Edward Lampert & The Demise of Sears

Earlier this year, Sears acknowledged publicly for the first time that bankruptcy might be a possibility.  The two charts shown here document the financial deterioration over the past decade.  Many people have placed substantial blame at the feet of CEO Edward Lampert.  In Forbes last year, Adam Hartung wrote about the unwillingess of Lampert to welcome and listen to dissenting views.  

Source:  Company 10K Filings

Mr. Lampert had no time for staff who did not see things his way. Mr. Lampert wanted his management team to agree with him - to confirm his Beliefs, Interpretations, Assumptions and Strategies -- to believe his BIAS. By seeking managers who would confirm his views, and execute rather than disagree, Mr. Lampert had no one offering alternative data, interpretations, strategies or tactics. And, as Mr. Lampert's plans kept faltering it led to a revolving door of managers. Leaders came and went in a year or two, blamed for failures that originated at the Chairman's doorstep. By forcing agreement, rather than disagreement and dialogue, Sears lacked options or alternatives, and the company had no chance of turning around.

Source: www.bigcharts.com

Of course, others have argued that Sears' culture had become insular long before Lampert took over.   Fortune writer Geoffrey Colvin wrote about an incident in the early 1990s, when Edward Brennan served as the firm's CEO:

At this same time, shareholder activist Robert A.G. Monks launched a campaign to get elected to the Sears board and to reform its rules; he even ran a full-page ad in the Wall Street Journal headed “The Directors of Sears, Roebuck and Co.: NON-PERFORMING ASSETS.” When he was finally granted an audience with Sears CEO Ed Brennan in his 90th-floor office in the Sears Tower (now the Willis Tower), the functionary escorting Monks in the elevator reportedly said, “This is the first time bad news has made it above the 78th floor.” Star consultant Ram Charan asks CEOs if they’re hearing lots of bad news. Why? Every company has lots of bad news, he tells them, and if you’re not hearing it, something’s wrong.

Sears Acknowledges Possibility of Bankruptcy

Many of us have been predicting the demise of Sears for years.  The writing has been on the wall now for quite some time - falling sales, declining customer satisfaction, and many store closings.  Fortune reported this week that Sears is admitting (finally) that bankruptcy is a possibility. Phil Wahba of Fortune writes:

Sears Holdings has recognized for the first time that many people think the retailer is not long for this world.  In its annual report released on Tuesday, the retailer, which owns Sears and Kmart, said that its years-long sales declines, "indicate substantial doubt exists related to the Company's ability to continue as a going concern." In other words, many think Sears will go under.

Amazingly, Sears has lost nearly $10 billion in the last six years.  How long can they continue to sustain such losses?  Could they be headed to liquidation, not simply a restructuring under Chapter 11? Some think that may be the case.  For me, Sears represents what Harvard Business School Professor Jay Lorsch once described as a "gradual crisis."  Lorsch argued that firms struggle mightily when a threat emerges gradually and unfolds over lengthy periods of time.  They can find themselves rationalizing the threat and avoiding the hard truths.  No single event causes them to shake things up and shift direction in a major way.  By the time they begin to truly confront the threat, it's too late. They find themselves far behind the times, or simply unable to transform the organization that is so set in its ways.  

The Decline of Sears

I've been saying for years now that Sears is doomed to fail.  I just don't see light at the end of the tunnel.  The company's revenues have been dropping for years.  Multiple restructurings have attempted to pare costs, but none of these moves have recharged sales.  Adam Hartung has a good article for Forbes about the reasons for the decline under CEO Ed Lampert.   Two of the reasons cited by Hartung are: "micromanagement in lieu of strategy" and "seeking confirmation rather than disagreement."   For more on the latter point, here's an excerpt from Hartung's article:

Seeking confirmation rather than disagreement. Mr. Lampert had no time for staff who did not see things his way. Mr. Lampert wanted his management team to agree with him – to confirm his Beliefs, Interpretations, Assumptions and Strategies — to believe his BIAS. By seeking managers who would confirm his views, and execute rather than disagree, Mr. Lampert had no one offering alternative data, interpretations, strategies or tactics. And, as Mr. Lampert’s plans kept faltering it led to a revolving door of managers. Leaders came and went in a year or two, blamed for failures that originated at the Chairman’s doorstep. By forcing agreement, rather than disagreement and dialogue, Sears lacked options or alternatives, and the company had no chance of turning around.

