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A Money Man's Trials in Retailing

(Corrects a Sears spokesman's statement about store closings in the ninth paragraph.)

When Sears Holdings (SHLD) said it would close as many as 120 stores last month after holiday sales tanked, its shares fell 27 percent, the biggest drop since 2003. In all, the stock has fallen about 80 percent from its peak in April 2007. Grim news for shareholders. Yet not necessarily for Chairman Edward Lampert, who with his hedge funds owns about 60 percent of the company since merging Kmart and Sears in 2005. Lampert still made money on his original investment, according to a Bloomberg analysis.

In the face of the company’s poor retailing performance, that’s drawn criticism that the 118-year-old retailer is being managed more as a portfolio asset than as a merchant for the long haul. “A lot of traditional department stores have reinvigorated themselves through merchandising—think of Macy’s (M),” says Gregory Melich, an analyst at International Strategy & Investment (ISI). “You haven’t seen that from Sears.” Adds Erik Gordon, a professor at University of Michigan’s Ross School of Business: “Being a successful hedge fund manager doesn’t make you a good retailer. It just gives you enough egomania to think you are.”

No one doubts Goldman Sachs (GS) alum Lampert’s financial acumen. He became a force in mass-market retailing by swapping Kmart bonds and bank loans for stock during a 2003 bankruptcy reorganization. He used the Kmart stake to help build a controlling interest in the company after its takeover of venerable Sears, Roebuck. His funds paid about $16 a share (some $1 billion in all) for a stake in the chain, according to regulatory filings and Bloomberg calculations. Even with all of its woes, Sears now trades for about $30 a share.

Lampert’s retailing touch is another matter: Sears has abandoned multiple strategies in his quest to make inroads against Wal-Mart Stores (WMT). An initial push involved converting 400 Kmart stores to a format called Sears Essentials with grocery and convenience items. Sears Grand, another concept, hewed to a superstore model. All have failed to revive revenues; Sears’s sales fell 1.6 percent to $43.3 billion last year. Sears spokesman Chris Brathwaite blames external factors. “A lot of what we sell is tied to housing,” he says. “The recession has had an impact on our company, like most retailers.”

Last February, Lampert, 49, hired Lou D’Ambrosio as his fourth chief executive for Sears. Formerly at Avaya (AVYA) and IBM (IBM), D’Ambrosio—like Lampert—has never worked in retailing. On Jan. 3, Sears beefed up its merchant ranks by recruiting Ron Boire, CEO of the high-end gadgets chain Brookstone, as its chief merchandising officer. While Boire has held senior positions at Toys ‘R’ Us and Best Buy (BBY), he’s never sold apparel or home goods, two areas where Sears is struggling. In an interview, Boire was vague about strategy beyond saying he’ll add “theater” to the stores and integrate them more with the Web.

Sears has always been known more for appliances and tools than clothes and home goods. In 2002, Sears paid $2 billion for Lands’ End to gain a popular apparel brand but has lost ground to Target (TGT), department stores, and specialty retailers. Since apparel and home goods lines generate a third of sales, they need to deliver, says Matthew McGinley, a managing director at ISI. “I don’t know what [else] they’d do with the square footage” in stores, he says.

Many older Sears stores are overdue for a makeover, McGinley says. Sears spends less than a quarter of the $8 a square foot retailers typically invest to maintain stores, according to ISI, even as Macy’s and others renovate. “Sure we want to have stores that look nice so we’re investing in fixtures, paint, and new designs,” says D’Ambrosio. “But store appearance in itself isn’t enough. Borders had great bathrooms, but that didn’t help them because they missed the e-book revolution in their industry.”

D’Ambrosio wants to better integrate his stores and online and services businesses. So Sears has given salesmen in 450 of its stores more than 5,000 iPads and 11,000 iPod Touches to help them track inventory and customer orders. He is also pressing managers to gather more information about customers’ buying habits. “Everything starts with knowing what our customers want to buy and how and then delivering that across platforms,” he says.

Sears is also opening smaller stores selling a narrower assortment of merchandise. These include franchised Hometown outlets, which sell tools, appliances, and outdoor goods, and Sears Auto Centers. The strategy could leverage one of Sears’s strengths: its DieHard battery, Craftsman tool, and Kenmore appliance brands. The latter two still lead their categories.

“They have a really good website, comparatively speaking, already,” says retail consultant Jan Rogers Kniffen. However, “a better online business will not solve the horror show that is the Kmart/Sears stores themselves.”

The bottom line: Sears Holdings, which has lost $19 billion in market capitalization since 2007, has spent far less than rivals on investment in its stores.

With Cotten Timberlake and Miles Weiss
Coleman-Lochner is a reporter for Bloomberg News in New York.
Hymowitz is an editor-at-large for Bloomberg News.

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