Will Sears Learn From Home Depot's Expensive Lesson?

Like the Ghost of Christmas Past, the reign of Bob Nardelli as Home Depot's  (NYSE: HD  )  chief executive officer was a painful, expensive specter best forgotten by its employees and shareholders. But for the workers and stock owners of Sears Holding (NASDAQ: SHLD  ) , Chairman Eddie Lampert continues to haunt the collapsing retailer for Christmas Present and what looks to be Christmas Future, too. The way that each executive treated employees weakened the fundamental strength of each company, to the ultimate detriment of both the shareholders and the employees.

Poor customer service results in losses
To save money, both Nardelli and Lampert instituted cost-cutting measures with workers that backfired. Nardelli replaced thousands of full-time employees with part-time workers to save on benefits and other compensation costs. Lampert has done the same at Sears at Kmart. Neither strategy worked. Buyers left Home Depot and Sears due to poor customer service: Home Depot's board fired Nardelli, and Lampert was selected as the "Worst CEO" by Marketwatch in 2007, even though he is technically the chairman of Sears Holding.

Kenmore is just one chapter
While the share price of Sears Holding under the rule of Lampert tells a tale of woe, the saga of its Kenmore Appliance segment is certainly its own instructive chapter in the decline of the once proud retailer. Kenmore Appliances is considered to be one of the "jewels" of Sears Holdings, along with Craftsman tools and Diehard motor vehicle batteries. But over the last decade, Sears' share of the home appliance market has fallen from 40% to 31%.

Although hardly a scientific survey, a quick Google search of "Kenmore appliance customer service horrible" brings up 2,030,000 results. As one starts off, "Is it just me or has the quality of Kenmore large appliances gone downhill?" The declining customer service for Kenmore appliances due to the cutbacks imposed by Lampert draws plenty of fire, having its own Blogspot page, allowing for grievances to be aired on the Internet. With a one-quarter fall in its market share for appliances over the last decade, it does not appear as if those concerns are isolated!

Sears already admitted defeat when it pursued opportunities to sell Kenmore, Craftsman, and Diehard products through other retailers. It is far more lucrative for these items to be offered only at Sears stores, but the foot traffic was not there. Selling its house brands through other venues is yet another admission of the defeat of the Lampert business model for Sears as it further weakens its core.

No recovery from the Great Recession
These losses of market share obviously show up in the share-price performance of Sears. As the chart below shows, companies in the business sector of Kenmore appliances, Craftsman tools, and Diehard batteries such as Wal-Mart (NYSE: WMT  ) , Lowe's (NYSE: LOW  ) , and Ford Motors (NYSE: F  )  have all rebounded sharply since the nadir of the Great Recession in early 2009. Not so for Sears, which has fallen from over $50 a share to under $40.

HD Chart

HD data by YCharts

As the table below reveals, even with the reverse in the housing and automobile sectors, which has helped spur greater sales of appliances, tools, and car batteries, Sears has not rebounded like competitors such as Lowe's, Home Depot, and Wal-Mart. Ironically, it has been Home Depot that has led to falling sales of Kenmore appliances for Sears by increasing the brands available, offering free shipping for customers, , and expanding the space in the store for appliances.

Earnings-per-share and sales growth for Sears has lagged behind those companies that have recovered from the Great Recession. EPS growth and sales growth for Sears is also far beneath the industry average.

Metric

Sears Holding

Home Depot

Wal-Mart

Lowe's

Ford

Industry Average

5-Year Sales Growth Rate

(4.75%)

(1.65%)

4.12%

1.36%

(3.17%)

(1.50%)

5-Year EPS Growth Rate

(37.39%)

6.81%

9.24%

(3.28%)

6.66%

(5.98%)

Source: The Motley Fool CAPs and Finviz.

For the Fool to avoid
The stock of Sears Holding is dominated by Eddie Lampert, the largest shareholder. Unlike Nardelli, he will not be fired. Press reports of Lampert taking the company private early in 2012, and then his heavy insider buying of $126 million worth of the stock later in the year, took the share price higher. But it has fallen since, down 30.70% for the quarter as sales and EPS growth continue to plunge.

This is a stock to avoid, as the fundamentals are terrible. The possibility of Lampert taking Sears Holding private or buying large blocks of stock makes it a risky short, even though the company is in horrible shape and performing poorly, with predictions of its further decline. 

The decline of Sears has led to profits for others in retail, so check out The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail" to find out which stocks have prospered.  In this report, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2012, at 7:19 PM, autoinsider wrote:

    Nardelli's now working his magic at Remington Arms. It's too bad you can't short this company.

  • Report this Comment On December 29, 2012, at 9:48 AM, jonathanyates13 wrote:

    You could be right!

  • Report this Comment On December 30, 2012, at 12:10 PM, Sears2006 wrote:

    Enough Already!!! My Prediction...Sears will be saved by its customers. Eventually each individual will have to make a decision as to where he/she would like to shop. Do you REALLY want Sears to fail? Do yo REALLY want to further limit competition in the retail sector - allowing the remaining few to set prices in the stratosphere? Time for a reality check and a call to Americans to stand up in the name of capitalism! The truth is that the only way Sears will become the great shopping experience it use to be is if each of us makes a personal decision and commitment to shop there more and keep them in business. Consider this, who really built Sears? We did - the customers! Who has the ability to really rebuild Sears? We do - the customers! Also consider this - what truly drives employee morale and customer service? Increase sales resulting in increased profitability resulting in increased employee compensation and new job creation. Maybe if we all make the personal decision to shop more at a Great American Company with a a Great American Pastime we can reverse all of the negative trends and recreate the shopping experience our parents and grandparents originally created before us! We have fallen into a victim mindset - somehow feeling Sears owes us more. Nonsense - we owe Sears for generations of Great Products and Great Customer Service! Join me - a proud Sears Customer in recreating one of the greatest companies we as Americans have ever built! Join the Sears Revolution Today!!!

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