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Lampert's Lament

"... much of the commentary in the media and on Wall Street following the results ignores the strength of [Sears Holdings] and the progress that we have made. ...
[M]any retailers, including Home Depot, Lowe's, Macy's, Kohl's and JC Penney, have suffered from the economic environment of the past year and have had disappointing sales and earnings results. Much of the commentary following their results focused on the difficulties in the housing markets, the overall macro environment ..."
-- Sears Holdings (Nasdaq: SHLD  ) Chairman Edward S. Lampert, Nov. 30, 2007

Pity Eddie Lampert. He just don't get no respect. But Friday's letter to "associates" of the venerable retailer that he bought and merged with Kmart three years ago does get my attention. For years, pundits and investors have debated the question: Is Sears Holdings (1) a struggling retailer playing second fiddle to Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) , or (2) a hedge fund in drag? Seems to me that Sears' chairman answered this question pretty clearly on Friday.

Sears is a retailer
In his letter, Lampert boasts that "we are one of the few retail companies that have actually reduced our overall debt levels, while ... investing over $1 billion on capital expenditures ... contributing significantly to our pension plans for our past and future retirees and repurchasing over $3 billion of our shares." He promises to "manage the business closely and opportunistically," "deliver better results in the future," and -- most telling of all -- to "earn [investors'] respect by our performance on the retail playing field."

So, news flash: Sears is a retailer.

But what kind of retailer?
This question is key to Sears' success. I mean, anybody can sell stuff, but a retailer doesn't thrive until it becomes "known" for something -- or at least, known for being an alternative to something. Consider, for example:

  • Wal-Mart: Always low prices.
  • Target: Wal-Mart, but with style.
  • Kohl's (NYSE: KSS  ) and J.C. Penney (NYSE: JCP  ) : Cheaper than Macy's (NYSE: M  ) , and better than Target.

So the question becomes, what does Sears mean to you?

Three things
Personally, I think of three things when I think of Sears. Sears is:

  • Craftsman tools. High quality, reasonable price, backed by a lifetime warranty.
  • Kenmore appliances. The same quality as a Whirlpool (which makes the machines for Sears), but because it's labeled "Kenmore," it costs less.
  • And of course, Sears also has a softer side, helped by the acquisition of quality clothier Land's End.

In a word (actually, three words), Sears means affordable, dependable quality.

Or it should
At the risk of overgeneralization, and the certainty of un-political correctness, I'd sum up Sears' primary competitors' wares with three words: "Cheap Chinese stuff."

Problem is, when everyone's selling the same stuff, it's hard to differentiate one seller from the rest -- and in this Fool's view, that helps to explain Sears' massive earnings whiff last week. Sears is selling the same stuff as the other guy, and not always at a better price. To differentiate itself from the competition, I offer Sears the following suggestion for how to establish an identity, earn better margins on its sales, and steal a march on the competition in the process.

Dance with the one that brung ya
Rather than compete with other retailers in a race to the bottom on margins, Sears needs to capitalize on (what's left of) its core identity as an American brand selling affordable, dependable quality. Ideally, it should play the "patriotism card" and advertise itself as a purveyor of "Made in the USA" merchandise. Granted, doing business in a flat world may make going 100% American impossible. But Sears can win the PR game if it goes as little as 51% "Made in the USA," and ensures that the remaining 49% of its products measure up, quality-wise.

It's hard to imagine a better time for Sears to make this move. Sears' rivals are beginning to see the cost of their foreign merchandise rise as the Chinese yuan appreciates in value. That's certain to squeeze margins, and makes Sears competing in a race to the bottom look pretty unattractive. Simultaneously, U.S.-made goods will become relatively cheaper thanks to the incredible shrinking dollar, making "affordable quality" a price worth paying.

It all adds up to a singular opportunity for Sears to get ahead of the curve, and brand itself as the "Made in the USA"-quality retailer.

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5/31/2016 4:00 PM
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