BREAKING THE CIRCLE: SEARS TO PULL THE PLUG ON BEAUTY THIS FALL
Byline: Evan Clark / With contributions from Faye Brookman / Laura Klepacki
NEW YORK — In an abrupt change of course, Sears said Tuesday it will exit the cosmetics and skin care businesses, ending a six-year odyssey to gain a national reputation in beauty.
The retailer is dismantling its proprietary Circle of Beauty and Studio Makeup brands and discontinuing all other manufacturer-supplied color lines. It is also backing out of its deal with Avon Products Inc. to carry the new retail concept BeComing in 125 doors this fall.
Alan Lacy, Sears chairman and chief executive, said in a statement, “As work on improving the performance of full-line stores progresses, it has become clear that a broad cosmetics business no longer fits with our financial and strategic objectives for Sears full-line stores.”
The decision to scale back beauty, said a spokeswoman for the retailer, “is part of an ongoing Sears strategy [to examine] the long-term potential of various categories.”
She said the firm is still evaluating what it will do with the space.
“We were pleased with Circle of Beauty, but it wasn’t contributing enough to the bottom line,” she said, adding that Sears is now working on the timing of its exit.
Sears launched Circle of Beauty in fall 1995 with 600 stockkeeping units. The in-store shops ranged from 500 square feet to 1,000 square feet, depending on the store. The intent was to help build Sears’s image as a softline retailer and give it an identity in beauty. Executives at the time referred to Circle, as “a national brand available at Sears.”
Along with the change, Vickie McClendon, Sears vice president and general merchandise manager of cosmetics, fine jewelry and accessories at Sears, has resigned. A successor has not been named. Meanwhile, the New York office for Circle of Beauty will be closed and store beauty associates will be reassigned to other departments, the spokeswoman added.
The move will effect an approximately $80 million charge, $53 million after tax, in Sears’s second quarter. By some Wall Street estimates, $30 million to $40 million of that charge went to Avon as settlement for exiting the deal. While terms of the agreement were not disclosed, Avon said the payment, which it received Tuesday, will be clearly recorded as an income item in its third quarter.
Investors reacted by pushing down shares of Sears 15 cents to close at $41.05 Tuesday. Avon’s shares dropped 79 cents to close at $44.46. Both securities trade on the New York Stock Exchange.
Sears currently sells its skin care and color cosmetics in 450 of its full-line stores and will continue to offer selected fragrances, bath and body products with an emphasis on gift and seasonal items in most of its full-line stores. It will retain its Time Out proprietary bath and body collection.
Mark Picard, analyst with Lazard Freres & Co., noted, “Changes in the softline component of the full-line stores shouldn’t be unexpected.” Speculating on the retailer’s decision, Picard noted the cosmetics business is very segmented and, “Maybe there’s not as much middle ground as they expected.”
Credit Suisse First Boston analyst Michael Exstein said, “Clearly, the company has hinted that there was a restructuring or a rethinking as to what businesses they should or should not be in.”
Exstein had expected the announcement to be “much more broad based” for Sears, though, adding that the timing of the Avon launch may have forced Sears to go one way or the other. Sears, he said, is going to see “more restructuring activity going forward.”
While the charge is relatively insignificant for Sears, which has annual sales of about $40 billion, Exstein noted these types of charges are adding up, since the company has “written off an awful lot” in recent memory. Including the charge revealed Tuesday, Sears has in the past five years, taken a total of $857 million in charges and spent $375 million on acquisitions, he said.
Wayne Hood, an analyst with Prudential Financial, in a research note, maintained his “buy” rating on Sears and highlighted some of the chain’s difficulties with the business. He noted, “Sears cosmetics business has been at a disadvantage since it lacks the major brands and can’t compete with the discount and drugstores on price.”
Hood added: “By our estimates, cosmetics generates a paltry $29 to $30 in sales a square foot, well below the company average of about $400 a square foot.”
Cosmetics sales, he said, account for about $50 million, or 17 percent of the $300 million of the total cosmetics, fragrances and bath category, and less than 1 percent of the firm’s overall sales.
