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Can Sears Be the Next Amazon?

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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 (Nasdaq: SHLD  ) fell victim to the trappings of its own excess. This large, bureaucratic organization got too big, too fat, and too far removed from its customers. Its moat thinned, leaving the company vulnerable to sneak attacks from enemies such as Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , and a host of specialty retailers.

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 (Nasdaq: AMZN  ) and Zappos for their customer responsiveness.

Sears 2.0?
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 (NYSE: M  ) ." Unfortunately, I think many consumers rank the retailer below both Target and Macy's. And when it comes to shoppers' decisions, perception is often reality.

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:

  1. Lifelong learners.
  2. People who aren't afraid to fail. (The occasional $5 million lesson is a necessary ingredient of success.)
  3. People who can innovate, and who aren't afraid to be benchmarked against the competition.
  4. 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.

Questions remain
"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:

  1. 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.
  2. 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.
  3. 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?
  4. 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.
  5. 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.
  6. 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.

The future
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 (NYSE: BBY  ) . Compare the lingerie section of any department store to that of Victoria's Secret. Old-school retailers also face stiff competition from online retailers like Amazon and Zappos.

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.

A blue-light special on further Foolishness:

At the time of publication, Buck Hartzell owned stock and debt in Sears Holdings, in addition to a Kenmore grill and a smattering of household tools. and Best Buy are Motley Fool Stock Advisor selections. Best Buy, Sears Holdings, and Wal-Mart Stores are Motley Fool Inside Value selections. The Fool owns shares of Best Buy. The Fool's disclosure policy misses the Wish Book.  

Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2009, at 3:27 PM, weiwentg wrote:

    I own Sears indirectly through the Fairholme Fund - and I have to say I'm not nearly as confident in Lampert as Fairholme and the article. Eddie is smart, there's no denying that. However, he's the chairman of a declining retailer in a declining economy. Other retailers are eating his lunch. He needs to find managers who can actually execute the transformation - and I don't think he will be able to.

  • Report this Comment On May 20, 2009, at 5:15 PM, jofallon wrote:

    Lampert's been in charge for years. How is he a new king?

  • Report this Comment On May 20, 2009, at 8:09 PM, gulicious wrote:

    I read about this guy in Cramer's book and that was years ago. I also notice that the 2004 stock price basically skyrocketed. Hm, seems to me like Eddie and his investing buddies made a TON of money on this company but the market priced it back down. I'm really hoping that he is sincere in his efforts to make Sears a big great company as it once was, but the stock price did not merit such a huge increase for those few years.

  • Report this Comment On May 21, 2009, at 12:42 AM, mfldog wrote:

    I worked under this man's idea of direction and the company is focused on selling insurance on goods and credit plans. His idea of work enviroment is ripe with serious problems that will sooner than later be a liability. The focus has been to purge the stores of older workers and experience.,many of the front line employees who work in retail know the problems. They have been there for years but ignored by top management. Poor customer service ( that includes having one cashier or no sales floor help, or the invisible manager who hides in his office), poor stores and refusal to modernize stores, concentration on reducing payroll to the amount where a focus on the replenishment of merchandise was not the priority. Every morning the employees are threaten with job loss if they don't secure credit applications and smart plans (P.A.'s)( this is a corporate directive..sounds wonderful Eddie..positive reinforcement) and meanwhile the focus on knowing the customer is way down the line. They instituted a new program for their front line workers this Feb;, minimum wage hire rate only, fulltime 25-32 hours, and no yearly raises. Quit investing in the people responsible for taking care of the customer. Meanwhile, management will recieve bonuses based on the credit cards and insurance plans which they themselves do not even solicate. Lastly, the customer base they have lost. He is not going to win them back with technology. When you lose a customer it takes so much more work and money spent to lure them back and with Lamperts performance, since his leadership, has shown he fails in this critical part of the business. Retail is a people business, not a hedge-fund business. It is too late now, but it doesn't take a fancy degree to realize, listen to what the customer wants, have it, sell it and let them know you appreciate their business. ( and realize your workers represent part of your business, they and their circle of family and friends provide some of the base, Walmart knows that and has kept that focus, whether their customer is employee based or general public)

  • Report this Comment On May 21, 2009, at 9:43 AM, Ohtobe20 wrote:

    The way Sears is using technology is just window dressing. Their logistics systems are 20+ years old. It is the same system that put catalog out of business. Merchandise is lost between the loading dock and the floor because they can not track their inventory. Hard line sales associates do a manual inventory weekly and work off of this paper sheet because the computer systems do not accurately reflect what is available in the stores. Internet sales go against this outmoded inventory system. Many times the merchandise is not available when the customer comes to the store. When they cancel the internet sale it adds it back into they inventory system. Now inventory thinks it has 2 of something when in fact it had zero to begin with.

    If you don't have good tools to work with, you'll never win the consumer back to the stores...

  • Report this Comment On May 21, 2009, at 12:04 PM, gulicious wrote:

    I never realized how fascinating Sears history was, and the current situation with Kmart and turning into a Holdings company is really interesting. Sears is not really entirely about the retail stores, but is a holdings company that represents brands, real estate, and a plunge into higher technology. I'm looking into it as a possible investment in the long term. Beat it down all you want, but this is a seriously golden opportunity.

  • Report this Comment On May 22, 2009, at 4:05 PM, TMFBuck wrote:

    Thanks for the excellent comments and insights into Sears. A few more thoughts: This is no slam dunk. A smart guy is taking on a very difficult challenge in really bad times. Secondly, Eddie realizes they are not nearly as efficiency as some of their competitors. I think openly admitting that is a good start. Of course it remains to be seen whether they can fix it. Ultimately, Sears won't fail or succeed based on Eddie. To succeed it's going require a great effort and teamwork from everyone as Sears. This will require an aligned board of directors, good strategy from the executive team, and great exection from corporate down to the store level people. Getting all those 300,000 focused and feeling accountable for Sear's success is a huge task. Once the economy turns a bit we'll get a better idea how much progress they are making.

  • Report this Comment On May 24, 2009, at 10:04 AM, Smartguy123456 wrote:

    I've worked at the company and set in meetings lead by the man.

    In our opinion, the optimal avenue to achieve good corporate governance and enhance long-term value is to place other shareholders with substantial holdings on the board to ensure the proper coalescence of interests between the board and all shareholders.

    Mr. Lampert has not down a good job as Chairman of the board and defacto CEO. The company has been without a new CEO for neatly 18 months now.

    We are disturbed by the present direction of Sears Holdings as exemplified by its failed vision, failed strategy, failed execution, and failed board. The amalgam of poor corporate governance, lack of strategic direction, and deteriorating operating and financial performance has led to dismal shareholder returns to date. The stock is down from highs of $190+ in june to just $55 today. To illustrate the mismanagement, corporate general and lack of growth investors only need to know that Sears has shrunk from $60B in revenue to $44B since the merger. Just returning to past Revenue and G&A levels at the time of the merger — on a per store basis less stock buy backs— would add $7 billion in cashflow and profits company. Clearly, the board has exhibited a lack of discipline about buying back stock, thereby damaging shareholder value. Yet revenue growth and G&A overspending is only one symptom of the firm’s myriad problems that must be confronted and corrected.

    Needless to say, sharesholders should be disenchanted by both the recent and long-term performance of the company. I am not alone; other shareholders have expressed to us a similar degree of disappointment. Consequently, we believe that now is a critical period for the company, so critical it warrants change of board leadership.

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