something is needed to sustain the cycle he’s entered into.
One question that arises is that, once there is a new company or two to practice his special brand of lobotomization on, will there be any need for both Kmart and Sears? Or for that matter, either of them?
This should be when the selling off of Sears/Kmart assets will come into major play; when the cash reserves that have been depleted by new acquisitions need to be replenished in time to play the next round of musical companies.
What is a problem for Sears? Getting the right product to the right consumers at the right time at the right price. What company does that well? That’s who Sears should buy and allow their management team to make the necessary changes at Sears.
Two words. Food. And food. If any retailer was in need of a traffic-building food business, it’s Sears/Kmart. As the unfortunate Andrew Young tirade showed, there’s still a great need for fresh food retailing in urban areas, particularly minority neighborhoods. Kmart has experience with urban retailing, and has a large minority base of shoppers.
I don’t think BJ’s is a particularly good match. Sears should look at expanding its Kmart base and locking up the inner city.
One idea that occurs to me is something along the line of Big Lots. That would allow Sears to shift its excess merchandise to an outlet where it can actually make a few bucks on it, put in continuity goods that compete with the dollar stores and operate a fresh grocery.
That could be a very profitable business, and it would be a way to leverage Kmart and Sears brands to an audience that is very familiar with those brands.
I commend Ryan Matthews for his insightful cosmetological phrase: “Lipstick on a pig.”
Through the years, we have seen many financial opportunists try to resuscitate companies with broken-bones (and, of course, themselves) into modern day Saints of Retailing and Marketing. Eddie Lampert is on such a crusade albeit his pockets bulge with golden nuggets forged from his costs-eviscerating press. But the proof of the constant pudding still lies in Mr. Lampert’s and Sears Holdings’ ability to capture market share instead of just scraping the skin off an old cat’s back. But it’s still too early to count “heady” Eddie out as a savvy new retailer.
When Sears Holdings started in 2003, it was $12/share. Two years ago it was $79. A year ago it was $140, and today it’s $140. How many other retail stocks can beat this performance? Sears can afford to buy other retailers because it can use its stock as currency. Many investors don’t seem to care about the declining sales. Edward Lampert is not alone in his focus on profits. Many people and institutions love this stock. Wouldn’t you if you bought Sears two years ago?
Many people see a high volume retailer with well-run stores and they believe they’re seeing success. High volume, great customer service, exciting displays, and superb technology add to up very little if the profits are disappointing. Sears is not unique: there are many retailers whose strategy and execution look second rate but their investors love them. And there are high-profile retailers with world class execution and great strategies who can disappoint their investors.
Example: Target is always mentioned as a well-run company with a top strategy. Today, the stock is $50, yet it was $56 a year ago. Five years ago, it was $37. So Sears stock seems to beat Target. Some people might think Edward Lampert isn’t a great retailer, but his investors don’t agree.
Their comments are only posturing to buy them time and, if they were to make an acquisition, it would be driven by the real estate it could bring and not the customer sales. We’ve yet to see anything come from Lampert to make us believe he is a long-term retailer interested in building customer share.
Mr Lampert knows real estate. Not retail. I would presume any new acquisition he would make would be for the real estate, rather than for the retail business. I hope he doesn’t really believe he’s become a retail specialist.
Am I the only one old enough to remember that we’ve seen this movie before? Can you spell C-A-M-P-E-A-U?
Next thing you know, Sears will stop reporting comp store sales in an effort to divert Wall Street’s attention from Sears’ problems. Oh wait, someone else did that already. Doesn’t work so well.
Sears should try spending some money on a decent marketing campaign to bring consumers back. The companies that are winning customer loyalty and gaining market share are constantly putting exciting spots on television. This strategy has worked well for JC Penney and Kohl’s – just look at their comp growth and EPS in 2006. It’s August 18th and heavy into Back-To-School season, but I haven’t seen anything from Sears to let me know they are in the game. Kenmore can only carry them so far.
