Sears: from Behemoth to The Brink
It is finally happening: Sears is on the brink. I’ve been predicting this from Eddie Lampert’s Bezos-like “day-one” declaration that he was going to return Kmart and Sears, two iconic American brands, to their once storied greatness. By his own actions and inactions, I argued his true (and unstated) intent was to financially engineer the failing retail business so that cash would flow into his own coffers. And it was, sadly, a chronicle of a death foretold.
I say, “on the brink,” because although Sears filed for bankruptcy, there is a very slim chance it may severely downscale the business and come out of bankruptcy a much smaller business, but still breathing. But don’t bet on it. While revenues and profits have been tanking year-over-year since his first day at the helm, he “pulled many rabbits out of his hat” (aka financial engineering) during that long, downward journey to create an illusion that he would find a way back to stability and potential growth. But as the rabbits piled up, the world tired of his illusions. Grabbing for yet another rabbit isn’t going to fool anybody.
Furthermore, In the real world, the only people that mattered to Sears were the dwindling number of customers. And they were not tricked by any of his illusions. They saw the reality of crumbling, dirty, dull and unraveling stores full of boring merchandise, lousy service and had a generally unhappy experience. At the end of the day, consumers, who are the only reason for any retailer’s existence, were driven away by the actions and inactions of Mr. Lampert, and accordingly, they drove Sears to the brink. And they are not going to haul it back up and save it from death.
For historical perspective (I have been covering Sears for 40 years), here’s what I wrote in The Robin Report in November 2004. It is predictive and Eddie proved me right by barging ahead and running Sears right off the cliff. Here is the report, written 14 years ago.
SEARS HOLDINGS CORPORATION: TALKING THE VALUE TALK = WALKING THE VULTURE WALK
- A New Beginning for a Real Long Ending
How many times have these two dying relics, Kmart and Sears, come back up for air, just to slip back under? And I’m not referring to bankruptcy, although it applies to Kmart. I’m referring to their long, painfully slow and “lumpy” (to use an Eddie Lampert term) descent into the abyss: Sears for a quarter century and Kmart for at least 15 years. The Titanic metaphor, used to describe Sears’ sinking woes in my past articles, would have been equally appropriate for Kmart.
However, together they now come up for air once again. Together, they have another chance. Together, under Sears Holdings Corporation, they have a new beginning. Will they create “Grand” new retail value, as the newly formed management troika is talking-the-talk about? Or will they walk the Eddie Lampert vulture walk, picking off billions in cash from these slowly dying brands to turn around and invest it in the next leverage opportunity?
My opinion? It’s going to be the vulture walk. But it will be a real long ending, a continuance of the slow and lumpy descent into the abyss. Therefore, the final metaphor might be “Two Titanics” in a great sinking synergy, kind of a swan dive to the bottom.
The end, however, will not come before a new beginning created under the newly formed Sears Holding Corporation is orchestrated by the troika of chairman Eddie Lampert, previously chairman of Kmart and head of his own hedge fund, ESL Investments; vice chairman and CEO Alan Lacy, previously chairman and CEO of Sears; and president Aylwin Lewis, also to be CEO of stores over the newly merged Kmart and Sears. Just prior to the merger, Lewis left his COO position at Yum Brands (Taco Bell, Pizza Hut and others) to take over as CEO of Kmart. Lewis has had no retail experience. He is, however, highly credited for his knowledge of operations.
The conductor of this orchestra will be Eddie Lampert, who will own about 40 percent of the combined $55 billion company, with about 3500 doors (1482 Kmart, 871 Sears “full-line” and 1100 specialty stores). Mr. Lampert, a widely acclaimed financial genius, has amassed billions of dollars for his ESL Fund.
Of note, his genius status grew from his ability to identify great deals, particularly distressed retailers that he snapped up. The other part of his MO is simply to cut costs, improve returns on capital, increase cash flow and boost per-share earnings.
Not only has this financial model contributed billions to his Fund (and himself, to the tune of 20 percent of the Fund’s gains per annum), it also fuels the other part of his self-professed master plan.
- Eddie Lampert as Warren Buffet?
Eddie thinks of himself as a latter-day Buffet. In the footsteps of his role model, Lampert looks to generate cash, as Buffet did with his original investment in ailing Berkshire Hathaway. Eddie’s idea is to invest in other bargains so he can begin the cash-generating bargain hunting cycle all over again.
