The Ever-Changing Face of Sears


By Amy Tsao With discount retail on one side, department stores on the other, and so-called "category killers" and specialty stores creeping into the mix, the place of Sears, Roebuck & Co. (S) in the retail food chain has become less clear in recent years. In its latest attempt to redefine itself, management at the broad-line retailer has come up with a long-term plan to overhaul its stores, its image, and its financial performance.

"They are admitting what they are, which is a relatively mature company with substandard margins," says Michael Exstein, an analyst with Credit Suisse First Boston. Sears aims to carve out a space in retailing that differs from that of any and all rivals -- somewhere between the price-driven chains and department stores. The shift also includes beefing up customer service in its electronics and appliances department while adding more self-service features like the central checkout areas that are a hallmark of mass merchandisers.

RISKS. Merchandise across a variety of categories will be updated, and Sears' apparel departments will get a face-lift to emphasize more casual styles and a unified brand. Savings through the three-year plan will come, in part, from reducing salaried staff by 22%, or 4,900 employees, within the next 18 months. By 2004, the company expects its annual operating income to be up by 50%, to $3 billion.

So far, Wall Street seems pleased. The stock, which closed Nov. 6 at $44.75, has appreciated around 40% over the past 12 months, far outpacing the major indices. It picked up another boost, jumping to $43 per share from $39, after Sears unveiled its new strategy on Oct. 24. But at a forward-looking price-to-earnings (p-e) ratio of about 10, Wall Street isn't pricing successful execution into the stock just yet. That's because, even though Sears has interesting assets to work with, there are plenty of risks.

For one, the company is not alone in jockeying to revamp itself. Even as Sears sets to work, mass merchandiser Kmart (KM) and department store JC Penney (JCP) are pursuing their own makeovers -- and doing so amid a steeper consumer spending slowdown than previously expected. Nor will the rival outfits that have been eating away at Sears' market share -- Wal-Mart (WMT), Target (TGT), Bed, Bath & Beyond (BBBY), and Best Buy (BBY) -- stand still while Sears finds more stable footing.

ONE MORE TIME. Then there is the makeover plan itself. This is not the first time the company has embarked on an effort to remake itself. Remember the "softer side of Sears" campaign, which pushed the company's expanded apparel offerings? "They've had some success in the past, but the competition always catches up," says Mory Levenson, analyst at Value Line Asset Management. Given today's difficult retail environment, he thinks the stock might have some attraction in three years to five years. "It's probably fairly priced at this point," says Levenson. "The patient investor might look at it here, but I wouldn't be in a rush to move in. This has to be viewed as a long-term fix."

Already No. 1 in appliance sales, the company aims to woo consumers on other fronts. Peggy Palter, spokesperson for Sears, says the company's market share in appliance sales is above 38%. The goal now, she says, is to improve and promote other merchandise areas so that consumers shopping for dishwashers or refrigerators will also pick up clothes and linens. Says Palter: "We believe that those already shopping...would be willing to spend more money at Sears if they realized all the other national brands we had."

According to George Whalen, president of Retail Management Consultants, that reasoning is flawed. "They're assuming that business is not getting any harder," he says. With tough competitors Wal-Mart, Best Buy, and Home Depot attracting larger numbers of appliance shoppers, even Sears' traditional strength may not be so secure. Whalen believes the company will need to spend a lot of money convincing consumers to buy additional goods. "I don't know that consumers will flock there just because they're reinventing [themselves] for the umpteenth time," he says. "I was thinking they would make some bold steps. This is not bold to me."

DEARTH OF A SALESMAN. Whalen wants to hear Sears announce that it is dropping marginal lines to concentrate on a future as a value-driven retailer. "They can't lean -- they have to really be there," he says. "It's going to take a very clear vision. I don't see anyone there with it right now. Someone needs to say, 'This is who we are. We're going to take steps necessary to build a company so we are in business for another 100 years.'" Whalen sees Sears' best possible position in retail as being a step up from the mass merchandisers.

Still, there are some who think Sears is doing exactly what is needed. Karen Sack, retail analyst at Standard & Poor's, likes what she's hearing about Sears' new approach, and upgraded her rating to accumulate from hold after the company unveiled its strategy. "Getting their cost structure down is important when they can't raise prices," she says. "Even if sales are not up next year, [Sears] will start to see benefits from a lower cost structure."

Alan Lacy, CEO since December, 2000, was formerly Sears' chief financial officer and troubleshooter at the credit-card division. Although he isn't a retailer by training, Sack approves of his emphasis on containing costs. "As a numbers person," she says, "he brings a lot of good perspective to Sears."

PREDICTIONS. The company has much to work with, including prime mall-based real estate and a brand that is a household name. By and large, however, analysts see Sears as a big ship to turn. "The problem is trying to combine a discount-store approach with the specialty-service side. Getting that to work...is going to be a lot," Levenson warns, and adds that Sears needs to spell out its new approach in its advertising -- and in its pricing.

Clearly, Sears CEO Lacy has his work cut out. Whalen recalls beloved department store Montgomery Ward's, whose management also sought to find some elusive place in retailing between discount and high-end, and failed trying. "What would prompt consumers to go to that store if it doesn't offer discounts, value, and the latest in fashion?" Levenson asks.

Will Sears' efforts suffice? Some pros think so. "It's a very sensible plan that is not looking for top-line growth in the near term. By the middle of next year, investors should be able to see some signs of whether or not it's working," Exstein says. The skeptics, however, also make a strong case. If they are right, investors might want to bide their time before buying into Sears' revamped ambitions. Tsao covers financial markets for BusinessWeek Online in New York


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