Sears-Kmart strategy still murky a year later

updated 2:47 p.m. ET March 17, 2006

CHICAGO - Minutes after securing final approval for the Kmart-Sears merger last year, Edward Lampert pledged in a rare appearance before reporters to transform the two faded retail icons into “a great company.” But he didn’t offer any blueprint for how he’d do it.

Twelve months later, approaching next Friday’s anniversary of the unlikely pairing that created Sears Holdings Corp., industry experts are still trying to figure out just what the billionaire chairman has in mind for the famously struggling store brands.

On the surface, retail results are shakier than ever.

Same-store sales fell 5.3 percent in 2005 — 8.4 percent at its namesake department stores, where an attempt to introduce more fashionable clothing fell flat, and 1.2 percent at Kmart. A new brand for a Kmart-Sears store hybrid, Sears Essentials, was abandoned amid poor results and will be incorporated into the existing Sears Grand. Service levels were reduced in some stores.

Competitors, meanwhile, are taking more market share and expanding while Sears holds down spending on stores and promotions.

For the quarter, its stock shot up 18 percent in two days. Shares are now up modestly since the merger despite short term, cutting costs to improve profitability works for Wall Street. After Sears reported results on Wednesday, including an increase in profit margins and operating income in the fourth weaker sales.

But prospects for shoppers, and the 120-year-old retail legacy of Sears, Roebuck and Co., remain highly uncertain. The strategy of reducing assortments, curtailing sales promotions and cutting service is not sustainable, industry observers say.

“Eddie Lampert is shrinking in the face of an explosion by Target, Wal-Mart, Home Depot, Lowe’s, Best Buy and Penney’s,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. “The proposition he’s put together doesn’t work as a retail entity. As a retail entity, he’s disappearing.”

Lampert, who oversaw Kmart’s turnaround before engineering the $11.9 billion acquisition of Sears, says he’s not concerned.

In a nearly 6,000-word letter posted on the Sears Holdings Web site, he said he views the Hoffman Estates, Ill.-based company as “a $55 billion revenue, 350,000-person startup” and doesn’t fret about same-store sales sinking lower and lower. He said he wants to make it “a great company whose greatness is sustainable for generations to come” and invoked the names of General Electric and another well-known billionaire investor whom he acknowledged over a decade ago as one of his investing heroes.

“Warren Buffett makes clear that his goal is to increase the per-share value of Berkshire Hathaway,” he wrote. “Similarly, our goal is to increase the per-share value of Sears Holdings.”

The reclusive chairman avoids contact with analysts and reporters and declined to be interviewed for this story. But Lampert-watchers think there’s more evidence than ever that the hedge-fund operator and investing whiz wants to turn the company into an investment empire along the lines of Berkshire Hathaway, taking it far beyond retail — and maybe even out of retail altogether.

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