Sears Looks to the Future

Discussion
Mar 16, 2006
George Anderson

By George Anderson


The good news: Sears Holdings reported that its profit for the fourth quarter more than doubled from the previous year as a result of the company’s efforts to drive costs out of its operations.


The worrisome news: While profits were up, same-store sales at Sears’ locations were down 12.2 percent during the period.


The encouraging news: Same-store sales were up 0.9 percent at Kmart stores during the fourth quarter, the first time the chain experienced a year-over-year quarterly improvement since the second reporting period of 2001.


The what’s next news: In a letter to investors, Sears Holdings’ chairman Edward Lampert admitted that the company had wrung just about all it could out of the savings end of the business and would focus on “the tasks of testing, adapting and executing.”


Mr. Lampert did reiterate that, while sales growth was an objective, it would not be accomplished at the expense of profits.


“While reducing sales is not a prescription for success on a base of healthy, profitable stores, it can be a prescription for success where profit was not the primary objective and where sales came from ‘giving product away’ rather than from providing value to the customer,” he wrote.


“Improving our stores and our store experience will take time, and I am pleased with the progress that we have made to date.”


Sears Holdings’ chairman also made clear that the company would determine its own metrics for success. He took particular issue with same-store sales as a gauge of progress,
suggesting the measurement had “significant limitations.”


Moderator’s Comment: Now that it has captured, in Edward Lampert’s words, “all the low hanging fruit,” where does
Sears Holdings go to profitably improve its sales performance at Sears and Kmart respectively?

George Anderson – Moderator

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22 Comments on "Sears Looks to the Future"


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Ryan Mathews
Guest
14 years 11 months ago

Gently into the night? Oh, sorry…I was just in a Sears a week ago. They might start by hiring a merchandiser or two. When I was there there were sales signs on almost every shelf in many departments. But, when people went up to the registers to purchase their prizes they were told by the battle weary staff, “Those aren’t on sale, the signs are misleading.” I sat and watched as dozens of frustrated shoppers tossed potential purchases down and walked out. The first step in doing things right is to stop doing things wrong.

George Whalin
Guest
George Whalin
14 years 11 months ago

It likely won’t be long until we will be watching Mr. Lampert make the decision to either close Kmart or convert what’s left of the stores into some kind of Sears stores. This will be the day Mr. Lampert begins to see his real plan for the company begin paying back on his investment. The Kmart locations that are still open today represent the company’s best stores and most valuable real estate. Once he’s squeezed everything he can out of the Sears operation, those stores might very well be the next to go.

What ever happens over the next three to five years, the once great Sears organization is in very big trouble. Consistently decreasing sales volume is enough to send a chill down the back of any retailer, but this guy seems to always find ways to explain the problems away. If you’ve been in any of their stores lately the problems are painfully obvious. Management won’t begin to turn the sales numbers around until they fix the stores.

Kai Clarke
Guest
14 years 11 months ago

Sears needs to adopt and change its stores or face retail death. This means first rate merchandising in all stores, a clear message in all ads, and communicating a clear vision across the entire chain. None of this has been done. Sears stores are neither a department store nor a first rate retailer. Their merchandising is still lackluster, and their presence as a “department” store is almost certain to hurt them. They need to step up their merchandising efforts and get first rate store layouts that are maintained in every store. Their ads need to reflect a common theme and induce the consumer to want to come to a store. Finally, they need to get out of the dying department store mode. What about Sears including something new in its stores like a grocery store concept? How about Sears drug stores inside their stores? Sears continues to allow their customers to shop elsewhere for many of their purchases and their bottom line reflects this.

Mark Burr
Guest
14 years 11 months ago

Sears has been a case study in great brands and poor brand execution for more than three decades. The same exists today.

Mark Barefield
Guest
Mark Barefield
14 years 11 months ago

The “low hanging fruit” may be gone, but so is a sizable chunk of the existing customer base. They went to Lowe’s or Home Depot when they couldn’t find nails in Sears for their Craftsman hammer or screws for that shiny new power drill.

Sears has cut, cut and cut; and now finds itself with only two more major sources of cost-cutting savings – the “high-hanging fruit” of inventory reduction and reduction/elimination of the higher-paid and higher-skilled consultive sales force. Not even Lacy would touch the Home Appliance sales force for fear of killing the golden goose, but Lampert is not afraid to make a mistake (his words). New staffing models call for a two-to-one ratio of part-time to full-time (think expensive benefits) sales associates. The ratio now is closer to one-to-one. The process of reduction is called “deselection” in Sears-speak.

W. Frank Dell II
Guest
14 years 11 months ago

The down-spiral for Sears and Kmart started 10+ years ago. Firing some people to make a company profitable only works short term. Year after year of double digit sales decline tells the story. This never was a retail play, only a real estate play. The future for Sears is a For Sale sign at each location after the next bankruptcy filing. What is truly sad is one of the best names for American quality products had been run into the ground by management. Both Sears and Kmart simply lost touch with consumers. Sears could have easily competed with Wal-Mart had management not had their head stuck in the ground. We only have about 15 years to see the same thing from our new largest retailers.