However, in this case, Lampert departs from Buffet’s formula by not only buying two losers, but losers who have long been and still continue to be badly beaten by dominant competitors. He has also placed himself in charge of the mess. As business writer Jesse Eisinger wryly points out, “Mr. Lampert is no longer just a hedge-fund whiz against whom it is suicidal to bet. He is also chairman of a mastodonic retail company that has to compete against companies with better brands, better management, more money, and more customers.”
Another Buffet tenet that Lampert has borrowed and rephrased his own words, “Managing the business strategically…for the long-term without having to worry about figuring out how to make monthly same-store sales hit a specific target, and without giving any type of quarterly earnings guidance and then trying to manage the business for that guidance.” In other words, he would focus solely on return-on- investment.
Good luck, Eddie. Perhaps if I were a retail analyst and Mr. Lampert were the grand Poohbah of retailing (say a Les Wexner, Allen Questrom or Lee Scott), and he was telling me to forget same-store sales increases and to focus with him on his long-term strategy of creating a retailing powerhouse (out of two cripples), I might (read: might) go along with him.
However, while he may be the Grand Poobah of finance, he’s no retailing Poohbah, much less a grand retailing Poohbah. And I can’t imagine too many investors who would be lured to Sears’ negative 2.1 percent year-to-date comp store sales, or Kmart’s negative 13.7 percent.
But wait a second! Upon announcement of the merger, the “greater fools” raced, lemming-like, to run up the stock prices of both brands. That, folks, is the talk-the-value-talk strategy, so well played out by Mr. Lampert. Can it work… and for how long?
Consultant, Howard Davidowitz, was asked what would result if Sears Holdings were to pull off exactly what they are talking about, that is, gaining synergies from real estate moves, cross marketing brands, and supply chain economies. His answer: “A cadaver.” He went on to say of Mr. Lampert: “He doesn’t invest in stores, he cuts costs, he cuts expenses, and by the way, here’s another thing he cuts: customers.”
So, we have a new beginning with two financial guys and an operations guy talking the talk of taking two really enormous and sick retail businesses and making them healthy. I don’t think so!
- Talking the Value Talk
The grand charade (If my assessment is correct) about the ultimate end of Kmart and Sears is why will it take so long? First of all, Lampert declares to the public-at-large and specifically the financial community that the troika is committed to create value where very little now exists. All this says is that the resuscitation efforts to stall off the ultimate demise will take a very long time. The guile of Mr. Lampert is that the longer he can keep these losers afloat, the more cash he can generate for himself. So, the talk and the walk tell us that Kmart and Sears will lump along for a long time before their many assets are finally sold off (that’s assuming they still have any value at the end). In fact, Lampert himself declared the path ahead as lumpy progress over time. Indeed!
Anyway, the greater fools and the public at large will view this lumpy and long final act as a valiant, sincere and purposeful attempt to rejuvenate the iconic Sears brand and perhaps save and reposition a much smaller Kmart. Realistically, maybe he should just turn them into a “super” dollar store chain in urban markets.
As I’ve said before, the greater fool theory is stronger than ever, and there are more fools than ever before, jumping on even the slightest win for the new holding company. Watch them throw good money after bad, pumping up the stock price.
However, this is but one part of the grand charade and the final act. How long will it play out, or more accurately, how long will Mr. Lampert play it?
I don’t know, but you can expect the following plot for Act III before the curtain rises on the final act.
- Act III, Scene I
The troika will likely initiate many of the tactical moves the pundits have been speculating on since the merger was announced.
Sears will continue its off-mall strategy, now able to move into those select Kmart stores (including the larger Kmarts, to be re-named Sears Grand, which will locate them closer to their desired consumer segment of higher income homeowners. A repositioned merchandising strategy might pit them effectively against Kohl’s. Or, wait a second, is it Kohl’s they target as their primary competitor, or is it Walmart, Target or Home Depot? Who knows?
- What is the repositioned Sears value proposition for customers in these new locations?
- Is there a potential cannibalization of current Sears locations?
- How many of the Kmart stores that Sears might want to have refurbished, and at what cost (the type of investment costs Lampert historically avoids or cuts, in favor of profits)?
- What does Sears do with its current off-mall Sears hardware division with its eroding appliance share against Home Depot and Lowe’s?
- When they want to sell off remaining underperforming stores, or those in bad locations, what do they do when they realize that those stores and locations are also undesirable for potential buyers as well?
