Insight: Memo to Eddie Lampert - Dump Kmart

Tue Jan 3, 2012 10:13am EST
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By Dhanya Skariachan and Phil Wahba

(Reuters) - If hedge fund manager Eddie Lampert wants to save one of the oldest retail empires in the United States, he should consider shutting down Sears Holdings Corp's (SHLD.O: Quote) Kmart discount chain and focus on revamping its Sears department stores.

Such is the advice of half a dozen retail executives and restructuring experts who have watched the company's sales shrink every year since 2005, when Lampert formed Sears Holdings by combining two of the most iconic American chains in an $11 billion deal.

After a dismal showing this holiday season due to dowdy merchandise, run-down stores and a reputation for poor service compared with rivals such as Macy's (M.N: Quote) and Target (TGT.N: Quote), the retailer last week said it would close 100 to 120 of its 3,500 U.S. stores. The news wiped more than a quarter off Sears Holdings' market value, which now stands at just $3.4 billion.

The company needs to take much more radical action to turn around its business, the experts said, pointing to 18 straight quarters of sales declines and Lampert's propensity to spend company cash on buying back shares instead of upgrading stores. His ESL Investments Inc owns 45 percent of Sears Holdings.

"Trimming down a hundred stores is like rearranging deck chairs on the Titanic," said Craig Johnson, president of retail strategy and consulting firm Customer Growth Partners, whose clients include J.C. Penney Co Inc (JCP.N: Quote) and Toys R Us. "This is a company that needs not just cosmetic surgery, not just minor surgery, but radical surgery."

Johnson and others said Sears Holdings should close as many as 1,000 stores to cut costs and recoup what it can from selling off inventory and related real estate. Then, it needs to significantly revamp its remaining stores and expand its online business to reverse its years long decline.

Such a culling would be very painful, likely resulting in layoffs for tens of thousands of the company's 280,000-strong U.S. workforce and loss of the major retail store in some communities, according to retail specialists.

Once the largest U.S. discount chain, Kmart has declined over the years as it has been unable to keep up with Wal-Mart's (WMT.N: Quote) low prices and Target's more upscale though still affordable offerings. Kmart went bankrupt nearly a decade ago and never fully recovered -- its 2010 sales of $15.6 billion were only about 5 percent of Wal-Mart's U.S. sales.   Continued...