Robert Antall
Guest
Robert Antall
14 years 11 months ago

Speech given at the Lord Mayor’s Luncheon, Mansion House, London, November 10, 1942 by Winston Churchill: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” The “end of the beginning” for Sears appears to be at hand. It is hard to believe there are more costs to be cut and there is likely to be a long-term negative impact as a result. Mortgaging the future is not a viable retail strategy. It may however, be a viable strategy to liquidate the assets of the company; first cash, then real estate. It is possible that Mr. Lampert may squeeze value out of Sears/Kmart, but it does not appear as if this will be by building a strong retail chain.

Don Delzell
Guest
Don Delzell
14 years 11 months ago
I agree entirely with the contention that same store sales is not always the best metric in reviewing operational performance. It depends completely on the stated strategy of the organization. For example, if we knew that Sears was dedicated to ruthless examination of assortments, locations and merchandise categories, with the objective of eliminating those which contributed below a given return rate (strategic and market basket impacts included), we’d understand and expect to see comp store declines, while looking for gross margin increases. Over time, we’d expect to see comp store increases as those categories being kept expanded or benefited from the space and inventory investments. Snapshot examination of results can be very misleading. Did Sears produce the profit gain because markdowns were being taken as promotional (booked at point of sale) instead of clearance (booked at the time of change)? Which expense line items were reduced significantly from the year before, and are there any mid or long range impacts of cuts in that type of spend? I just don’t know. It would be wonderful… Read more »
Race Cowgill
Guest
Race Cowgill
14 years 11 months ago
These are wonderful ideas, every one. I believe Sears has actually been fighting this battle since the mid 1970s, when its competitors began to take serious advantage of its weaknesses and Sears began to show its inability to adapt. I believe that nothing much will change for Sears unless it changes its highly defensive Master System. We began tracking and studying Sears and Kmart in 1973 and 1978, and we have seen a highly rigid culture in both all that time: risk averse, think-in-the-box (“We are a department store”), so-so is as good as anyone else and is probably good enough, we are a great company therefore so-so is great, protect turf and save face at all costs, don’t talk about the problems (and don’t tell me about them either). Some of the results of this System are: small changes take a long time to make, small changes are seen as being more significant than they are, significant problems aren’t addressed effectively and are sometimes not even recognized, strategy choices are analyzed to death and… Read more »
Charlie Moro
Guest
Charlie Moro
14 years 11 months ago

Profitable sales are very important, I don’t think anyone would disagree. But to continue to have double digit sales declines does not bode well for any venture.

Bill Bittner
Guest
Bill Bittner
14 years 11 months ago

Another interesting twist to the Sears Holding environment is that Julian Day and Michael Miles announced they will not stand for reelection and the number of directors will drop from 11 to 9. I think the organization is still digesting the merger and there are some more efficiencies to be achieved as they reduce the redundancies. One encouraging aspect is the commitment to keep their promises to former employees by honoring the pension agreements. I agree with their concern that “bad” companies have increased the operating costs for firms that have financed their pension obligations adequately by requiring the government insurance programs to raise premiums. This is a perfect example that “someone has to pay” for the under financing of other companies, but that is a different topic. As far as further improvement, they must seek further overhead reductions, decide if there are significantly different customer segments that they can support two banners or not, close units that cannot be saved, and of course move into groceries.

Karin Miller
Guest
Karin Miller
14 years 11 months ago
I have visited 2 Sears Grand stores (Austin & Rancho Cucamonga) and I was impressed. Great signage, and pretty darn good product too. They were clean, new, organized and had a positive vibe. This concept is not an obvious Target knock-off either, though there were clearly influences. That they are going to expand on this concept gives me hope for their future. If you visit a Kmart, yes, you still will get the convenience of parking close to the front door, and you will also see that their new products, which started rolling out a year ago, are looking better and better. I like that they have been willing to take risks and make statements with their merchandise. They have done a lot of work there in a short time. A small lift in sales is encouraging. In the overall retail world, the mall anchor department store seems to be a less and less viable format. In the case of Sears, the mall stores must feel like a millstone around the neck these days, but… Read more »
Chuck Chadwick
Guest
Chuck Chadwick
14 years 11 months ago

I agree with the concept of cutting costs, eliminating unprofitable customers and driving up profits. However, there has never been an optimum customer-service level in the Kmart stores. The recent elimination of full-time staff is simply wrong thinking. Yes, by all means, cut the unnecessary costs. Kmart is missing their greatest differentiation, which is customer service. I wish them well.

