The Wall Street Journal-20080119-Flagging Sears Plans Shakeup In Latest Bid at Turnaround

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Flagging Sears Plans Shakeup In Latest Bid at Turnaround

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In a fresh effort to halt a long decline, Sears Holdings Corp. Chairman Edward S. Lampert plans to reorganize the 121-year-old retailer into several businesses with broad authority to shape their own future.

Mr. Lampert, a hedge-fund executive who acquired the retailer in 2005 through a merger with Kmart Corp., now sees a holding-company structure as the best way to breathe new life into Sears's slow-moving culture, said people familiar with the situation.

The change was outlined to senior executives Thursday after Sears, with $50 billion in annual revenue, warned that its fiscal fourth- quarter profit would fall as much as 57% below the year-earlier level. Sears shares have lost half their value over the past year despite new marketing and advertising moves at Sears and Kmart.

A Sears spokesman confirmed the moves late Friday, saying the new structure will provide operating businesses with "greater control, authority and autonomy." Mr. Lampert wasn't available to comment, he added.

The restructuring is a high-wire act for Mr. Lampert, whose ESL funds own nearly 48% of Sears shares, according to securities filings, a big reason ESL was down more than 20% last year. Since acquiring Sears, he has been active in hiring decisions, strategy and merchandising despite his dislike of the spotlight.

It also represents the latest effort to turn around a pioneering department store chain, founded in 1886, that for much of the last decade has seemed lost in the past, unable to stop customer losses to more focused rivals. Sears's once-dominant place supplying refrigerators and washing machines to American homes has been chipped away by Lowe's Cos. and Best Buy Co. Its clothing business has suffered at the hands of Kohl's Corp. and J.C. Penney Co. Its identity as the nation's broadest one-stop shop was usurped years ago by Wal- Mart Stores Inc.

The contemplated restructuring would create separate units to manage Sears's real-estate holdings and run brands such as Kenmore, Diehard and Craftsman. It isn't clear how the units would be divided or which unit would run the stores themselves.

The structure would allow Mr. Lampert to spin off or close business units more easily, said a person knowledgeable about his thinking. "He warmed to the idea of a spin-off strategy," this person said. The company also is willing to be flexible about how each unit will be set up, based on the skills of its operating executive. One practical effect of that could be to reduce costs.

Mr. Lampert has argued retailing shouldn't be so inefficient, making big purchase decisions as much as a year in advance and without concrete information on customer needs. "He's trying to find a different way to manage the company where he can be involved in a more effective manner. The previous structure wasn't working," said an executive with knowledge of the restructuring.

Walter Loeb, a retail consultant, said the plan flies in the face of most retailers' strategy of designing a cohesive image for their business. "He's looking to turn it around by using a different approach," said Mr. Loeb. "I think it's risky."

Sears's turnaround efforts have been hurt by a revolving door of senior executives at its Sears and Kmart retail units. John C. Walden, Sears's chief customer officer, who was hired away from Best Buy less than a year ago, resigned this week, a Sears spokesman confirmed. Mr. Walden couldn't be reached for comment.

Details on how many businesses would be created and who would oversee the units were unclear. Aylwin B. Lewis, the company's 53- year-old chief executive, has been involved in developing the new organization but his position after the revamping isn't clear. Some retail experts have suggested that the company abandon its Kmart brand and convert the stores to Sears.

Mr. Lampert, a 45-year-old billionaire hedge-fund manager who is often compared to famed investor Warren Buffett, wants Sears to have a structure similar to Mr. Buffett's Berkshire Hathaway Inc. conglomerate. Mr. Buffett typically gives chief executives of his business units broad latitude. The Berkshire holding company has only a small staff.

Sears's dramatic profit decline comes amid rising customer complaints about its stores and service. Susan R. Russell, a Maine- based consultant to nonprofits and longtime Sears customer, says recent instances of poor service have sent her shopping elsewhere. Sears initially refused to honor a warranty for an oven that was delivered damaged, and another time it required hours on the phone and two service visits to replace a dishwasher rack covered by a warranty. "They value people's time at zero. That's outrageous," Ms. Russell said.

Mr. Lampert has been thinking about splitting up the company for some time, say people familiar with the change. He has been interviewing seasoned retail executives for positions atop the holding company, and for what might be as many as three dozen independent business units. The heads of the new business units are expected to include some existing Sears executives as well as outsiders.

As general partner of the Greenwich, Conn.-based ESL Investments hedge fund, Mr. Lampert has been careful not to be seen as running the company. He left Sears's Hoffman Estates, Ill., headquarters Wednesday, a day before the revamping was outlined by executive vice presidents Dev Mukherjee and Corwin Yulinsky.

Messrs. Mukherjee and Yulinsky described the plan to executives Thursday morning, saying it would allow the company to unlock the value of its real estate, proprietary brands, and online units by managing each as separate entities. The executive over Kenmore, for instance, could strike sales or licensing deals with other retailers, said a person who attended the meeting.

According to the Sears spokesman, each operating unit will have a "designated leader and an advisory group comprised of senior Sears Holdings executives to provide direction and oversee the business unit's performance."

The restructuring is an indication that Mr. Lampert won't be making big new investments in the business. The plan is for unit presidents to craft their own budgets and set spending priorities. With the U.S. economy heading downward into what some see as a recession, this year could be troublesome because Sears's cash cushion has declined. The company spent some $2.9 billion this fiscal year on share repurchases, some at as high as $150 apiece, compared with Friday's closing price of $89.43. Sears forecast cash and equivalents as of Feb. 2 of about $1 billion, down from about $4 billion a year ago.

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