Monday, January 21, 2008

Sears (All) Shook Up

Following my recent post on Sears and its effective controlling shareholder, Ed Lampert's dismal track record with the retailer, the Wall Street Journal published another piece on the firm's shakeup in this past Saturday/Sunday's edition.

This time, Lampert and his team plan to prepare for a financial slicing and dicing approach, as evidenced by these passages from the Journal article,

"In a fresh effort to halt a long decline, Sears Holdings Corp. Chairman Edward S. Lampert plans to reorganize the 121-year-old retailer into several businesses with broad authority to shape their own future.

Mr. Lampert, a hedge-fund executive who acquired the retailer in 2005 through a merger with Kmart Corp., now sees a holding-company structure as the best way to breathe new life into Sears's slow-moving culture, said people familiar with the situation.

....Sears, with $50 billion in annual revenue, warned that its fiscal fourth-quarter profit would fall as much as 57% below the year-earlier level. Sears shares have lost half their value over the past year despite new marketing and advertising moves at Sears and Kmart.

The contemplated restructuring would create separate units to manage Sears's real-estate holdings and run brands such as Kenmore, Diehard and Craftsman. It isn't clear how the units would be divided or which unit would run the stores themselves.

The structure would allow Mr. Lampert to spin off or close business units more easily, said a person knowledgeable about his thinking. "He warmed to the idea of a spin-off strategy," this person said. "

This would seem to be a reversal of course for the retailer which joined with KMart, and also owns Land's End. Citing a retailing consultant, the article further noted,

"Walter Loeb, a retail consultant, said the plan flies in the face of most retailers' strategy of designing a cohesive image for their business. "He's looking to turn it around by using a different approach," said Mr. Loeb. "I think it's risky."

Sears's turnaround efforts have been hurt by a revolving door of senior executives at its Sears and Kmart retail units. John C. Walden, Sears's chief customer officer, who was hired away from Best Buy less than a year ago, resigned this week, a Sears spokesman confirmed. Mr. Walden couldn't be reached for comment."

The prior article had also noted a loss of recently-hired talent at the once-dominant retailer. With this new approach, Lampert seems to be throwing in the towel on operating a single retailer, and aiming, instead, to eventually sell off the more notable brands- Die Hard, Craftsman, Kenmore- while freeing up the real estate holdings in a single, more accessible unit.

Speaking of Lampert's desire to not be seen actually running Sears, the piece concluded,

"....He (Lampert) left Sears's Hoffman Estates, Ill., headquarters Wednesday, a day before the revamping was outlined by executive vice presidents Dev Mukherjee and Corwin Yulinsky.

Messrs. Mukherjee and Yulinsky described the plan to executives Thursday morning, saying it would allow the company to unlock the value of its real estate, proprietary brands, and online units by managing each as separate entities. The executive over Kenmore, for instance, could strike sales or licensing deals with other retailers, said a person who attended the meeting.
According to the Sears spokesman, each operating unit will have a "designated leader and an advisory group comprised of senior Sears Holdings executives to provide direction and oversee the business unit's performance." "

This passage evoked several reactions for me. First, the idea that an 'advisory group' is being provided to each business executive provides a sort of ready-made firing squad for Lampert. How many of the business unit heads are going to want this group of snitches in their operations rooms or executive suites?

If you run a business, and you have this 'advisory group' that is available to you, but is not actually accountable for decisions, how readily will most managers actually be to use this group? Wouldn't they tend to want their own, hand-picked advisers?

Second, I know one of the Sears EVPs. Long ago, in my last days at Chase Manhattan, I crossed paths with Corey Yulinsky. At the time, he was in flight from a staff job at the old, pre-Weill Citigroup. Let's just say that, as a member of the new Corporate Planning staff, Corey did not distinguish himself- neither in his grasp of the bank's businesses and situation, nor the reality of dealing with then-President and CEO Tom Labrecque.

The corporate planning staff which remained in the wake of my boss Gerry Weiss' retirement, of which Corey was reputedly a key member for the new SVP of Planning, was hardly capable, in the event, of helping guide Chase along a profitable, independent road.

From there, as I recall, Yulinsky wandered over to Mercer. I can't say that I know whether it was due to ineptitude at Chase, or part of a general flight before the Chemical takeover at the point of Michael Price's gun. Apparently some time after that, Yulinsky wound up as part of Lampert's new hires at Sears Holding.

Judging by Sears' performance since Lampert's takeover, as I mentioned in the prior post, it's doubtful that his team has been adding any substantive value. Now, evidently, Yulinky's and others' best new idea is to begin stripping the firm apart into actionable entities- brands, real estate, and separate businesses.

Can you imagine a (former) customer entering a Sears store, looking for Die Hard batteries, and being told that the store management no longer had anything to do with the availability or any other aspect of the Die Hard business? It had become an arm's length supplier?

Yeah, that's going to draw in plenty of new customers, Corey. And bring the few remaining ones running back again.

The Journal piece notes, near the end,

"The restructuring is an indication that Mr. Lampert won't be making big new investments in the business. The plan is for unit presidents to craft their own budgets and set spending priorities. With the U.S. economy heading downward into what some see as a recession, this year could be troublesome because Sears's cash cushion has declined."

I think this last passage tells you the real endgame for Lampert at Sears. He's lost enough money and time spent on this nightmare. Now, he's putting everyone into their own business lifeboat, and letting them sink or float on their wits. No more money, no more top-down direction. The strong will be kept or sold, the weak, merely scuttled.

You can already imagine the business and store closings, real estate sales, and gradual contraction of the retailer's presence. In time, the few strong brands may be spun off or just sold to other retailers.

What began for Lampert, and Sears' shareholders, as an alleged attempt by a hedge fund owner to save an ailing retailer, will probably end as just more financial maneuvering, Lampert's strong suit, to squeeze some last positive value out of this failed venture by an unqualified, wealthy financier and his less-than-capable team.

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