Driving up Sears Parkway in the Chicago suburbs is a nostalgic journey. Heading to this year's annual shareholder meeting, I couldn't help recalling the glory days when this was the headquarters of the most dominant retailer in the world's largest economy.
Unfortunately, success gave way to arrogance and complacency. Sears Holdings
All the king's horses ...
But there's a new king in town, and his name is Eddie Lampert. He runs a tight ship, and he has little patience for the status quo. At this year's annual meeting, he sounded like a tech czar from Silicon Valley.
He praised the mass communication benefits (not business models) of Twitter and Facebook. He noted how the Internet and social networks require transparent pricing from retailers. He also described how Sears Holdings is trying to create an open dialogue and feedback loop with its customers.
In the new world, "engagement" replaces "marketing." In Lampert's words, marketers talk to someone. Engagement requires you to talk with them. He stressed how the conversation must be authentic and applauded both Amazon.com
So what's the plan for Sears Holdings? Could it become the next Amazon? Short answer: Probably not.
Turning around behemoth retailers Kmart and Sears would be tough work in normal times. The difficulty factor has been ratcheted up tenfold now, with the dire economic conditions that struck the world's economies in 2008. Completely remaking both companies' bureaucratic cultures, problem-solving approaches, and business methods is a monumental undertaking.
The Sears brand does own some good names, including Lands' End, Kenmore, Craftsman, and DieHard. It also has a broad reach, with more than 200 million square feet of retail space.
But Sears stores aren't nearly as efficient as many of their competitors are, and they're saddled with a serious perception problem. During the press Q&A period, Lampert said, "Some might think [Sears is] caught between Target and Macy's
All the king's men ...
So how does one bring about such drastic change? Lampert began the meeting by introducing his management team; half of them are new to the company in the past year. That's a good start. You can't solve a problem with the same level of thinking that caused it. Fresh blood is essential to changing the way Sears Holdings does business.
Bruce Johnson still carries the uncomfortable title of "interim CEO." Lampert spoke about the company's Senior Leadership Program and how he wants to recruit smart people who want to innovate and take on responsibility. Sears Holdings wants people who are willing to question authority and challenge the status quo. Lampert admitted that he can't force a culture on such a big ecosystem, but he does believe he can create circumstances that will unlock the company's human potential.
Sears Holdings ultimately wants people who can both be managers and entrepreneurs. Specifically, it seeks:
- Lifelong learners.
- People who aren't afraid to fail. (The occasional $5 million lesson is a necessary ingredient of success.)
- People who can innovate, and who aren't afraid to be benchmarked against the competition.
- Individuals who can examine problems in multiple ways.
It seems that interim CEO Johnson is on a short leash. He just doesn't seem like the type to embrace the quick moving, technology-focused strategy Lampert is trying to deploy. Lampert would love a visionary leader like Steve Jobs. The real question is whether a Jobs-esque leader is looking to work for Sears Holdings.
"It's only when the tide goes out that you find out who has been swimming naked," Warren Buffett once famously said. Lampert switched this around, saying, "When the tide comes back in, I want to be sure that we've got some good swimmers who are ready to go."
Before assessing how well it'll be able to swim, let's take a look at some of the challenges that lie ahead:
- The company wants to infuse more innovation into its existing brands. First, it wants Lands' End to produce specialty-retailer-type margins. Lands' End will be coming to 75 more Sears stores this year. Second, it wants Craftsman and Kenmore to be known as creators of innovative products, and it's challenging its manufacturers to step up and meet that goal.
- The company needs to put its 200 million square feet of retail space to better use. Typically, 50% of its Sears stores are dedicated to apparel. The company needs to figure out how to earn a good return on that space; it appears that Lands' End will be a part of that solution.
- To date, Sears hasn't freed up its brands to appear at competing retailers, and for good reason. If you can find DieHard batteries in your local Wal-Mart, why would you go to a Sears auto service center?
- Credit is a big issue for larger purchases such as appliances and tractors. Have these big purchases been merely deferred, or are we experiencing a complete shift in consumer purchasing behavior? Lampert believes that as homes turn over, even at lower prices, Sears Holdings will benefit. Both sellers and buyers will spend money on home improvements. Still, the banks behind their credit cards are pulling back on their own risks -- and tightening the credit lines they extend to Sears' cardholders.
- Can the company pull off a multichannel strategy that combines online shopping and research with offline fulfillment? The company's investing heavily in technology, and trying to build in customer feedback loops at all points of the shopping experience. To me, this seems like the biggest reach for the company, but also the biggest opportunity. It would be way too costly for the company to invest heavily in its existing base of 2,300 Sears stores. To his credit, Lampert has refused to make those huge capital expenditures. Instead he's focused on building out the company's online presence and buying back its stock. He's bought back more than $5 billion worth in the past few years.
- Lastly, Sears Holdings has the sort of legacy pension responsibilities that competitors such as Lowe's
(NYSE:LOW)lack. The company has contributed $1 billion to shore up pensions over the past three years. Lampert said the company has probably lost 30% of those funds, despite directing its pension fund managers to have approximately 50% of the funds' holdings in short-duration, fixed-income assets. Lampert expects the company will need to contribute approximately $170 million to pensions in 2009, and $500 million in 2010.
Over the past several years, specialty retailers have eaten the lunch of the lumbering one-stop-shops. Compare the electronics department of Sears or Kohl's to that of Best Buy
Ultimately, an investment in Sears Holdings requires strong faith in Eddie Lampert's leadership. To succeed, he must transform the culture of a gigantic organization into a responsive, customer-focused, learning machine. When the tide comes in and the real estate market starts to rebound, we'll see just how many good swimmers this company has developed. If all goes well, Lampert and Sears Holdings' balance sheet will be swimming in cash.
As he stated several times during the annual meeting, Lampert is a large shareholder, and he believes the board of directors is well-aligned with shareholder interests. In today's me-first culture, where executives and board members continually put their own interests ahead of shareholders, that allegiance is a breath of fresh air.
Despite the numerous challenges that lie ahead, I think Lampert just might have the gumption to pull it off. Mr. Lampert, I wish you and your team luck as you try to restore the luster of your Sears stores in this most difficult retail environment. Your shareholders, your 300,000 employees, and this Fool are cheering you on.
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