HOFFMAN ESTATES, Ill. — Edward Lampert wants Sears Holdings Corp.’s apparel business to be sleeker, speedier and more stylish.
This story first appeared in the May 7, 2014 issue of WWD. Subscribe Today.
And he wants to make it all happen within a smaller footprint.
Speaking at a press conference following the retailer’s annual meeting at its headquarters here Tuesday, the chairman, chief executive officer and largest shareholder of the company said, “There is too much space at Sears dedicated to apparel. We need to be more effective with all our constituents or more effective with one or two. We are evaluating who our core customers are going to be. We can’t be all things to all people, but we want to serve the entire family.”
At Sears and Kmart stores, the company considers apparel “an important business for us” and is in the midst of “accelerating our sourcing pipeline for fashion, recognizing that many apparel retailers are competing on speed, price and fashion,” Lampert said. “We’ve made some talent changes with a focus on doing that.”
The company last month appointed William Hutchinson, formerly of Dell Inc., senior vice president and president of supply chain for Sears and Kmart.
Instead of bulk orders to cover an entire year’s worth of selling, the retailer is looking toward more frequent, smaller fashion buys. “It’s cheaper to make a decision 50 weeks out,” he said. “But that’s offset by the inability to learn — you make a mistake and it costs you a year.…We’ve been deliberate, and aggressive, in bringing talent comfortable in that faster environment,” said Lampert.
The decision to spin off Lands’ End earlier this year, after the fashion subsidiary reported a 58 percent increase in net income to $79 million in 2013, came about because “it was not maximizing its potential inside Sears, and also to make Sears more focused,” Lampert said.
Kmart will continue to roll out personality-based and social media-oriented lines like those dedicated to Adam Levine and Nicki Minaj within its softlines offering, the ceo said. Sears stores also will continue to offer apparel but probably not the 40,000- to 70,000-square-foot sections traditionally found at the retailer during the 20th century, especially now that specialty competitors are operating within considerably leaner, 5,000- to 10,000-square-foot spaces.
All told, and including Sears Canada, apparel and soft home furnishings accounted for $11.36 billion in sales last year, or 31.4 percent of the merchandise and services total of $36.19 billion. At Kmart, they accounted for 32.6 percent, or $4.3 billion, of sales of $13.19 billion; at Sears U.S., the share was 27.1 percent, or $5.2 billion, and at Sears Canada the figure was 49.2 percent, or $1.87 billion, of $3.8 billion.
During the meeting, Lampert attempted to put Sears’ 2013 losses of $1.37 billion into the context of a “transformation” that will bring it to profitability, rather than a turnaround that simply modifies existing practices.
“There is a legitimate disconnect between our financial results and the work we’ve been doing,” he told shareholders, acknowledging that “it’s fair criticism to say, ‘You’re doing all this stuff, and maybe it will work and maybe it won’t, but look at your financials.’
“Transformation requires you to say, ‘The old solutions don’t work,’” he added.
Sears, he argued, had taken the transformative path, embracing fundamental change through more aggressive pursuit of online retailing, the continuing rollout of the Shop Your Way member program, subletting of store space to and through partnerships with other retailers and divestitures of subsidiaries like Orchard Supply, Hometown Outlet and, most recently, Lands’ End.
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Sears Holdings has closed more than 500 stores since 2005, which collectively had lost $100 million in their last 12 months, although board members and others had urged Lampert to close “hundreds more,” he said. “We’ve been ridding ourselves of stores that were not performing and focusing on our well-performing stores and our Shop Your Way program.”
In some cases, though, he saw potential for low-performing stores and kept them open. In undergoing this retrenchment, the company has not closed nearly as many stores in high-end locations as people sometimes think, Lampert said, noting that Sears Holdings has stores in 41 of the top 100 malls in America, as rated by Goldman Sachs, down from 42 in 2007, and has stores in 39 of the top fashion malls as rated by Morgan Stanley, down from 41 in 2009.
He acknowledged that “in some cases, we were the last survivor in a mall that had died years earlier.”
Supporting his transformation thesis, Lampert presented case studies of other companies that had sustained years of significant losses and later reinvented themselves. Apple Computer, now Apple Inc., saw revenue fall from $9.8 billion to $5.9 billion between 1996 and 1998, he said, and by 2003 the company was barely profitable. And it didn’t turn around because its personal computer business rebounded, he noted.
Similarly, General Dynamics survived a nosedive from $10 billion to $3 billion in revenue from 1990 to 1995 after the Cold War ended, but the company divested itself of businesses, lowered capital expenditures, and today it’s earning more than $30 billion, he said. When Eastman Kodak saw that photography was going digital, the company invested heavily in research and development and later reaped its rewards.
“There are certain disciplines great companies undertake to build a brighter future,” Lampert said. “Sometimes it’s not so obvious at the time” how the changes in direction will bring profitability.
The Shop Your Way program provides members with a reward program, a social commerce platform, a marketplace with more than 120 million products — up from 40 million two years ago — often sold by third parties, and free shipping through Shop Your Way Max, Lampert said. “We’ve been very focused on serving members, providing products they want and very focused on price,” he said.
Store managers around the country joined a video conference at the meeting to tell shareholders how the company’s integrated retail network operates, including in-store kiosks that enable associates to help customers order items they can’t find in-store, the ability to order online and pick up items at curbside from a specially designated parking spot, and the ability for associates to e-mail a summary of items a customer asked questions about in-store, so they can think more about their potential purchase at home.
Lampert said he sometimes shows up unannounced at stores so that he can see them the way any Shop Your Way member does, which he acknowledged is probably “unnerving, but you’ve got to be prepared for anything” as a Sears or Kmart associate. “We’re very proud of our stores,” he said. Addressing critics of the company’s overall service, he added, “We don’t get it right every time. But it’s very easy to cherry-pick and create a false impression.”
In response to questions from shareholders, Lampert added that the company has added personnel and changed processes in order to ensure fewer screw-ups in shipping products. One shareholder noted that he had been sent Converse sneakers with the theft-prevention lock still attached, for example.
“We’ve got to improve our process,” the ceo responded. “We believe these things are going to happen less and we will know about it sooner.…I’m not unsensitive or insensitive to these issues. They bother me a lot. We think with the right leadership and the right oversight, we’re going to be doing it better.”
Although Sears doesn’t disclose income from real estate, it’s been rising and is “likely to go up further,” Lampert said. “We’re likely to do more deals. We’re open for business. We know we’re very well located.…Our stores are going to be around for a long time. But how they’re going to be used is going to be very different.”
As for subleases, “There are always conversations going on.…Retail historically has been very controlling: ‘This is my store and my format.’ This is why I call it a transformation and not a turnaround. We’re rethinking the way we do business.”
He described as “very tricky” the determination of whether to sell a store, keep as is or perhaps sublet a portion.
“We probably have more space than we need. In some cases we lease part of the space; in some cases we sell. We have great real estate.…Will we be operating more or less stores five years from now? It’s hard to say. If it’s more stores, it will be different types of stores with hybrids of our brands and others,” Lampert said.