I would one other key point to Hartung's insightful analysis.  The Sears decline began long before Lampert took over.  Yes, he has mismanaged the retailer and accelerated its fall toward bankruptcy. However, in many ways, the crisis at Sears stretches back decades.  Harvard Business School Professor Jay Lorsch has said that gradual crises are often much more dangerous than sudden crises. When a sudden jolt occurs, firms often mobilize resources and attack the problem with a sense of urgency.  However, when a decline occurs over many years, beginning with small decreases in performance, managers often find ways to rationalize the diminishing results.  Denial sets in during these crises that unfold over lengthy periods of time.  Sears seems the perfect example of what Lorsch calls gradual crises.  

It's Time for Sears to Sell Lands' End

Sears has been on a slow slide to extinction for some years, even decades.  Now we hear that Sears is considering the sale of its Lands' End business unit.  Well, it's about time.   Whenever we look at a corporate strategy, we have to ask the following question about each business unit:  Is it truly better off as part of this corporation, as opposed to being on its own or part of some other organizational arrangement?   In this case, you have to ask:  Does Lands' End benefit from being part of Sears?  Is it perhaps disadvantaged because it is part of a struggling retailer?  This article in Business Week makes a good case for why Sears should divest Lands' End.  Several good arguments can be made.  First, Lands' End could benefit from being a smaller, focused company with all attention focused on growing its online business (it already has a strong catalog business and a decent presence online).   Second, it would not be battling for capital within a larger corporation that has liquidity issues and clear capital constraints.   Third, the company may be able to attract more talent as a focused entity, as opposed to being part of a struggling giant such as Sears.  Does a young talented fashion merchandiser want to work for Sears?  Might they work for a Lands' End brand that is owned by a private equity firm instead?    Finally, Lands' End may actually be harmed because, as the article suggests, "Being close to Diehard batteries or Kenmore dryers doesn’t do much for an apparel line looking to burnish its fashion cred."  

Is The End Drawing Near for Sears?

The Wall Street Journal reports today that Edward Lampert, whose hedge fund ESL Investments Inc. controls over 50% of Sears' shares, will be taking over as the CEO of the company.   Lampert merged Sears and K-Mart several years ago, and he has been Chairman of the company since that time.  He succeeds a former IBM executive who ran the company for the past two years.  Before that, Sears had an interim CEO for three years.   Hmmm... That's a pretty long period of instability at the top, and now we will be continuing with a person at the helm who lacks retail industry experience.   Can Lampert turn this ship around, or is it too late?

Same-store sales have decreased for six straight years.  Sear lost $441 million through the end of the third quarter, and it expects to lose roughly $300 million in this quarter. Concerns have been raised about liquidity at Sears.  The firm is clearly in rough shape.

What should they do now?   I think Sears really has to think long and hard about what assets it has that are truly valuable and distinctive.  It's future must rest on building around those assets.   What is valuable and distinctive?  Craftsman and Kenmore appear to fit the bill.  Perhaps Lands End does as well.  After that, it's not clear that the firm has a future.  So, if I were thinking about the future strategy, I would be thinking about those three brands, rather than trying to preserve the entire traditional department store business.  Maybe the future is in small stores and/or an online retail presence that just sell Craftsman, Kenmore, and related brands, with Lands End sold off to another clothing catalog retailer.  For certain, the future does not seem to bright for the traditional brick-and-mortar business that they have been trying to preserve for years, amidst a clear and tragic decline. 

