NEW YORK — Edward Lampert has barely begun executing his plans for Sears Holdings Corp. — the result of the $11 billion merger he orchestrated between Sears, Roebuck & Co. and Kmart Holding Corp. — and already some naysayers have risen to poke holes in his strategies.

To be sure, the chairman of Sears Holdings is known more for his artful deal-making than retail experience, which caused many experts to wonder whether the merger, which closed in March, was above all a real estate deal. And some analysts see signs that Lampert may not be focused on building a powerhouse retail chain.

“The minimum information coming out of the company indicates that management is more interested in generating cash flow than in redefining the retail landscape and emerging as a competitive threat to existing retailers such as Wal-Mart, Target and J.C. Penney,” said Christine Augustine, a retail analyst at Bear Stearns, who published a research note on the firm on Thursday. “Sears Holdings has yet to announce a retail turnaround expert to head its management team and we haven’t seen evidence of investment in systems and a distribution network to increase productivity … to become competitive.”

Sears Holdings chief executive officer, Alan Lacy, is not a turnaround expert nor does the company’s board, which consists primarily of former Kmart members, have strong retail operational skills. Augustine also sees the company losing talent to other retailers, which are taking advantage of its condition.

Augustine also cited these problems:

This story first appeared in the June 22, 2005 issue of WWD. Subscribe Today.

  • The operating performance of Sears Holdings trails its rivals.
  • Chronic out-of-stocks at Kmart and a lack of an investment in distribution and network and supply-chain technology.
  • Inadequate inventory management, merchandise planning and allocation systems at Sears.

Nonetheless, Augustine initiated coverage with an outperform rating and a 2005 year-end target price of $169. On Tuesday, Sears Holdings closed at $153.75, down $1.68 in Nasdaq trading. “Our thesis is based on valuing Sears Holdings as a portfolio of assets and a cash generator instead of a fundamental retailer,” she wrote.

A Sears spokeswoman said the company doesn’t comment on analyst reports. But at a news conference in March, Lampert said the goal is to bring the best of Kmart to Sears and vice versa. There are also plans to convert some existing Kmart stores to Sears Grand stores.

Howard Davidowitz, chairman of Davidowitz and Associates, a national retail consulting and investment banking firm here, said Lampert’s retail accomplishments so far have been reducing assortments, cutting promotions, cutting service, raising prices and dramatically reducing inventory.

“Under his reign, Kmart’s negative comp-store sales grew larger than ever in Kmart’s history,” he said. “The chain was down an average of 13 percent per year for three years. In addition, he didn’t build one store, he only closed and divested stores. He sold some of his best stores to Home Depot.”

Apparel is a weak link at both chains, which lack strong merchants. Kmart has never had a strong apparel culture, although it’s developed several proprietary lines such as Thalia Sodi, Route 66 and Jaclyn Smith. Kmart also began selling Levi’s Signature jeans in the first quarter.

Sears carries Lands’ End, which industry experts speculate may go on the block, A-Line, Laura Scott, Sugar Reef, Hane’s, Apostrophe and Rena Rowan.

Augustine, who called the brands outdated, suggested that Kmart and Sears lose the fashion altogether. She noted that turning around the apparel business is a multiyear process with no guarantee of success.

“Vendors may decide to not distribute their products through Sears, much like Nike did,” she wrote. “We believe that Nike decided to stop selling to Sears because the retail strategy is unclear and because Nike didn’t like the prospect of seeing its product at Kmart after the merger.”

Walter Loeb, a retail consultant here at a firm that bears his name, said: “The apparel business brings repeat business and brings people back into the store on a more frequent basis. Sears has been very weak. The only brands they’re known for is Craftsman, Diehard and Kenmore. People come into the store for those every 16 years.”

“We’re not going to be looking for fault lines,” said a Levi’s spokesman. “We’re somewhat new and we’re in an expansion mode at Kmart. We don’t have a full two quarters under our belt and are in a fraction of their stores. We sell the Levi’s brand to Sears.”

If apparel is a difficult business, consumables and food doesn’t seem much easier. According to Bear Stearns’ proprietary pricing survey, Kmart’s pricing in the consumables area can be as much as 20 percent higher than Wal-Mart or Target. At Sears Essentials, a new off-the-mall concept, prices will also be uncompetitive, Augustine said.

Sears Grand, a 200,000-square-foot store selling food, health and beauty aids, among other categories, is another new concept. Davidowitz questions its chance of success in light of Wal-Mart’s aggressive dominance of the food industry. “Sears has no food infrastructure,” he said. “Sears will have to pay 14 percent to the food wholesaler.”

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