The cross-merchandising of proprietary brands is expected to provide a synergy. Sears brings its revered Craftsman, Kenmore, and DieHard brands to the table, along with Lands’ End and the lesser-known Apostrophe, Covington, and Lucy Pareda to the apparel table.
- A big gain for Sears, of course, will be Kmart’s Martha Stewart brand. And they may find Kmart’s Thalia Sodi apparel brand a complement to their Hispanic-targeted Lucy Pareda. Other strong apparel brands from Kmart are Jaclyn Smith, Joe Boxer, Route 66, and Sesame Street.
- What are the combined Sears and Kmart value propositions they think will make these synergies work?
- Will Kmart’s more down-market image dilute Sears’ brands? Conversely, will Kmart’s brands diminish Sears’ image?
- How will the national wholesale brands view potential negative crossover effects on their brands?
Supply Chain Synergies
Reportedly, Sears Holdings Corp. expects to realize $300 million annually in cost savings from merchandise procurement, marketing, technology and supply chain activities.
- According to many experts, both of their supply chains are woefully lagging behind Walmart, the industry gold standard, particularly in technology, logistics, and distribution. As one pundit put it, “What do you get when you put two messes together? You get a bigger mess.”
- Without a Strategic Position and Value Proposition, none of it Matters.
Kmart and Sears must determine strategically who their consumer is and how they are going to be competitively positioned, or will be trapped chasing tactics searching for a strategy. They will therefore have possible short-term wins, but in the long-term, they will continue to sink.
Who is their core consumer? What do they stand for to those consumers? How are they competitively positioned for sustainable advantage? What is their superior value proposition for their very clearly defined consumer?
Some or all of these questions may have been addressed separately by Sears and Kmart over each of their many declining years. Their performance, however, indicates a total lack of execution. Without clear answers to those questions, they have no strategy. Without a strategy, tactics are irrelevant. And with questionable execution, they will certainly not be able to create one viable retail entity (much less two, if they choose to keep the Kmart nameplate).
- The Competition Never Sleeps and the Consumer Never Waits
Forget about all the textbook stuff. The Lampert troika will soon start the long march of figuring out how to position each business, merge cultures, reorganize, decide on what stores to switch and/or get rid of, what brands to cross-market, how to upgrade their technology, systems, and supply chain processes and ultimately how to create the backend economies they so sorely need.
However well they execute this gargantuan task, it really doesn’t matter how quickly they accomplish it because It will not be soon enough. If they decide to keep the Kmart nameplate and keep it positioned in the discount sector, Walmart and Target will continue to gobble up their share even faster as Kmart is distracted by the merger.
Likewise, and perhaps worse, Sears has many more competitors, a situation that was largely of their own making. They failed in the late 1970s to define who they were and what they stood for, led by a president who described the retail business as “mature.” At the end of the 1980s they failed to focus and reorganize around the home sector, and during the 1990s new leader Arthur Martinez arrived and departed asking the same question, “What is this company going to be? What does it stand for?”
Finally, under Alan Lacy, just prior to the merger, it became obvious that he was no better at figuring out who they were and what they stood for. In 2003, he made the statement, “We’re just Sears, a broad-line merchant.”
What that meant for Sears in the 70s, and what that means for Sears now, is that they do not stand for anything. They are selling everything to everybody, therefore meaning nothing to anybody. What this did to them competitively then, and what it is doing to them now, is allowing competitors from many different sectors to steal their business until it is all gone. And like Kmart, the competitive onslaught will accelerate during the merger period. Walmart and Target are killing Sears from below. Home Depot and Lowe’s are killing them on their flanks. Kohl’s, JC Penney and even some of the department stores are taking direct chunks out of them. And of course, the specialty chains continue to pick away big pieces.
- Amazon is Coming
By the way, there’s a big $64,000 question: What are they going to do about Amazon? Folks, it’s over.
- Act III: Final Scene, Year 2007
It’s 2007, and the Two Titanics, with sterns majestically spiking vertically up above the icy cold surface of the Atlantic, are poised for their final plunge into the swirling abyss. There are no deck chairs left onboard. Those that were not sold at an earlier “pre-sinking” auction, now slide quickly into the briny deep.
