The Incredible Shrinking Sears Holdings

With more than 300 stores closed since 2010, Sears Holdings'  (NASDAQ: SHLD  )  CEO Eddie Lampert told investors last week, "Closing stores is going to be part of our future." While it's agreed the once-venerable retailer doesn't need thousands of stores to be relevant to consumers, it still needs to figure out how any of its stores can become relevant to them.

Sears operates around 1,150 Kmart stores and over 830 Sears stores, but the latter division accounted for 56% of its revenues last year, and also the lion's share of its operating losses. If not for Sears Canada, however, the whole operation would be a lot worse off, as it was able to offset Kmart's contribution to the earnings slide.

So, the company needs to figure out exactly how to make whatever level of stores it chooses to retain a destination for whatever number of customers continue to shop there. For Lampert, that's meant remaking Sears into an omnichannel marketplace, where merchandise from both Sears and third-party providers is featured. And a large part of that has been to fashion a loyalty program that will keep its customers returning.

The Shop Your Way program has become a key component of the turnaround strategy, with sales from it now accounting for 69% of total sales from Kmart and Sears full-line stores, up from 59% the year before. In the fourth quarter, it accounted for nearly three-quarters of all sales. Along with online and multichannel sales growing 10% year over year, these results make it clear Lampert is looking to make the business a smaller one, but with more opportunities for consumers to shop where and how they want.

Shop Your Way allows members to accumulate points for purchases made and then redeem them for merchandise, either from Sears itself or authorized third parties, sort of like airlines' frequent flyer programs. The more you spend at Sears, the more you earn.

Unfortunately, it's also killing the company at the same time. Gross margins have come under assault from the Shop Your Way program. Even as its revenues are plunging because it's reducing its footprint -- they fell by $3.7 billion in 2013, largely because of all the store closings -- margins contracted by 170 basis points at Kmart, and 260 basis points at Sears because of the promotional environment created by the loyalty program (though the Sears domestic division was also affected by the spinoff of Sears Hometown & Outlet Stores).

Sears Holdings has had 28 consecutive quarters -- seven straight years! -- of declining sales due to a mix of store closings, asset sales, and spinoffs. Comparable sales, or sales at stores open for more than a year, have had a similarly poor showing, indicating it's not just the footprint reduction that's impacting results. And even as the loyalty program grows in importance to the retailer, it hasn't stemmed the hemorrhaging of customers, as comps fell 3.8% last year, actually worse than the decline experienced the year before.

Making Sears Holdings a smaller company is the right thing to do, but there doesn't appear to be a cohesive plan in place to turn the tide. The retailer has shown a willingness to try anything to halt the losses -- except the one thing everyone says it needs to do: remodel its stores. Lampert maintains customers don't want "decor and fixtures," yet as the company fades away, it may find that an overhaul of the shopping experience could actually make a difference.

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  • Report this Comment On May 13, 2014, at 11:06 AM, CapHoya wrote:

    Their Shop Your Way program truly is killing them. It's the only metric that matters inside stores, and since the pressure is so high to achieve this metric they create a toxic mix of customer disloyalty and employee fraud. And the loyalty program is largely worthless. Spend $100, and you still don't have enough value in points to buy a soft drink at the cash register.

    Couple that with angry, mistreated employees, deteriorating stores, an antiquated computer system that crashes constantly, and it's amazing anyone still dares enter their stores.

  • Report this Comment On August 27, 2014, at 11:41 PM, colinsgma wrote:

    Kmart bought Sears and then gives Sears the free for all letting them run the company! So much money wasted at store level because of the way things are done! That money could have bought registers and given their poor employees a raise that hasn't happened in over 5 years and done a REAL spruce up on their buildings!

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