Is Digital Retail the Light at the End of the Tunnel for Sears Holdings?

As its brick-and-mortar locations continue to chase customers away, the old-line retailer is looking for succor online.

Jul 20, 2014 at 9:30AM

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Maybe Sears Holdings (NASDAQ:SHLD) is finally learning a thing or two from its recently spun off Lands' End (NASDAQ:LE) division -- specifically that the path to any future it is going to salvage will be through its online services. The old-line retailer announced last week it will be expanding its in-store pickup service to some 2,000 locations.

The brick-and-mortar retail story of Sears and Kmart continues to be a dismal read, with ever-shrinking sales and traffic, but its digital initiatives have enjoyed far more success and the retailer reports that 60% of its online sales are multichannel transactions. Whereas comparable sales at physical locations maintain the same dreary decline they've experienced just about since chairman and CEO Eddie Lampert fused the two ailing retailers together, online and multichannel sales increased 26% over the prior year.

Last year Kmart highlighted its ship-to-store policy with its fun and award-winning "Ship Your Pants" commercial, and Sears has sought to leverage that with the establishment of its Shop Your Way loyalty program, which seeks to reward consumers for the purchases they make regardless of how they make them, whether in-store or online.

Although there seem to be some problems with the latter in that it serves to siphon off profits at a time it can least afford it, Sears at least recognizes that it can't afford to do business the way it has been doing it. Expanding the in-store pickup policy is another step in the right direction, as it has the chance to drive more traffic to its stores, and, in theory anyway, possibly perk up sales there.

Lands' End is largely online and catalog-based, featuring a mix of clothing, footwear, and home products, although it has several stand-alone stores and several hundred store-in-store shops inside Sears. In its first quarter since being spun off from its former parent, Lands' End said sales rose 3.6% to $331 million, while profits surged 48% to $11 million. Maybe focusing more on online opportunities can help Sears, too.

However, Sears Holdings' biggest problem these days may be Lampert himself. Even as he implements these initiatives, he's working at cross-purposes to the retailer's full potential by steadfastly refusing to invest in upgrading his stores. As he's closed or sold off some of his best real estate -- some investors still maintain it's in Sears' real estate that the real value of the company lies -- increasingly what's left are the tired, urban stores that, as the sales and traffic numbers highlight, fewer people want to shop at.

It's there, though, that Lampert's policies are causing the most problems. By declining to spruce up the stores to make shopping in them a more encouraging experience, he's giving customers little reason to go there other than to get in, pick up their online orders, and get out. The in-store environment only reinforces the preference consumers will have to continue shopping online, but with other retailers also offering ship-to-store policies of their own, consumers have a choice about where they want to make their purchases.

As Sears' footprint shrinks, moving further away from its customer, Wal-Mart is one retailer in particular that is moving closer. It may be investing heavily in smaller-format stores instead of supercenters, but the ability of the consumer to interact with Wal-Mart in some fashion grows considerably.

It, too, has invested heavily in its online marketplace, and while its stores are also suffering from falling comps and traffic lately (though its experience is far more recent than Sears'), the expansion of its presence as an omnichannel retailer increases as it more closely adopts technological advances.

Sears says its Shop Your Way program now accounts for three-quarters of the retailer's eligible sales, and, with nearly two-thirds of its online sales being multichannel, cross-promotion of items across the two may help blunt the impact the decline of its stores creates. Renovating its stores could be the missing ingredient needed to turn the story around at Sears Holdings.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. 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.

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