Sears Big Challenge: Change to Survive

 
 
By Reuters -  |  Posted 2008-02-04
 
 
 

ATLANTA (Reuters) - Sears Holdings Corp is looking for a new CEO and revamping its operations management, but many more changes will be required for the operator of Kmart and Sears, Roebuck stores to avoid retail oblivion.

The changes include rethinking the way apparel is marketed and sold and focusing more on the hardline goods, like tools and appliances, that made the Sears brand a household name.

The retailer, controlled by hedge fund manager Edward Lampert, has announced two big changes since warning in mid-January that it expected to post a third consecutive quarterly decline in profit. Chief Executive Awylin Lewis was ousted last week, shortly after Sears unveiled a plan to separate its operations into five types of business units.

Those changes have aided the stock. Sears Holdings shares have rebounded 25 percent in the last two weeks to the $106 range from a year low of $84.72 reached after the profit warning. But the stock is still down 45 percent from a high of $195.18 in April 2007.

"A change in management gives a temporary reprieve," said James Gregory, chief executive of CoreBrand, a firm that helps companies craft and express corporate brands. "But if they do not make significant changes that will improve the long-term performance of the company, it will become obvious very quickly."

Sears is struggling to draw shoppers amid competition with chains such as J.C. Penney Co in clothing and Wal-Mart Stores Inc in general merchandise. Home Depot Inc and Lowe's Cos have chipped away at Sears' dominant market share in appliances.

TOUGH CHOICES

The task that Lampert faces isn't easy, said Love Goel, chairman and CEO of Growth Ventures Group, a Minnesota retail investment firm.

But he said Lampert deserves credit for making tough calls, such as moving to separate Sears Holdings' operations and focusing on profits, even if at the expense of sales, since Kmart and Sears merged in 2005.

"Strategically, he's made some brilliant choices," Goel said. "His biggest challenge has been finding quality talent to execute on these opportunities."

Getting quality talent -- especially at the CEO and merchandising levels -- will be crucial to putting Sears on the right track, others said.

"Unless they can get somebody who wants the challenge (as CEO), Sears may end up with second-rate people," said Erik Gordon, associate dean of the business school at Stevens Institute of Technology in Hoboken, New Jersey.

Goel said Sears might find its next CEO outside the retail arena, where he says there is a paucity of the kind of specific talent needed to manage the turn-around.

"You have to literally go outside to find someone from ... a best-practices company," such as Apple Inc or Google Inc, Goel said. "You have to talk to dozens of people."

Gordon, the business school dean, said Sears should close underperforming stores and needs to turn away from apparel and go back to its core strengths -- hardline goods such as tools, appliances and electronics.

"I would give more space to the stuff that sells," Gordon said. "They need to focus on building market share in an area where they still have credibility."

Goel stopped short of saying Sears should exit apparel but did allow that the company needs to sell clothing in a different way, such as by relying more on online efforts to drive traffic.

He also said the ideal Sears store may likely be a smaller outlet than the current mall-based stores, with Sears' proprietary Kenmore appliances or Craftsman tools being the main goods sold.

"The current size of those stores, assortment of those stores ... does not work in the present environment," Goel said.

Under the reorganization, Sears plans to separate into five types of business units: operating businesses, support, brands, online and real estate.

"We're really unsure as to what's going on there," said Tiffany Co, a retail analyst with Fitch Ratings.

Co suggested there could be lessons for Sears from rivals such as Kohl's Corp and J.C. Penney, "two companies that actually have a merchandising strategy that seems to be much clearer and a focused senior management team." Co added that those competitors are also building new stores and overhauling old ones.

"Sears is not moving along any of those lines, and we think those are the steps it needs to take to improve the top line," Co said.

Sears Holdings shares were down $1.76, or 1.6 percent, to $106.55 in Nasdaq trading on Monday.

(Editing by Gerald E. McCormick)

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