Sears Holdings Corp. is the latest company to join the store-closing game that is likely to be a major feature of retailing in the year ahead.
The company on Tuesday said it expects to close between 100 and 120 Kmart and Sears full-line stores, or 5 percent of its 2,200 full-line store locations. It joins the ranks of specialty women’s chains Talbots, Coldwater Creek and Christopher & Banks, which are cutting their store base by 12 to 15 percent each. In addition, Gap Inc. said at its annual investors meeting in October that it plans to shave 189 locations from the brand’s nonoutlet fleet in North America, reducing it to 700 stores by the end of 2013.
The planned closures indicate the increasing squeeze on retailers that have struggled through the holiday period, and even before. And Sears is perhaps among the most pressured of them all, as the strategy of chairman and owner, hedge fund billionaire Edward Lampert, misfires in the current consumer environment. Further evidence of Sears’ financial woes came Tuesday, when the company said it expects to record a noncash charge of $1.6 billion to $1.8 billion in the fourth quarter in connection with a valuation allowance on certain deferred tax assets.
Sears’ two chains have been declining for years, and the period leading up to Christmas proved no better. In a statement that provided an update on its quarter-to-date performance, Sears said comparable-store sales for the eight-week and year-to-date periods ended Dec. 25 for Kmart fell 4.4 percent and 1.8 percent, respectively. The company said the declines reflected drops in the consumer electronics and apparel categories and lower layaway sales.
For Sears domestic stores, comps for the quarter-to-date dropped 6 percent and for the year-to-date were down 3.3 percent. The decrease at Sears was attributed to lower consumer electronics and home appliance sales. Apparel sales at Sears were flat, but were up midsingle digits at Lands’ End.
“Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce ongoing expenses, adjust our asset base and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail — at the store, online and in the home,” said Sears chief executive officer Lou D’Ambrosio.
The ceo said the store closures are expected to generate $140 million to $170 million of cash as the net inventory in the stores is sold. It also expects the sale or sublease of the locations to be shuttered to generate more cash for its balance sheet. Excluding the impact of store closures, the company expects to reduce peak inventory in 2012 by $300 million from the 2011 level of $10.2 billion at the end of the third quarter.
Including store closures and inventory reduction actions, peak inventory in 2012 is expected to be reduced by $500 million to $580 million, which would reduce peak borrowing needs by $300 million to $350 million in 2012, the company said. Sears also plans to reduce fixed costs by $100 million to $200 million.
Sears said, “While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment. We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.”
The company said it expects to report fourth quarter and full-year results “on or about Feb. 23, 2012.”
Analyst Gary Balter of Credit Suisse said that Sears’ announcement “point[s] to deepening problems at this struggling chain and renew worries about Sears’ survivability.”
Sears said that it expects fourth-quarter consolidated adjusted earnings before interest, taxes, depreciation and amortization will be “less than half of last year’s amount.” Last year the firm generated $933 million of adjusted EBITDA in the quarter, with $795 million from U.S. operations and $138 million in Canada.
Balter, who noted that the EBITDA projection does not include pension expenses, said that despite the measures unveiled to sustain cash flow, “[W]e do not see how they dig out of these problems. The shoe to watch is the supplier shoe, as to date vendors are still shipping.”
The analyst lowered the price target of shares of Sears stock to $20, but said, “We...believe if we see that level, it will be a stop on the way to liquidation.”
Shares of Sears plummeted 27.2 percent in over-the-counter trading Tuesday, down $12.47 to close at $33.38.
Not everyone believes that Kmart and Sears are old and tired nameplates — provided Lampert can get the strategy on track and begin to invest in the retailer rather than simply cut back.
Marc Beckman, ceo and founder of Designers Management Agency, believes there is still a reason for the two nameplates to exist. “Kmart and Sears are the only game in small towns, but [owner Edward] Lampert needs to do some soul searching and surround himself with a team that really understands what the American public is looking for.”
Walter Loeb, retail consultant of his own firm and former senior retail analyst at Morgan Stanley & Co., said, “I think this is just the beginning....We have seen for the past five years that what Edward Lampert has been trying to do doesn’t work. As Sears rationalizes its business, it will eventually close many more stores. They need to develop a new formula and be innovative in their thinking. There is still a lot of improvement that can be done.”
Lampert heads up hedge fund ESL Investments, which in 2003 bailed Kmart Holdings out of bankruptcy proceedings. Kmart’s roots go back to 1897 when Sebastian S. Kresge invested in two five-and-dime stores and named them S.S. Kresge. In 2005, Lampert orchestrated the $12.3 billion acquisition by Kmart of Sears, Roebuck. The combined entity became Sears Holdings, of which Lampert is chairman.
Loeb said that while neither the Kmart nor Sears nameplate is great, Sears probably has more brand value. He foresees the possibility of “closing the Kmart name completely, and that Sears will eventually sell off Lands’ End.”
Richard Warren Sears started a mail order catalogue business selling watches, and later joined forces with Alvah C. Roebuck. The business became known in 1893 as Sears, Roebuck & Co., and the first Sears general merchandise catalogue was printed in 1888. Lands’ End, which has origins as a sailboat equipment company, was acquired by Sears, Roebuck in 2002 for $1.9 billion.
Robert Passikoff, founder and president of brand and customer loyalty research and strategic planning consultancy firm Brand Keys, said, “You only close stores when people are not coming in, so clearly Sears needs to revamp the stores in terms of brands because it isn’t just a matter of location and perceived values anymore.”
He explained that while Craftsman for tools, Kenmore for appliances and Diehard for automotive batteries remain the top brands that Sears is known for, many other brands in the stores don’t really hold much cachet. Destination brands Lands’ End at Sears and Joe Boxer and Jaclyn Smith at Kmart are all available online, which means consumers have less of a need to head to actual brick-and-mortar stores to buy what they want.
According to Brand Keys, both Sears for department stores and Kmart in the discounter arena rank at the bottom of their respective categories.
“They do badly in all areas of the shopping experience, from customer service to merchandise to pricing. Sears cut back on Christmas decorations. That hurt the consumer shopping experience [during the holidays], which is a big differentiator for retail,” Passikoff said.
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