Eddie Lampert Correctly Equates Sears And Kmart With Land Line Phones, Then Keeps Pitching Them To Consumers

With operational losses mounting at Sears and Kmart stores nationwide quarter after quarter, an interesting thing has happened. CEO and largest shareholder Eddie Lampert has started to speak publicly about the company, the reasons behind his previous decisions, and his vision for the future. This is notable because Eddie never used to speak to anyone about Sears Holdings. If you were a shareholder you could attend the annual meeting for a couple of hours and read his annual letter to investors, but that was it. Now that creditors, suppliers, and customers are becoming more and more concerned about the company’s viability as a retailer, Eddie is giving interviews and is writing on multiple blogs on a regular basis. For the first time, investors are getting a better sense of where Eddie’s company is headed.

Despite the policy of silence over the last decade, it has not been difficult to gauge the company’s progress under Eddie’s leadership (either as CEO, majority shareholder, or both). The operational results have been dismal, which made it clear to any financial analyst that Lampert and his team lacked the retail experience and were ill-equipped to compete against other large mass merchants. Eddie has been quick to admit that the company is struggling but he has also insisted on drawing parallels in history to describe the journey he is taking with Sears as it tries to transform and return to growth and profitability. The more Eddie speaks and writes, the more obvious it becomes that he does not have a firm grasp of why Sears and Kmart are losing a billion dollars every year. For example, consider this excerpt from a blog post Eddie published on December 15th:

“How much retail floor space do we need to deliver great experiences that meet or exceed our members’ expectations? Are our locations where they need to be? With more and more of our sales and member engagement happening online or via mobile and shipping straight to home, do we need the same kinds of stock rooms and warehouses?

Sears Holdings is far from alone in tackling these questions. To take just one example, in virtually every city across the country, real estate owners and communities are trying to figure out what to do with large, windowless buildings that once held essential – now useless – telephone equipment to make landlines work. Some developers are trying to convert them into offices or apartments. Other entrepreneurs think the solid construction and robust electric power could support data centers for new generations of businesses. None of these transformations are simple.

Similarly, some of our stores are simply too large for our needs, given that populations shift, new roads are built and new retail areas open constantly. Restoring them to profitability has been a challenge. At the same time, many of our stores are in some of the most attractive mall locations in the country. Though we expect most of them to stay open for the foreseeable future, in some places mall owners and developers have approached us with the opportunity to reposition our stores for other uses and are willing to compensate us. When they’ve offered us more money to take over a location than our store there could earn over many, many years, we’ve accepted offers. We’ve used this funding to invest more in our transformation. We have also adjusted the size of our stores by partnering with retailers like Whole Foods, DICK’s Sporting Goods, Forever 21, Primark, and others. In these cases, we continue to operate in the same location, in a smaller (but still large) space, leasing out the rest to retailers who will drive traffic and who compensate us for that space.”

So to summarize: Eddie would like you to believe that with the advent of e-commerce big box retail is dead. His company is losing money hand over fist because they have too many stores that are too large and therefore cannot be operated efficiently to serve today’s customer. The Sears and Kmart stores you grew up with are like land-line telephone equipment facilities and now you have disconnected your land-line, leaving those locations grossly misappropriated.

Do you buy this argument? I don’t and I think it illustrates that Eddie and his team do not understand why Sears and Kmart are getting clobbered in the retail sector. Before I share my view on what the problem is, let’s first squash the idea that it is too many stores that are too big. Below I have put together some data on store counts and retail selling square footage for major big box retailers from 2013.

SHLD-store-prod

The numbers are striking. Compared with four major big box chains (Costco, Sam’s, Target, and Wal-Mart), Sears and Kmart stores are not too big. In fact, if you combine Sears and Kmart the average store is approximately 112,000 square feet in size, less than all four of the competitors. It is also hard to argue that they simply have too many stores, relative to the competition. Sears and Kmart together have about the same number of stores as Target and less than half as many as Wal-Mart.

Simply put, if big box retailing was dead and there was a glut of selling square feet across the country, all of these other brands would be struggling like Sears and Kmart are right now. But they’re not. Even with Target’s credit card hacking issues recently, they are still extremely profitable. As you can see from the chart above, Sears and Kmart lag other stores considerably on a sales per square foot basis. They have the same selling space to work with but are failing as merchandisers. Consumers are simply voting with their wallets and they prefer shopping at other stores. No surprise there to anyone who has a pulse.

Eddie Lampert seems to be ignoring the obvious when it comes to fairly and accurately assessing his company’s fortunes. To me the problem is clear as day; the Sears and Kmart brands are dead. Unless you offer something very compelling and unique (and therefore have brand loyalty), consumers do not want to shop at your stores and will not do so. Even when Eddie took control of Kmart in 2004 the brand was dying (it was in bankruptcy proceedings at the time after all). He either didn’t see the brand’s shrinking relevance, didn’t place enough importance on it, or thought he could energize it. In 2005 when he merged Kmart with Sears, it added fuel to the fire. The Sears brand was also dying, so merely combining those two retail brands was not a recipe for success. As long as people think that Sears and Kmart are not good places to shop, like Target and Costco for example, there is nothing that Eddie can do.

Now, you may have noticed that Eddie’s team created a rewards program for Sears and Kmart called “Shop Your Way.” It’s not called “Sears Rewards” or “Kmart Rewards” so kudos there. A separate name is the first step towards a new, fresh brand. Progress? Maybe a little, but it’s not being emphasized. The TV commercials for Sears and Kmart this holiday season mention the old brands multiple times but barely reference Shop Your Way. They say things like “Members get more” but then you ask yourself “members of what?” The Shop Your Way program is not being advertised as the focus. Sometimes they flash the logo up silently at the end of the commercial for a split second, which is hardly engaging. It’s still all about Sears and Kmart for the most part. And that is why things are not going to get materially better unless the current strategy is changed and the company moves away from Sears and Kmart brands. Put a fork in them.