PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
SCANT INFO. Sears hasn't demonstrated much reason for them to be optimistic. It's losing market share in its appliance business, the retailer's biggest generator of sales and profits. Sears has long been the market leader in that category, but home-improvement retailers Lowe's (LOW ) and Home Depot (HD ) are cutting into that lead, thanks to more convenient locations and easier-to-shop stores. In this year's first quarter, according to research outfit Stevenson Co., Sears' appliance market share fell by 3.2 percentage points, to 38.6%, vs. the same period a year ago.
And despite the introduction of the Lands' End label in 400 of Sears' 870 outlets, same-store apparel sales overall are still down. In its second-quarter conference call, Sears said such sales were between 2 percentage points and 4 percentage points better at stores with Lands' End clothing. But with the scant information Sears has provided on Lands' End, it's hard to analyze whether the improvement is due largely to the higher prices being charged for the brand, notes Levenson. However, the conference call did make clear that the higher gross profit margin Sears is earning on Lands' End is being more than offset by the higher expenses associated with selling the brand.
Furthermore, some analysts contend that Sears' sale of its credit business could ultimately hurt retail revenues. That's because its ability to offer credit to consumers has been integral to boosting sales. In 2002, 44% of total sales were on Sears' plastic -- and the figure was even higher for appliances. Richard Church, managing director of hedge fund Shumway Capital Partners, argues that Citigroup will be focusing on its profits rather than driving Sears' sales -- a contention the retailer staunchly denies.
MINDING THE STORE. Rivals Lowe's has echoed Church's argument to major investors, contending that Sears' control of its own credit business was the last major strategic advantage it enjoyed in the appliance business, according to one major institutional investor, who declined to be named. Predicts Church: "It will take some time, but Sears will be hurt by this."
Thomas Bergmann, vice-president for finance at Sears, counters that the Citigroup deal will have the opposite effect. His argument: As one of the nation's largest credit-card companies, Citigroup has greater risk-management skills, a wider selection of credit products to offer, and lower costs of funds. All these factors could indirectly spur sales at Sears.
Whatever the case, CEO Lacy insists that the sale is in Sears' best interests because it will put the emphasis on turning around the retail business, an argument some analysts endorse. It also will make the stock -- which trades at a price-earnings ratio of 7, well below the department-store average of 11 to 12 -- a pure retail play. That also could help lift the multiple.
WATCHING CLOSELY. Lacy is making a big gamble that he can turn around the retail business, a goal that has eluded Sears' management for years. His maneuvers to cut costs in the retail business are running out of steam, no longer able to hold up profits in the face of falling same-store sales. Short term, the aggressive buyback of Sears' shares will certainly increase earnings per share, as will the payments and savings associated with the Citigroup transaction.
But the smart money will be watching the retailer's top line. Excuses are in short supply -- and Lacy has little time left to deliver the goods.
Copyright 2003, Bloomberg L.P.
Printer-Friendly Version
