Sears-Running Out of Luck

Implications: New Kmart formats are too little and too late to save the giant retailer.  Here's why Sears Holdings'  luck has probably run out.

Analysis: Evidently Sears Holding is testing at least one new format for its “Big K” stores.  That’s the other name for Kmart, depending on what part of the US you live in.  Kmart’s sales and profit declines have recently accelerated despite the economic slow down that has seen its competitors sales grow substantially.  Now, as Wal-Mart and a host of other discounters gain even more market share at Kmart’s expense, SHLD is testing new formats.   

According to company spokespeople, Chairman Eddy Lampert has been reluctant to invest in a new store format for either Sears or Kmart without a proven success record.  Just how much encouragement he will get from two stores trading covertly in Rockford, IL isn’t clear.  The issue is probably more one of management insecurity, than a determination to get the format right.   

If hedge fund owner and Sear Holding’s Chairman thinks he can develop a new ‘big box’ concept in a vacuum he is likely to be wrong, again.  What he needs is visibility, especially consumer visibility, and a lot of it.  He also needs a willingness to listen to what customers and store managers tell him. Unfortunately, listening hasn’t been on of the Chairman’s strengths.   

Just what he has in mind, remains to be seen; customers that have shopped the store report wider isles and less product density.  If that’s true an upscale Kmart may be the plan.  But isn’t that what Sears Roebuck is today.  In effect, Lampert tried to move Sears from its specialty branded roots to compete with the likes of both Wal-Mart and Target and ‘killed’ what was left of Sears in the process.  

Now as Sears crumbles, his organization refocuses its attention on Kmart.  That isn’t surprising.  It seems to fit his personality.  He has made lot of money by doing the ‘big’ deal.  Strategic incrementalism isn’t the way he thinks.  That could be a good thing, if he were a visionary retailer, but he isn’t.  It could also be a good thing, if he knew how to recruit the best retail talent and listened to them, but he won’t.  That leaves about half the shareholders with disintegrating $50 billion business waiting for a ‘big’ solution to make everything all right.  

Specialists say four things are essential for a turn around to be successful.  One: a base of customers that is sufficiently large to support the core business.  Two: a way to make a profit that is defendable.  Three: adequate cash to support the business during the turn around.  Last:  luck and lots of it.  Sadly, management’s indecision, combined with their ‘big’ deal operating style drove customers away with mediocre product offers while the board squandered its cash on overpriced stock buybacks.  Now, as the economy slows and their largest competitors strengthen, management has probably run out of luck too.