Lampert Rallies Team as Sears Net Plummets

Retailing is a corporate contact sport, but hedge fund titan Edward Lampert, quarterback — chairman, that is — of Sears Holdings Corp., has taken the analogy a step further, comparing the company with the upset Super Bowl winners, the New...

Retailing is a corporate contact sport, but hedge fund titan Edward Lampert, quarterback — chairman, that is — of Sears Holdings Corp., has taken the analogy a step further, comparing the company with the upset Super Bowl winners, the New York Giants.

Identifying with regular-season criticism of quarterback Eli Manning, Lampert said Thursday in a letter to shareholders: “We know what it’s like to be underestimated and questioned, but we intend to keep working on our game to achieve our full potential.”

Lampert even suggested that some of the company’s popular brands, which range from Lands’ End to Craftsman tools, might be sold at other retailers.

It’s unclear how far along in the season the corporate parent to both Sears and Kmart is, but it is one of the tough times: Fourth-quarter profits fell 47.5 percent as the company held an oversupply of inventory in apparel and cut prices in the face of slowing sales.

For the three months ended Feb. 2, net income dropped to $426 million, or $3.17 a diluted share, from $811 million, or $5.27, in the same period last year, on sales that slid 6.8 percent to $15.1 billion from $16.2 billion. Same-store sales decreased 4.5 percent.

The gross margin rate dropped to 27.7 percent from 29.7 percent. For the year, net income slipped 44.6 percent to $826 million on a sales decline of 4.3 percent to $50.7 billion.

To approach anything like the Giants’ come-from-behind victory over the undefeated New England Patriots, Sears will have to figure out how to boost its profits or grab market share from rivals such as Wal-Mart Stores Inc., Target Corp. and J.C. Penney Co. Inc. Each chain struggled with the same macroeconomic pressures — falling consumer confidence, a housing slowdown and higher prices — but turned in better results.

Target and Penney’s reported fourth-quarter profit declines of 8.2 percent and 9.9 percent, respectively, as discount heavyweight Wal-Mart managed to boost its bottom line 4.1 percent.

“Our profit margins continue to lag our competitors,” Lampert said in the letter. “We intend to manage the company’s expenses and our inventory position more tightly in 2008 in order to improve our productivity on both fronts. We will continue to work to improve our game.”

This story first appeared in the February 29, 2008 issue of WWD.  Subscribe Today.

That might mean a fresh playbook for the Hoffman Estates, Ill.-based retailer, which is searching for a new chief executive officer and has already restructured, shifting its corporate model to a holding company that owns five types of operations, including brand businesses and real estate businesses.

Lampert lauded Sears’ Lands’ End brand, which reported a 12 percent jump in profits in its direct business last year, and said the company needs to reach customers with products and services.

“We need to be prepared to supply them where and when our customers want. In many cases, that may not be exclusively through our stores,” said Lampert. “Instead, it could be online, via catalogue or possibly even through other retail outlets.”

Goldman, Sachs & Co. analyst Adrianne Shapira said the company’s performance was “subpar” given the continuing deterioration of sales, gross margins and expenses. She described the stock’s long-term outlook as “challenging.”

“We haven’t seen tangible evidence of ‘Act 2’ or a top-line turnaround take shape,” Shapira said. “As such, we maintain our ‘sell’ rating.”

At the end of the quarter, Sears Holdings reported a lower cash position. Cash and cash equivalents were $1.6 billion, which compares with $3.8 billion at the close of the previous year’s quarter. “For the year, the significant uses of our cash included $2.9 billion for share repurchases, approximately $580 million in capital expenditures, debt payments (net of new borrowings) of approximately $600 million and approximately $220 million of contributions to our pension plans,” the company stated.

Sears Holdings also is looking for a way to invest profitably in its own stores.

Citing a hypothetical example, Lampert, ever the money manager, noted that, if a $200 million investment in stores doesn’t boost profitability, it makes more sense to invest that money where it could earn 3 to 5 percent.

The question then becomes why the retailer can’t find ways to invest in stores profitably, he said.

“That’s exactly the problem we have been working to solve, and we will continue to work until we solve it,” he said. “Until then, we will seek to be responsible with our shareholders’ capital.”

Lampert’s letter wasn’t enough to keep investors from pushing the company’s stock down 0.2 percent to $101.40 on the Nasdaq exchange Thursday. Sears, however, did outperform the S&P Retail Index, which fell 3.2 percent. The stock’s 52-week high is $195.18 and the low is $84.72.

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