Avon’s chief executive, Andrea Jung, who learned of Sears’s change of plans just days before Tuesday’s announcement, said she was “disappointed,” but stressed the upset had no affect on earnings outlooks for fiscal 2001 or 2002. Wall Street is looking for Avon to post earnings of 57 cents in the second quarter and $2.09 for the year.
The firm’s August launch of BeComing in 75 J.C. Penney stores is proceeding as planned. On a conference call with analysts Tuesday, Jung noted, “Our decision not to move ahead with Sears in no way diminishes anyone on this team’s commitment to the retail strategy.”
She added, “While this development will have an impact on the number of stores we’ll reach in the very early stages, it’s important to remember that our move into retail has always been long-term, not short-term, and we’re calling this a marathon — certainly not a sprint.”
The settlement payment also gives Avon considerable breathing room to retool its strategy. Jung told analysts, while Avon hasn’t yet talked to any retailers about taking Sears’s place, “I’m very confident that we’ll find another partner or partners.” The ceo added that Avon will be looking at mall retailers of some size.
“I certainly think that a couple of hundred [stores] is a requisite,” she said.
William Steele, an equity analyst with Banc of America Securities, said that the retail initiative “is just such a small part of the puzzle” for Avon.
Last year, Avon posted a net income of $159.3 million, or 16 cents a share, after extraordinary gains, on $1.65 billion in sales.
Avon initially was looking for $150 million to $200 million in first-year sales from BeComing, including the Sears stores. It could not be learned what J.C. Penney’s contribution alone would be.
“While we’re very pleased at the launch of BeComing and we like the initiative, we don’t have any real material earnings for this year, next year or the year after built in,” Steele said, referring to the retail launch.
A spokeswoman for Penney’s said the company is “excited about its partnership with Avon,” but doesn’t have any immediate plans to expand its program with BeComing because of the Sears announcement. “We are committed to the initial agreement, that is, 75 stores. This is a test for us. We will see how that merchandise performs before we eye bigger and brighter horizons.”
Avon retail president Steve Bock said the initial agreement was to keep BeComing exclusive to Sears and Penney’s for 2 1/2 years. But with Sears pulling out, he said, “that no longer exists.”
He said there are opportunities for the BeComing brand with other U.S. retailers, which Avon plans to explore.
“Our options are many and we will very diligently examine all of them,” said Bock. Sears’s decision to withdraw from cosmetics has implications for brands beside Avon. For several small color lines, like Color Me Beautiful and Fetish, Sears represents a sizable business. Fetish, a relaunched teen brand from New Dana Perfumes Corp., had a fixture designed specifically for Sears, its largest customer.
The Sears beauty department was an atypical mix of private label, prestige and drugstore brands. In addition to Circle of Beauty, Sears offered Studio Makeup, a private label line with a makeup artist-type look that targeted young women.
Candace Corlett, a partner in WSL Strategic Retail, a consulting firm, said she is somewhat surprised by Sears’s shift in direction.
“I thought the ‘softer side of Sears’s strategy was where Sears needed to go,” she said. But she recognizes that to support a beauty staff without the help of a manufacturer can be prohibitive.
Thomas Winarick, president of Prestige Cosmetics, which manufactured the Sears Studio Makeup line said, “We have a great respect for the beauty team at Sears. They tried their best and everybody did what they could within the operational world they had. But customer perception is customer perception, and ultimately the customer decides. You can lay it all out and either they come or they don’t.”
The demise of Sears beauty, he commented, “had nothing to do with a lack of effort or lack of vision. It was just the numbers.”
With Sears retreating on cosmetics, Corlett surmised shoppers will likely gravitate to mass stores like Wal-Mart or drug chains for traditional cosmetics brands, or possibly an Avon mall kiosk.
Sears withdrawal from color comes at a time when several other retailers have begun to launch private label cosmetics. Target, Wal-Mart, CVS and Eckerd have all recently added proprietary colors, and other chains, including Duane Reade, are expected to get into the fray.
One beauty executive questioned the future of the other retailer private label brands in the wake of the Sears retreat. He commented, “It is hard enough to build a beauty brand with national support.”