Shop Your Way: Just Another Way Sears Holdings Can Go Broke

Loyalty program is causing retailer to hemorrhage profits.

Jun 3, 2014 at 10:01AM


The idea is sound: reward your most loyal customers by giving them discounts for spending more at your store. Shop Your Way is Sears' (NASDAQ:SHLD) increasingly popular loyalty program that, having started from nothing just a couple of years ago, now accounts for three quarters of the retailer's eligible sales. Although it can make Sears "sticky" for consumers and perhaps reverse the long, steady decline in which Sears is mired, it needs to do so quickly before it breaks the bank. 

Like many such programs, Shop Your Way awards members points for purchases they make at Sears stores, Kmart, and through its website. Sales made at Sears Canada and through third-party merchants at Sears Marketplace are excluded. Like an airline's frequent flyer program, members can redeem those points for merchandise, so the more they spend the more they save.

And therein lies the problem, as they can also eat away at margins. In the first quarter, Sears gross margins tumbled $328 million to $1.8 billion, and though a good portion of the decline was due to Lampert spinning off Lands' End, the Shop Your Way program contributed to the impaired margin rate, which declined by 220 basis points. It was a similar situation in the prior quarter as well, where the Sears Hometown & Outlets spinoff bore the biggest responsibility for declining margins, Shop Your Way had a hand in the 170 basis point drop at Kmart and the 260 basis point decline at Sears. 

Yet Sears Holding also carries the burden of having two promotional models, the Shop Your Way program and traditional discounting, which ultimately is what the loyalty program amounts to. Lampert admits it's going to cost the retailer points, but he sees the value of additional investments in the program paying off further down the road.

As it stands now though, because sales remain in free fall, the more people that sign up for the program the faster it erodes profits, which it really can't afford to give away at this point. Losses widened to $442 million in the first quarter from $292 million in the same period in 2013 as same store sales fell for yet another quarter, a years' long skein that shows no sign of abating.

In essence, loyalty program members will become bigger fish in a quickly drying out pond. Moreover, a recent study by McKinsey & Co. found that despite their general growth and popularity, loyalty programs actually destroy value for their owners. Companies with them grew no faster than -- and sometimes slower than -- those without loyalty programs.

Screen Shot

Source: Sears Holdings SEC filings

Now perhaps without the program things would have been even worse for the retailer, but considering sales are still declining even as membership rises, it's actually not unreasonable to assume spending patterns haven't changed all that much. And because margins are increasingly contracting, they're just getting more stuff they otherwise might have paid for, although Sears says its most engaged customers spend 75% more than the average member. 

Yet because only the scantest of information is given on Shop Your Way, it's hard to know just how much everyone's actually spending, and whether it's more or less than they were before the program. Certainly it's a delicate balance and Sears needs something to staunch the bleeding, but Shop Your Way could be the cure that's worse than the disease. Or at least hastens its spread.

The term "loyalty program" is really a misnomer, since it should really be providing a vast database of information about a customers spending habits. The retailer must put that information into use then to enhance the relationship between it and the customer. If all a retailer is doing is rewarding existing behavior -- rather than increased positive behavior, such as shopping more often or spending more -- then all the company is doing is reducing its profit per customer.

This seems to be the path Sears Holding is on. My worry is that road leads it at last to the brink.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information