The Wall Street Journal-20080123-BUSINESS- Sears-s Unorthodox Tactics Encounter Stiff Head Winds
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BUSINESS: Sears's Unorthodox Tactics Encounter Stiff Head Winds
Since acquiring control of the Sears retail empire in 2005, financier Edward S. Lampert has delighted fans and horrified traditionalists by relying on strategies that don't depend on sales growth.
Shrinking per-store sales haven't bothered him, so long as other tactics kept operating earnings strong. Former employees and a wide range of retailing consultants kept predicting ruin, but Mr. Lampert until a few months ago benefited steadily from cutbacks in capital spending, occasional real-estate divestitures and aggressive investment of Sears Holdings Corp.'s cash. The company's soaring stock price seemed to vindicate his unorthodox approach.
Not anymore. While Sears shares remain well above Mr. Lampert's original purchase price, they have skidded about 40% since July. Business at the company's 3,800 Sears and Kmart stores keeps waning. At stores open a year or more, sales were down 3.5% during the holiday season. Last week, Sears warned investors that the current quarter's profit will be disappointing.
Right now, nobody in retailing is thriving. Mr. Lampert keeps trying to divert attention from Sears's empty aisles. Yesterday, he announced a modest restructuring plan that sent the stock soaring $10.42, or 12%, to $99.85 in 4 p.m. trading on the Nasdaq Stock Market. But it is harder for his nonretailing tactics to work when markets are in chaos and the economy is headed south.
Asset sales, for example, no longer look like a sure-fire backup plan if retailing operations remain iffy. Sears's property portfolio has long been regarded as a treasure chest full of long-term leases at attractive rates, in addition to its outright ownership of more than 500 Sears mall stores. Mr. Lampert hasn't rushed to exploit that portfolio, but in 2004, Kmart reaped $253 million in gains by selling a group of store sites to Home Depot Inc.
In the current environment, it could be more challenging to find buyers, says David Stowell, a finance professor at Northwestern University's Kellogg School. Other retailers are hesitant to expand, and volatile credit markets make it less likely that developers with other uses for the land will step in.
Say goodbye, too, to hopes of big investment gains from Sears's cash position. Mr. Lampert is a hedge-fund manager by background, and his firm, ESL Investments Inc., has been running Sears's cash. That worked out nicely in the year ended Feb. 3, 2007, when ESL helped Sears earn $254 million of investment income. Morgan Stanley analyst Gregory Melich last year calculated that Sears's stock price included at least a $25-a-share "Lampert premium," based on its access to his money- management talents. Recent results don't seem to justify that premium. For the nine months ended Nov. 3, Sears posted a $14 million investment loss.
Sears's austere spending habits have taken their toll, too. Since Mr. Lampert took over, Sears has cut capital spending to as little as $513 million a year. That's barely half of its depreciation and amortization charges, suggesting that Sears's outlays aren't enough to offset the natural deterioration caused by age. By contrast, Target Corp., which has about the same annual revenue as Sears, devotes more than $4 billion a year to capital spending.
In California, Sears's largest market, the consequences of this thrift are evident. A San Bruno, Calif., Sears store is lit with bare fluorescent bulbs, while mall rivals use incandescent spotlights to make apparel and jewelry look brighter. Carpeting in a San Mateo, Calif., store is stained and littered with gum wrappers. A Mountain View, Calif., store still has tile flooring while a nearby Wal-Mart recently upgraded to hardwood.
Sears spokesman Chris Brathwaite says his company is increasing capital spending about $200 million this year. He also notes that Sears is experimenting with many new store formats, including ones that use its Lands' End brand more aggressively to showcase apparel and home furnishings.
Of course, it's possible to spend too much on stores, as well as too little. That's what Mr. Lampert has accused other retailers of doing. In the pre-Lampert era, Sears tried a vast range of comeback strategies, none of which really worked. The big challenge for him -- as Sears chairman and owner of 47% of the retailer through ESL Investments -- is to devise a sound, long-term way to manage what appears to be a declining business.
Sears's latest restructuring plan could open a path for the company to get more mileage from its best-known brands, such as Craftsman tools and Kenmore appliances. But if Sears makes those into separate businesses and lets them sell products in competitors' stores, that could further undermine the appeal of Sears's own outlets.
Mr. Lampert, through a spokesman, declined to talk about his strategic options. In recent years, he has portrayed himself as a student of legendary investor Warren Buffett, who started out as a fund manager and then began buying industrial companies in the 1960s.
There's one Buffett maxim that Mr. Lampert may have overlooked, however. As Mr. Buffett told investors years ago, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."