Sears Spinning Off Hardware Stores

Sears continues to struggle.  Yesterday, it reported a net loss for the last quarter of $2.4 billion. Same store sales declined during the quarter as well.   The firm announced that it will be bolstering its balance sheet by selling off its Sears Hardware stores (along with several other moves designed to increase cash).  I understand the move, given the liquidity concerns about the company.  However, I found one item in Chairman Lampert's letter to shareholders rather puzzling.  He described the third pillar of the company's strategy:

With regard to our third pillar, we still have a long way to go but Kenmore and Craftsman have held up relatively well, despite our overall company performance and housing builds and turnover continuing at relatively low levels.  In the fourth quarter of 2011, Kenmore maintained its market leadership in appliances, while Craftsman, too, gained market share.  But, market share alone is not enough.  When we think about brands, we think about brands like Nike and Apple, and we aspire to have Kenmore and Craftsman be the Nike and Apple of the appliances, tools, and lawn and garden industries.

If a key pillar of the strategy is to build the Kenmore and Craftsman brands, then why sell off the hardware stores?   Is Sears more known for and appealing to customers with regard to apparel or hardware?  Sears already had announced the intent to sell Kenmore and Craftsman products at other retailers.  Will the brands thrive if the hardware stores are spun off entirely?  Are there synergies that will be lost as a result of the sale of the hardware stores?  I don't know the answers to these questions, but I think management must address these issues and explain their thinking to investors. 

Can Sears be Saved?

The Wall Street Journal reports that Sears has hired Brookstone CEO Ron Boire as its new chief merchandising officer and president of the Sears and Kmart store formats.   Boire told the newspaper, "My focus will really be on creating more and better theater in the stores."  He also will attempt to better integrate Sears's stores, website and mobile-phone application.  ,He has a major challenge ahead of him.  According to the Wall Street Journal, "Sales at stores open at least a year have declined every single year since Mr. Lampert created the Hoffman Estates, Ill., company by merging Sears and Kmart in 2005."

What can and should Boire do to reverse Sears' fortunes?   Rather than proposing a specific answer, I would recommend an approach that might be fruitful.  I don't think Sears will turn itself around simply by making changes in the store experience, or in its ability to appeal to cross-channel shoppers more effectively.  Sears needs to take a top-to-bottom look at its entire business model.  Such an analysis would ask some fundamental questions to begin:


1.  Do Sears and Kmart belong together?   Do they help each other?  Are they truly more valuable together than apart? 


2.   Does Sears belong in all the product categories in which it competes?  Which categories are money-makers and which are money-losers?   What products still draw people into Sears stores?  (consider tools, appliances, etc.) 


3.  How many stores does Sears want/need in its network?  What's the optimal size of its store network?


4.  What's the optimal size/layout of a Sears store? 


5.  What are the right kinds of locations for Sears stores?  Does its mall-based strategy work effectively or not?


These kinds of questions must be addressed if Sears is to survive.  The firm has been on a long-term downward trajectory for years.  Minor adjustments won't save the company.  

Could Sears Become a Product Company?

The Wall Street Journal reports today about Sears' moves to expand the sales of its Kenmore line of appliances to other retailers, such as Costco. A decision to move in this direction offers peril and promise. On the one hand, Kenmore is a strong brand likely to sell at other retailers. On the other hand, every sale at another retailer diminishes foot traffic and associated sales at a Sears store.

The decision raises a broader long term strategic question though. Sears has struggled mightily in recent years. Some question whether it can ever reverse this slide. If that is true, perhaps Sears could gradually be transforming itself from a retailer into a product company. It already sells Craftsman and Diehard branded products at other retailers. Could Sears one day no longer be a retailer at all, but instead be a home and garden products firm with a stable of strong brands (Kenmore, Diehard, Craftsman, etc)? As the retail business continues to decline, this may not be so far fetched.