Sears Sees More Tough Times Ahead

Sears Holdings Corp. is on the hunt for big talent and big ideas to stem the slide in its profits and sales ??? but it doesn't expect things to get...

HOFFMAN ESTATES, Ill. — Sears Holdings Corp. is on the hunt for big talent and big ideas to stem the slide in its profits and sales — but it doesn’t expect things to get better anytime soon.

This story first appeared in the May 6, 2008 issue of WWD.  Subscribe Today.

During the retailer’s annual meeting here Monday, chairman Edward S. Lampert focused on the fact that the group has cut its debt and not overexpanded, unlike many fellow retailers, instead concentrating on specific problems at Sears and Kmart. While many competitors have doubled their debt to expand their footprint — adding 500 million square feet of retail space in the past five years — Sears has reduced its debt 47 percent since 2004, he contended.

“Look at Home Depot, Kohl’s and Lowe’s, with their significant expansions,” Lampert said. “They have not seen their shareholders richly rewarded.”

But Sears Holdings’ shareholders have suffered a roller-coaster ride themselves. While the company’s shares soared in the period after Lampert created the group, they fell sharply last year before recovering slightly over the last few months. On Monday, Sears Holdings’ stock closed down 3 percent to $100.08. The stock peaked at $191.93 in April 2007 and sunk to below $90 in January before recovering to its current level.

Fiscal 2007 financial performance fell below expectations and Sears Holdings emerged from the holiday season with excess inventory, particularly in apparel, leading to costly markdowns.

For the fourth quarter ended Feb. 2, Sears Holdings reported that profits fell 47.5 percent to $426 million from $811 million a year ago, while revenues slid 6.8 percent to $15.1 billion from $16.2 billion.

For the full year, Sears’ net income fell 44.6 percent to $826 million, as sales slipped 4.3 percent to $50.7 billion. Sears noted fiscal 2006 revenues of $53 billion included 53 weeks, while fiscal 2007 had 52 weeks.

“We are not banking on any significant recovery and expect conditions to remain tough through the balance of the year,” Lampert told the estimated 200 people gathered at company headquarters here.

Bright spots for Sears Holdings include the Lands’ End brand, which saw record profits in 2007 and was expanded to 100 Sears stores. (Lampert did not break out sales figures.)

Going forward, Sears Holdings will focus on three areas to turn around its businesses: protecting margins, optimizing promotions and pricing and better managing how goods are bought and sold, he said. Sears sources apparel from 47 countries.

Lampert said Sears Holdings’ restructuring into five distinct business units, announced in January, should enable the company to improve accountability and productivity of all assets from brands to real estate to home services. Jim Barr, who headed up Microsoft’s shopping portal, MSN.com, is now president of Sears’ new online unit. The other four major units include real estate, operating businesses, support and brands.

There is no firm timetable for naming leadership to lead each new business unit, but Lampert said the brands unit is key. (Sears’ search for a chief executive officer is under way and W. Bruce Johnson, who was named interim ceo and president in February, continues in that capacity.)

During the three-hour shareholder meeting, several questions were geared around brands and the opportunity for “alternative distribution” channels for famed exclusive brands like Craftsman tools and DieHard batteries. Lampert said it’s premature to discuss whether Sears would consider offering those products through competitors like Wal-Mart or Target. However, he did note Target sells a lot of iPods, manufactured by Apple, which has its own stores and appeals to a different shopping demographic.

“If by interacting with others, we are able to drive more innovation, more awareness, it may help the performance of that brand in our own stores,” he said.

Whether talking product, merchandising or sales, Lampert repeatedly referenced Sears’ need to attract top talent to its leadership ranks.

“We are trying to build a culture here where there will be a long succession of senior management that will be developed from within,” Lampert said. “We will figure out how we can bring in great talent — people who would otherwise go to Goldman Sachs, McKinsey or Google. We need to make those types of investments [in people].”

Several shareholders raised concerns about the shopping experience in stores, ranging from poor lighting and climate control to feuding employees in plain sight of shoppers. While Lampert seemed to dismiss those anecdotes, calling them “anomalies,” he did say improving the customer experience is a priority.

Johnson said an “executive customer service response unit” has been formed to address customer issues. He said one of the biggest “aha” moments of taking on the role of interim ceo came from reading customer complaints. “It was painful to read some of those letters,” he told reporters in a media briefing following the shareholders’ meeting.

Executives are assigned one customer complaint to resolve personally, Johnson said. Once the issue is resolved with the individual, the executive then drills down to better understand the systemic root of the problem and propose corrective measures.

Karen Austin, executive vice president and chief information officer, said the 128 scheduled technology projects for 2007 — such as getting Kmart and Sears on a single PeopleSoft payroll system and SAS markdown management technology — were completed on time.

“We retrieve store level data hourly and our biggest user is right here,” Austin said, motioning to Lampert. “And if it’s not on time, we know it.”