Sears is Chicago based. Maybe they should acquire the famous improvisational comedy group Second City because everything they do from a retail point of view looks comical. Maybe what they do makes sense from a financial point of view and maybe what they do makes sense from a real estate point of view. I have no expertise in those areas, so I can not comment, but I do know that, to date, everything they have done from a retail point of view is nonsense.
Buying more is reminiscent of Robert Campeau of the 1980’s who got much publicity and support (even though it made no sense) when he bought the two largest department store chains (Allied and Federated) and merged them into eventual bankruptcy. Like the Sears/Kmart people, the key reason why we all knew Mr. Campeau was headed towards failure was that he was not a retailer; his expertise was finance and real estate.
Sears Canada is an attractive target for Sears Holding; not as a retail entity, but for its real estate. The obstacles to turning around Sears Holding are too great: declining comp sales, stiff competition, uninspired workforce, and fickle shoppers. Soon Lambert will stop the charade that he has transformed himself at mid-life into a retail mogul.
By that time, Sears Holding, including Sears Canada, will have an amazing portfolio of choice real estate across North America in dozens of revitalized downtowns in major cities and in near-suburban malls. Soaring energy prices make these properties even more valuable.
Why play retailer to an unimpressed consumer when you can make a killing selling or developing the real estate?
Hard to say who Sears would buy. Probably a company with lots of cash and, somehow, not use any of their own to do it. I agree with Ryan that an acquisition would be a stall tactic. Sears and Kmart are operating at a very low sales per sq. ft. level and it is difficult to understand how they keep the doors open on these retail museums. I think this is all a big charade and I choose not to believe any of the numbers released or that Sears is really making a legitimate profit. I would compare the latest financial reports to claims made by late-night infomercials.
RadioShack.
Don’t think Mr. Day went there for fun.
Sears and Kmart real estate isn’t as prime as one might think. Are malls prime real estate today, with so many empty stores? Or old Kmart locations, when Target and Wal-Mart have moved further out with the population?
I think some of our respondents are being unfair…. to Mr. Campeau: though the results were less than stellar, his basic idea – create a nationwide, upscale department store company – was sound. (It’s what Federated is doing as I write.) It failed for the reason that all over-leveraged buyouts fail….R-E
Mr. Lambert’s plan – God only knows what it really is – seems less laudable. Call me old-fashioned but I’m going to join all those others who think sales matter…. you can’t cut your way to profitability forever. As for the defense that Sears’ rising stock price shows he’s successful, I think it’s wonderful that the (former) dot.com “investors” have found a new idol.
I said RadioShack a month ago because of the Lampert and Day relationship. Of course, the powers here thought it shouldn’t be printed, I guess, because it didn’t appear.
I still feel RadioShack is in the future of Sears Holding Co simply because Day is one of Lampert’s front men just as Lacy was at Sears.
Maybe Ed is just laying low and keeping the cash mill flowing for a really big purchase, say Royal Ahold US grocery holdings concentrated in the Northeast. Now that would really shake up the market. Reinventing the failed Sears Grand concept with combo locations, a la Super Kmart. This might work. Also a cheap closeout version could be developed, Roebucks, which would be an Aldi on steroids.
Also Kmart still has legs. If any of you are near one of the eight Kmarts that have gone renovations in the past 15 months, they are really amazing. The transformation is all about clutter free, clean stores, low prices and customer service.
Yes, customer service. When a store calls the customer to cheerfully tell him/her that a rain check item as arrived, I call that great customer service. And that’s what Kmart is providing in these stores.
The Sears in my home town is no longer the glory that it once used to be. Its sales have plummeted and they have cut down on payroll massively. The prices are way too high and, in my opinion, there really is no reason to shop in the store.
This charade can only last so long, and Target and others would love to snatch up some of the mall locations that would become available should Sears go out of business. The one here in my home town is in a perfect area without a Target, and a SuperTarget could be put in its place, and would no doubt generate 4 or 5 times the sales per square foot as the sears that is currently there.
The next few years should be interesting when it comes to this story!!!