SEARS GETS TOUGH WITH ITS SOFTER SIDE
Byline: David Moin
HOFFMAN ESTATES, Ill. — Sears, Roebuck & Co.’s $9 billion softer side has been pounding Seventh Avenue.
But now — after 18 months of weeding out and muscling suppliers for better quality and prices, culling labels with little distinction, and pumping up product development — Sears chairman and chief executive Alan Lacy has a message to soften the blows.
“Narrowing the vendor base should be substantially done by the end of this year,” stated Lacy, ceo of the $40 billion Sears since October. “It’s not been an easy process. It’s substantially behind us. This is an important year. Our softlines business needs to bear fruit.”
No bumper crop is expected this year, particularly in light of the economic slowdown and Sears’ announcement on Monday that Mark Cohen, president of softlines and chief marketing officer, who was leading efforts to revive the lagging apparel business, was shifted to Sears Canada, as chairman and ceo. That could stall the progress and adds uncertainties about future directions. A new soft goods chief is being sought.
Lacy, formerly Sears president of services, has a financial background — he’s not a merchant — and was rewarded the ceo post for successfully turning around Sears’ credit operation, which has become highly profitable and the envy of the industry. Nevertheless, in an interview with WWD last week, Lacy spoke at length about Sears’ apparel business and sounded confident in predicting a mild reversal in the chain’s apparel trend, from slightly negative to flat last year, to slightly positive this year. “Cleaner” inventories for spring could give a lift, he said.
He also quelled speculation, undoubtedly arising from the vendor upheaval, that Sears would consider dropping apparel entirely. “It’s extraordinarily important, economically,” he stressed, even if it’s not nearly as lucrative as Sears hardlines, credit and service operations.
He had other good news. “This year, we’re gaining [department store] square footage,” meaning some additional Sears doors to sell. “We are opening more stores [nine] than we are closing [four]. And yes, we would love to get some opportunities out of Wards. We’re looking at their sites, and at Bradlees too.” He didn’t specify how many.
Target, Federated and Kohl’s are also examining Wards and Bradlees, which are both liquidating and selling off assets.
“Last year was a big change in a lot of our apparel assortments,” Lacy explained. “One of the good things that did come out of it is that our apparel inventories are about $70 million lower. We ended the year very clean, which means we start the new year with fresher inventory than we’ve been able to in a long time. Mark [Cohen] was very driven and focused on having a very clean inventory position at the end of the year.
“Our apparel comps last year — flat to negative one or two points — could be reversed this year,” Lacy said, noting that the company is projecting “relatively modest sales growth overall. “One to 3 percent for this year is appropriate.”
The future health of Sears rests heavily on reorganizing the softlines business and making it meaningful to consumers, who in the Nineties abandoned Sears’ full-line stores in great numbers for easier-to-shop concepts like Kohl’s, emerging discount giants Target and Wal-Mart, and such specialty stores as Express. Retailers with smaller footprints and greater perceived values continue to steal market share from Sears and other moderate department stores. And a week ago, Sears reported another poor apparel period, largely blaming softlines for a 37.1 percent decline in retail operating income in the fourth quarter.
During the interview, Lacy accentuated the bright side, recapping the year and the quarter, by saying, “We had 14 percent earnings-per-share growth for the year. That’s a good number, after 12 percent earnings per share compounded growth for the last five years. “But we are disappointed by our underlying operating performance,” he acknowledged. “Three of our four sectors were down in profitability — retail, services [down slightly] and Canada. Credit had a great year.
“We had nice increases in retail through the third quarter from the year prior. That clearly slipped from us in the fourth quarter, with modestly negative comps in December, but wound up slightly down for the year in retail.
“For softlines, we had some very good success stories last year,” in footwear, fine jewelry, cosmetics, home fashions and in the fourth quarter, housewares, he said. “There were certain things that did perfectly fine. Women’s, men’s and children’s did not perform well for the fourth quarter certainly, and for the year, they were mixed. It was a relatively good year in certain portions of women’s.”
Uneven performances in apparel for the past several seasons have raised questions about how complete the Sears turnaround of the past decade actually was. For much of the Nineties, Sears outpaced the industry in same-store apparel gains, yet the increases came partially by converting unproductive back areas into apparel selling space, or as some analysts saw it, simply piling on more merchandise in the added space that was hardly much better than the old offerings.
To be fair, part of the gains were attained by adding a handful of national brands to the lineup, including Lee, Levi’s, Vanity Fair, Leslie Fay dresses, and later Nike, and building up private brand offerings, like Canyon River Blues, Sears’ biggest apparel label, which racked up just under $400 million in sales last year.
However, as Lacy recognizes, “We basically had a period of time where probably we put some things on the floor that were a little less than well thought through. It wasn’t quite up to the billing of the softer side advertising campaign. While it was a very effective campaign, at the tail end, it’s message was style and excitement, when most of marketplace talked about price and value.”
It was Cohen who led efforts to beef up Sears’ promotional and value message and ultimately pulled the plug on the softer side campaign.
While that left a hole in the marketing, it also signaled an awareness, perhaps overdue, that things at Sears must change.