But just before they plunged beneath the surface in their surreal dive to the bottom, the captain and his two remaining officers telegraphed an urgent request. This was not an S.O.S., but a “sinking sale” offer for their final assets. The next day, headlines appeared in newspapers around the world: “Kmart and Sears brands sold for a song.” This was no Nearer My God to Thee. Eddie Lampert’s latest deal nets him billions. As the officers’ lifeboat raced to escape the inevitable undertow, an aerial photo captures Captain Lampert and officers Alan Lacy and Aylwin Lewis racing away from the wreck toasting in celebration of the consummation of their final deal.
- Quotes to Remember from the Sears-Kmart Merger
I have compiled numerous quotes taken from individuals as well as various publications that have covered this monumental merger including The New York Times, Wall Street Journal and WWD. Many are from Mr. Lampert, which might be retained for future reference, once the “talk” turns into a different “walk.” I found some of the quotes witty and entertaining, however, all of them are instructional and I felt they might either support your thinking or provide you with new ideas about how this event is going to unfold. These quotes are random in no defined order, and some individuals wanted to remain anonymous.
“The Kmart takeover of Sears could be Eddie Lampert’s Waterloo, and he isn’t the Duke of Wellington,” according to business writer Jesse Eisinger. Continuing the analogy, he concluded with a remark about Sears and Kmart’s competitors: “It will take quite a lot to successfully meld two creaking retailers whose foes eat Napoleons for breakfast.”
“I don’t think any retailer should aspire to have its real estate be worth more than its operating business,” declared Mr. Lampert to investors, analysts and reporters.
Mr. Lampert on running a retail business: “If you can ship a product on June 29 to make the quarter look better, but you can sell it for more the next month, it’s worth holding off on the sale. The way to create value is to see businesses run better, and that may not be how they are traditionally run. A lot of CEOs are constrained.”
More from Mr. Lampert on Sears’ real problem: “The problem is they are not where the customers are, and that’s the big opportunity. It’s not that the retailer per se is weak, but if you have the greatest store and it’s not where the customers are, that’s a problem.” My question: Just who is the customer, Eddie?
Jim McTevia, chairman of his own turnaround firm said of Kmart’s hiring Aylwin Lewis: “For Lampert to get his hands on this kind of person tells me that the powers that be at Kmart are thinking about other ways to make Kmart a viable company other than selling merchandise. Lewis has the ability to put deals together.”
Mr. Lampert described the merger as a blending of the two, “into one culture, an operation under one culture with two brand names…this is a great opportunity to explore commutations and permutations.”
Investment banker Peter Solomon commented on the merger of the two cultures: “That would be the $64,000 question,” noting the past history of the two operations and lack of success on execution.”
Retail consultant Walter Loeb commented: “I think this is a marriage made in heaven by non-merchants. I can visualize that this can take several years to sort out and that the identity of both retailers will be blurred in the customers’ minds.” I say, “Walter, they have been blurred for years. It can only get worse.” Your truly.
Lewis Kaplan, retired owner and publisher of Clothes Magazine, weighs in on the blurred meanderings of both searching for an identity: “The merger of these two losers reminds me of Denny Dimwit, famous for his quote: ‘Who am I? That’s what’s bothering me.’”
UBS analyst, Gary Balter, commented on the competitive situation: “This move effectively adds a new hardlines competitor in 1300 stores overnight, which is a negative primarily for the home-improvement retailers and to the extent that the brands in Kmart drive traffic, Walmart.” I say, a threat to Walmart? I think not, Gary.
Business author Tom Peters noted that there was little logic in merging two losers and added, “If you think they’ll be able to take on Walmart, I’ve got a nice bridge.”
“This is cause for celebration for competitors,” said consultant Burt Flickinger.
Anonymous comment on the statement that both “Sears and Kmart are moving into the unknown”: “Both have been doing business in the unknown for years.”
“This merger does bring some economies of scale to the picture. Now Walmart can finally put both companies out of business at once versus having to do it one at a time.” Anonymous.
“The complexity and time it takes to merge two healthy companies is an enormous, time consuming and often deleterious undertaking. With these two crippled behemoths, the merger dynamics alone could kill them both.” Anonymous.
“With two financial and an operations guy and reputed ’dealmaker’ running the company, and now that Vornado has bought significantly into Sears, let the great asset sale of the century begin.” Anonymous.
- The Last Word: The Fat Lady Is Singing
So, the fat lady is finally singing. Eddie “The Magician” Lampert has no more rabbits, and Eddie “The Doctor” has no more life support. And his “vision forward” is now an oxymoron. R.I.P.
Source: The Robin Report