Edward S. Lampert’s bid to pull Sears Holdings Corp. out of bankruptcy has been approved. But his work is far from over. In fact, the former Sears chief executive officer has been tasked with a seemingly impossible challenge: make the retailer a profitable company again, even though it saw revenues fall from $53 billion in 2006 to just $16.7 billion before it filed for Chapter 11 bankruptcy on Oct. 15.
With the obstacles that lay ahead, he’ll need more than business savvy to pull this off — he’ll need superpowers. Here are a few roadblocks Lampert and his team may face, and what they will need to do to pull them off.
Operating a Retailer Without Scale
Traditionally, retailers need scale, that is size, in order to compete. Christina Boni, department store analyst at Moody’s Investors Service, pointed out in a note after the decision was handed down that the new Sears will be lacking just that.
“Its core customer proposition still remains in question,” Boni wrote. “Further shrinking of the store base and cost reductions may be required as profitability remains elusive.”
Sears’ footprint went from 3,770 stores during its heyday more than a decade ago to fewer than 700 when it filed for bankruptcy, to roughly 425 today — and Lampert’s new business plans outlines the possibility of closing even more stores.
Even so, some say the smaller store fleet is not a bad thing.
Rob Riecker, Sears’ chief financial officer, testified during the bankruptcy hearing that having a smaller store footprint would actually increase profitability for the new company.
“The smaller footprint will allow us to buy the right amount of product for those stores,” Riecker testified on Wednesday. “As opposed to having stores where I’m trying to optimize the inventory and merchandise contained in those stores and starving other stores.”
He pointed out that Sears has had trouble negotiating with vendors within the last few years before filing bankruptcy. Fewer stores would allow the company to “properly structure the SG&A,” Riecker said.
But how will Lampert and his team know which products to sell in which stores? The company hasn’t exactly been at the forefront of determining consumer trends — at least not in recent memory.
Andrea Szasa, a principal at A.T. Kearney, said it’s all about rethinking retail. In fact, Szasa pointed out that it’s better to have a strong foundation than a bunch of extra stores that may serve as a “distraction.”
“At the end of the day what they really need to understand, if they go back to the core and are a retailer, what type of retailer should they be?” she said. “What is the new narrative of retail that they should be telling that they can really engage the consumer and can create a sustainable momentum?”
Szasa said the new company will need to focus on things that enable growth and innovation “and not trying to close patches on old narrative and an old business model that was clearly not working. It’s a new retail way of looking at things and it works.”
Operating a Brand With a Damaged Image
Throughout the course of the Sears bankruptcy trial, some could argue that the name Sears has become synonymous with failure. America’s once largest retailer had fallen from its throne, unable to pay its bills.
Now Lampert will have to convince the public that he was “acting in good faith,” all along, as his hedge fund said earlier this month in a statement. He’ll also have to convince people he’s a good guy and that they should continue shopping at Sears — or start.
Szasa argued that consumers are more open-minded than most people think. History, she said, is full of examples of brands that have cleaned up their image with lasting benefits. Just look at Nike and Under Armour, two brands that have had to do major damage control in the midst of the #MeToo movement.
The trick is for Lampert to follow through on his promises, or as Szasa said, “putting your money where your mouth is.”
“Customers have a history of showing that, if those promises are reflected in actual performance and an actual different proposition and something that actually talks to them, then they’re very open to rethink things,” Szasa said.
One way for the new company to do that — and connect and engage with customers in the process — would be to leverage the company’s strengths, like its legacy name and the customer data it has.
“There is a lot of richness there that can be leveraged,” Szasa said.
Operating a Store With Employees Who Have Been Traumatized
Throughout the four-monthlong bankruptcy process, 69,000 Sears and Kmart employees — now down to about 45,000 people — have been left wondering if and when they might lose their jobs. It’s safe to say that employee morale is low. Some employees might even be downright disgruntled.
The culture then will need to offer a new perspective that celebrates the iconic history of the brand.
“It has to be an environment that is nurturing enough that it is sustainable for current employees,” Szasa said. “They have to see the potential new leadership as new vision and a completely new and exciting way of doing things, instead of resisting. This probably is going to be a winners-losers game in which whoever is aligned with the vision and excited by the change will stay afloat.”
Operating a Department Store With Outdated Stores
It’s no secret that Sears lost its sense of style a long time ago.
Curating a perfect selection of goods in the era of online is going to be difficult. Craig Johnson, founder and president of Customer Growth Partners, said one solution would be to completely eliminate softlines, which includes apparel, and focus on what the company has going for it: like appliances and automotive.
Sears’ hardlines, however, may still be a viable business.
“There’s still a certain equity with consumers, a residual brand equity that’s all built around the hardlines categories,” Johnson said.
Finding the Best CEO to Lead the Company
Another criticism throughout the Sears bankruptcy has been Lampert’s lack of retail experience. In fact, Lampert’s resume includes finance and real estate ventures, but no retail prior to Sears. A noticeable absence for the former ceo of America’s once-largest retailer.
Some argue that this is why Sears fell into bankruptcy in the first place. Lampert joined Sears in 2005, during its peak.
The logical solution then would be for a new ceo to run the new-and-improved Sears — someone with retail experience. But it would also have to be someone with a proven history of turning around troubled companies.
And now the search may be on.
Kunal Kamlani, president of ESL and a member of the Sears Holdings board, testified during the hearing that the company was waiting until the hearing was over to fill senior leadership positions. He said this would give ESL the competitive advantage of finding the best talent — people that compliment the management team.
But Johnson argued that the leadership, especially the ceo, should be “a truly independent retail executive with turnaround experience… a real pro.”
“This is going to be a tough uphill climb,” he said. “The shareholders, they’d have to get onboard.”
Szasa added, “There’s a lot of energy that is needed to drive this transformation.”