The Softness Side of Sears (News) September 2, 1999

The Softness Side of Sears

By Dave Marino-Nachison (TMF Braden)
September 2, 1999

Its "Softer Side" advertising campaign a disappointment, venerable mega-retailer Sears, Roebuck & Co. (NYSE: S) dispatched its ad agencies to figure out a way to reinvigorate retail activity at the $36 billion chain. Up jumped "The Good Life at a Great Price. Guaranteed."

Jumping up today was news that August same-store sales rose a scant tenth of a percentage point as revenues (adjusted for store divestitures) managed just a 1.8% rise. With sales soft and gross margins hurting, the company now expects Q3 earnings per share (EPS) of between $0.63 and $0.67, missing both last year's $0.76 and First Call's $0.82 consensus. Full-year EPS is now seen increasing in the "low single-digit percentage range," considerably less than expected.

"Although we continued to drive strong increases in categories such as infants' and toddlers' apparel, home appliances, personal computers, and big screen and projection TVs," said Chairman and CEO Arthur Martinez, "sales in categories such as lawn and garden, men's, and footwear were below the levels of a year ago and overall comparable revenue performance for the month was not up to our expectations."

Sears is determined to revamp its retail sales. The company's "The Good Life at a Great Price. Guaranteed" campaign, announced last month, is intended to remind shoppers that Sears is the place to go for just about everything.

That, of course, lumps it in the rather unenviable department store category, which has been victimized by superstore chains -- such as Best Buy (NYSE: BBY), Linens 'N Things (NYSE: LIN), and Home Depot (NYSE: HD) -- that are considerably more nimble. Sears has attempted to address this by growing its network of specialty stores, but the going has been difficult despite a handful of good proprietary brands such as Craftsman tools and Kenmore appliances.

Perhaps mindful of that, Sears is launching the campaign by promoting its Crossroads, Fieldmaster, and TKSBasics apparel brands. While that's a nifty idea, in the apparel category the competition is as fierce as in home furnishings and electronics, with companies such as Wal-Mart (NYSE: WMT) to Gap Inc. (NYSE: GPS) firing away. Besides, "Softer Side" was supposed to do the same thing but didn't -- perhaps that's because Sears and fashion aren't exactly synonymous.

The company's other big news was something of a yawner. While the headline "Management Initiatives" on a press release can sometimes be grounds for some excitement, today there was little to report but the reshuffling of a few higher-ups.

Here's what happened: Sears Credit President Alan Lacy will also lead the company's home services and e-commerce businesses; CFO Julian Day got the newly created position of executive vice president and COO for finance, logistics, and information technology (he and Lacy join Martinez in the new Office of the Chief Executive); former executive vice president of marketing Lyle Heidemann is now president of hardlines; and retail marketing chief Mark Cohen won the title "President of Softlines."

Another part of this mess is that Robert Mettler, president of merchandising for Sears' full-line stores, is leaving. So what you've got at this point is the reordering of some business cards coupled with the departure of a veteran executive. Not too hot.

The Sears story is an American business classic. January's Foolish Duel over the company's prospects is recommended reading -- particularly some of the historical information in Warren Gump's bear argument -- as it tells the story of an aging company potentially beyond revival.

That Sears is apparently rededicating itself to the things that have paid off pretty lamely over the past two years isn't particularly encouraging.

The shares are trading at a 52-week low as of this writing, so you can be sure value investors will be taking a long look at Sears. Will Martinez' "new" team be able to, as Depeche Mode once said, shake the disease? Investors might want to wait for signs of more substantial change before counting on this one to make much money.

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