“We need to rethink who we are and our business model,” Lacy affirmed. “That is particularly true in our softlines. Our hardlines generally get good sales growth and market share gains. But in the last decade, the middle market has been looking off the mall, for hard and soft goods. While we’ve been able to grow hardlines, it’s become more problematic in softlines. Here we sit today with a moderately priced softlines offering, and most of our customers are willing to take on self-service and looking for more depth and breadth of assortment.”
Other concerns: “We have some brand access issues and we don’t execute as well as we should,” Lacy said. “The value proposition is not as clear as it should be.”
“It seems like the marketplace has been judging [the level] of our success based on our softlines trend,” Lacy added. “There’s a mild frustration here, that people keep focusing on that as the bellwether of how we are competing in the marketplace.
“It’s not that softlines is not an important part of our business, but this is a broader franchise. If you look at our hardlines, services, and credit operations, these are our real moneymakers. Softlines is important and it needs to do better.
“The credit profit is unique to us and we still make more than half our profits outside of retail. That’s not a liability. It’s an enormous source of profitability that no one has,” Lacy noted.
Still, “It’s absolutely important to have a relevant, successful softlines offering,” He said. “Sears has always been a broadline retailer and will continue to be, in my hearts of hearts. Appliances is our core franchise. We own 38 percent of the market and the customer gives us huge authority here.”
Appliances sales, he added, drive the service and credit operations profitably and are “a mechanism to talk to customers directly.”
Still, he said there are “some very good opportunities” in softlines. “In fine jewelry, cosmetics, home fashions, footwear, we’ve had very respectable growth trends.”
Asked if there is a growth target for apparel sales and profits, he replied, “No. We would like to grow both, to the best of our ability. As long as there’s growth, I don’t care.
“We are in the process of rethinking how we go to market, and through this process, we’ll look at competitors that we admire, but I don’t think our answer is, ‘Kohl’s is working, so let’s copy Kohl’s.’ We have 860 full-line stores. Unfortunately, each one is its own engineering model. Making sure there are consistent standards is a challenge. For newer retailers in a cookie-cutter rollout [like Kohl’s and Target], it’s easier.”
According to the outgoing softlines chief Cohen, “All of our merchants are working toward improving our ability to be in the sweet spot that we are in with appliances — in that wonderful value location where you’ve got the right fashion, the right quality and the right price.”
Interviewed before he transferred to Sears Canada, Cohen described the ready-to-wear editing of the past 18 months as “a very painful and expensive process where we said to ourselves that we’re doing business with too many people, we have too many different price points and products on our selling floor.
“We can’t behave like May Co., because we just don’t have the square footage. Even if we were to presume that we have complete crossover in the customer base, we just don’t have the room to emulate their assortments. So let’s get much more realistic about what’s physically possible and then let’s financially understand where our performance opportunities are.
“So, we’ve eliminated an enormous amount of market label products and a fair number of private label products.”
Cohen said the vendor base in softlines has been reduced by as much as 30 percent, depending on the category, and in women’s, 25 to 30 percent. The stockkeeping unit count was reduced more than that in women’s, with items being eliminated even in lines that continue to be bought.
“We are focusing assortments that reflect a casual lifestyle with some support for dress-up because it’s part of our customers’ view of us.”
On the dress-up side, he cited Apostrophe, a $100 million sportswear private label and the store’s most expensive private brand in women’s. A skirt, blouse and jacket outfit is typically priced around $130.
Among other key women’s labels cited by Cohen are Crossroads, a casual active private label, and Classic Elements, for opening price points, as well as the Field Master, Trader Bay and David Taylor private men’s lines. The six-year-old Canyon River Blues label, the best known and perhaps best presented at the store, cuts across several categories.
“Each of these businesses are being treated in a much more intense — and I would submit, correct — way from a brand equity point of view, and we believe they’re the underpinnings of our future,” he said.
According to Cohen, 30 to 40 percent of Sears’ apparel business is in private label apparel and over the next 36 months, that could grow to 50 to 60 percent.
“Last year, we began to invest in best practice brand development behavior, which is to say we began to build a brand development group and a professional sourcing team. We’re a very large company and we have more than enough leverage to play in the space, and yet we have, up until now, never really leveraged our size,” Cohen said.
“We have worldwide offices and wonderfully talented people, but they all served the individual buyer’s needs, which was kind of the old-style department store paradigm. Last year, we began to develop a team process and all focused on a smaller number of very specific private label programs in men’s, women’s, kids, footwear, accessories — the entire sweep. Each of these brands now has an articulated vision of who its customer is.
“We’ve begun to behave like a multi-billion dollar fashion retailer,” where buyers still buy but the design basis, from start to finish, is entirely in the hands of brand development groups. Buyers no longer can fundamentally change the characteristics of private brands and can’t label just any item anymore. “Literally, a bicycle buyer was perfectly capable of slapping a Canyon River Blues label on a mountain bike because it was a company-owned label,” Cohen said.
Like Lacy, Cohen cited Sears’ fine jewelry business and said it’s been growing for three years “in a very big way, because like appliances, it represents a big-ticket purchase, largely unbranded and a product that has life-event connotations and an enormous trust dimension. Believe it or not, people are very comfortable buying a bridal set from Sears, because they believe they will get something that has a tremendous value and they can trust us and rely on us to stand behind it.”