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WWD Stock Index Sags 2.2%

NEW YORK — Although news of the $11 billion merger between <B>Kmart Holding Corp.</B> and <B>Sears, Roebuck & Co.</B> created a market rally, it was not enough to rebuild losses the sector made early last week. <BR><BR>As a result, the <B>WWD...

NEW YORK — Although news of the $11 billion merger between Kmart Holding Corp. and Sears, Roebuck & Co. created a market rally, it was not enough to rebuild losses the sector made early last week.

As a result, the WWD Composite Stock Index tumbled 2.2 percent to 1,169.18 on Friday from 1,195.42 the previous week, while the broader S&P 500 showed a week-over-week gain of 0.4 percent to 1,170.34.

Kmart’s shares dropped 0.9 percent during the period to $104.99, while Sears skyrocketed 15.1 percent to $52.95.

On Friday, as Wall Street digested news of the merger, one question quickly emerged from analyst reports: Can two beleaguered retailers merge to make one viable player?

While it may be premature for a definitive answer to that question, analysts said the deal had its merits. In a research note from Sanford C. Bernstein & Co., the broadlines analysts described the merger as having a “strong strategic rationale.”

“Sears is currently trapped in a capital-consuming, but obsolete, on-mall real estate footprint,” they wrote. “Kmart real estate helps level the playing field with other hardline players. From the Kmart point of view, access to Sears’ brands provides its stores with a competitive advantage, differentiation, which it has sorely lacked in the face of strong discount competitors.”

The Bernstein analysts examined where Kmart and Sears stores overlap, as well as the demographics they serve. In their proprietary research, the analysts found about half of the Kmart store base, roughly 750 units, were within 5 miles of a Sears store, and more than 500 Kmarts were located within 3 miles.

“In order to limit sales cannibalization, we believe it is reasonable to assume that management of the combined company would initially focus on conversions of Kmart stores to off-mall Sears that are more than 5 miles from an existing mall-based Sears,” the analysts wrote. “Therefore, we can consider the number of Kmart stores outside of these proximities to be theoretical limits on the number of conversions in the early phase of the merger.”

Meanwhile, Wall Street will surely watch other aspects of the integration of these two retailers, which will have combined sales of $55 billion. All eyes are on Edward S. Lampert, chairman of Kmart and founder of ESL Investments, the hedge fund that bailed Kmart out of bankruptcy early last year.

Lampert will serve as chairman of Sears Holdings, the merged entity. In Kmart’s statement of the deal, the company said Alan Lacy, Sears’ current chairman and chief executive officer, will serve as vice chairman and ceo of Sears Holdings. Aylwin B. Lewis, the recently announced president and ceo of Kmart, will serve as president of Sears Holdings and ceo of Kmart and Sears Retail.

Glenn Richter, who currently serves as executive vice president and chief financial officer at Sears, will be hold the title of executive vice president and chief financial officer of Sears Holdings.

William C. Crowley, who is senior vice president of finance at Kmart (and also a Kmart board member) will step up to be executive vice president of finance and integration at Sears Holdings.

Kmart told Wall Street the new company will have a 10-member board of directors, “which will include a total of seven members of the current Kmart board and three members of the current [Sears] board.”

It’s unclear who will be picked from the nine-member Sears board to serve on the board of the merged company, but there are some heavyweights to choose from, including: Hall Adams Jr., former chairman and ceo of Leo Burnett Co.; Bill Bax, a former PricewaterhouseCoopers managing partner; and Hugh Price, president and ceo of the National Urban League.

Kmart’s current, 10-member board includes powerhouses such as Crowley, who also serves as president and chief operating officer of ESL Investments. Julian Day, former president and ceo of Kmart, is also a current Kmart board member. Prior to running Kmart, he served as chief operating officer at Sears.

On the vendor and merchandise front, sources in the beauty segment said they saw opportunities with the merger, the biggest being a retooling of the merged company’s offering to cater to ethnic consumers.

While such a strategy would require Sears and Kmart to make adjustments storewide, the beauty category presents one of the most significant areas in which the pair can win over Asian, Hispanic and African-American shoppers. “Kmart has an opportunity to bring the right beauty care products to ethnic consumers,” said Candace Corlett, a principal partner in WSL Strategic Retail, adding its competitors, namely Wal-Mart and Target, have yet to accomplish such a feat.

Procter & Gamble would not speculate on what impact the deal might have on its extensive business with Kmart, but a company spokeswoman did comment, “We value our relationship with Kmart and will continue to work to collaborate with Kmart to build its business and our brands.”

“Our hopes would be that Kmart stays committed to beauty,” said Joel Carden, senior vice president of sales and category management for Pacific World, makers of the Nailene nail care brand.

Not all observers are quite so optimistic. Industry consultant Allan Mottus, pointing to Sears’ aversion to beauty care, said that if history is any indication Lacy — who is reportedly still overseeing the Sears business — will likely steer clear of mass cosmetics. Should the two retailers pursue a strategy of hybrid stores, Kmart may retreat from beauty as well, noted Mottus. Sears abandoned the entire category, with the exception of fragrance and bath, after a failed attempt to build its proprietary Circle of Beauty brand. In so doing, Sears also walked away from a distribution deal with Avon’s BeComing brand.

— Arthur Zaczkiewicz and Molly Prior