David Livingston
Guest
14 years 11 months ago

It’s easy to get nearly a 1% sales increase when you have beaten your sales per sq. ft. performance to the lowest in the country while at the same time closed down sister stores. After population growth and inflation, they are still in negative territory.

I don’t believe KSears has any intention of spending money to increase sales. For the past few years, all we have seen is a few window-dressing attempts at selected locations, only to have improvement plans halted for some other short lived idea.

Somehow, they still seem to show a profit. Well so did Enron and Fleming.

James Tenser
Guest
14 years 11 months ago
Clearly S/Mart is not out of the woods yet. Although it seems to have staunched much of the bleeding, the company has yet to take steps that will resuscitate its image among consumers. These would include (but not be limited to), defining its corporate brand strategy, revamping merchandising, building campaigns behind its strong own brands, physical plant improvements, and an overhaul of customer service. Lampert is correct in his assertion that like-store sales is a poor metric for assessing a retailer’s business health. His company is suffering in this metric because it is not expanding. Chains (like Wal-Mart) that maintain rapid expansion can pump-up the like-store sales statistic through what I call the “second-year effect” in which results from fast-growing new and replaced stores drive up the growth rate. This can happen even while older stores experience flat sales. To compare Sears/Kmart sales with other retailers, I want to see it and other firms report on the trend at stores more than three years old. It takes a real merchant to drive growth at established… Read more »
Bernie Slome
Guest
Bernie Slome
14 years 11 months ago

Cutting costs, eliminating unprofitable customers and driving up profits is step one. Step two is utilizing some of the profits to enhance the overall customer experience. If Sears can go back to its roots (albeit those roots are decades old) or take a page out of Nordstrom’s playbook and become customer centric, then they can start to increase sales AND be profitable.

The same obviously applies to the Kmart stores as well. Kmart/Sears needs to start working with their vendors, in a partnership, in order to deliver good product at good value with excellent service. If not, the trend towards lower sales will continue.

Ben Ball
Guest
14 years 11 months ago

The whole concept of walking away from “unprofitable volume” has not been accepted by most of the retail community. For one thing, it’s just too hard to confidently sort out the difference between an “unprofitable sale” and an “unprofitable customer.” We would like to make unprofitable customers either behave in a way that is profitable or go away. But often (we believe) an unprofitable sale is the price of keeping an otherwise profitable customer from heading over to the competition. And who can be sure they will come back?

Sears Holdings is gambling that they have a profitable base of customers that is large enough to keep the doors open. If they prove correct, we may see other retailers taking notice.

Gene Hoffman
Guest
Gene Hoffman
14 years 11 months ago

With “all the low hanging fruit” having been plucked and Sears sales off 12% even though Kmart sales have leveled off, what should Mr. Lampert do? Forget being a “Scrooge” retailer; go to Bentonville, make a deal and another financial killing.

Phillip T. Straniero
Guest
Phillip T. Straniero
14 years 11 months ago

I continue to believe that Sears needs to extend its presence “outside the mall” if it is going to better compete for the appliance, tools/hardware, and outdoor equipment sales it has lost to the big box stores. I think there is a huge opportunity to extend the Sears/Kmart equities through the utilization of Kmart real estate which is probably generating less than desirable sales per square foot in many locations. The difficulty in my mind is which equity do you feature in different locations and how do you gain the efficiencies of advertising, promotion, etc.? The question almost begs for Sears to consider taking a small market in the U.S. and blending the locations and advertising/promotion vehicles to fully test the concept. I know this sounds easier than it may be (to implement) but I think they have a great opportunity to turn the ship around in rough waters!

Mark Lilien
Guest
14 years 11 months ago

Ed Lampert shows more brains than most retail executives. His observation about comp sales is correct. His profit orientation is what’s needed. He tests different strategies and ends the tests if they aren’t successful. If he was simply an egomaniac, he wouldn’t admit his tests fail. If he was simply a liquidator, he would’ve sold the real estate already. It’s obvious that the stores look lousy, have lousy service, boring advertising, and a mediocre market positioning. So there’s still some work left. Rome wasn’t built in a day. The great challenge: crafting winning strategies for Kmart and Sears. So far, the Big Vision Winning Strategy has not yet revealed itself. If it was easy or obvious, it would’ve been sighted and implemented already.

Mark Douglass
Guest
Mark Douglass
14 years 11 months ago

It is important to drive expense out of the business. This should be the lever to continually reduce merchandise margins to push sales which are the life blood of a retailer, particularly at the discount end of the market. Stock starts aging as soon as it hits the shelf and it needs to be moved on as quickly as possible. I find it interesting that the sales/ market share growth seems to be a secondary strategy.

Annette Mansour
Guest
Annette Mansour
14 years 11 months ago

The employees in Sears I believe do their best in the enviroment in which they work. They give good customer service but have to deal with managment that cut hours, bad pay and the atmosphere is sad in every Sears store I have entered.

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