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Eddie Lampert's Smart Talk vs. Actual Visit to Sears

If you ask Eddie Lampert about his role as Sears (SHLD) chairman and CEO, he’ll tell you he’s dragging a moribund retailer kicking and screaming into the future. That’s the focus of his famously prickly shareholder letters and it’s how he explains away infighting in the executive suite, as detailed in a Bloomberg Businessweek article.

Lampert’s justification for years of falling revenued (down 8.8% in the most recent quarter) and stingy capital spending (less than 1% of company revenue last year) is that Sears is better off closing unprofitable stores and investing in his signature plan, “Shop Your Way,” a hydra-headed loyalty program, mobile commerce platform and social network. Meanwhile, rivals like Kohl’s (KSS), Macy’s (M) and Lowe’s (LOW) have healthier levels of sales and bigger commitments to capital investment, as these charts demonstrate:

SHLD Revenue Quarterly YoY Growth Chart

SHLD Revenue Quarterly YoY Growth data by YCharts

SHLD Capital Expenditures Quarterly Chart

SHLD Capital Expenditures Quarterly data by YCharts

Sears has poured hundreds of millions into Shop Your Way over the past four years, Lampert says, in technology investments, employee training and customer rewards. Crain’s Chicago Business recently profiled Leena Munjal, the hard-driving young executive who runs the program, asking, “Can this woman save Sears?”

So far, investors have been skeptical, as this stock chart shows:

SHLD Chart

SHLD data by YCharts

YCharts visited a Sears on Chicago’s North Side last week to “Shop Our Way” and see how Sears is, as Lampert describes it, transforming into a “membership company.” Outside the store, a large window display read, “Members always get more points/perks/privileges.” Below the sign sat a washing machine made by Whirlpool -- not the exclusive Sears brand Kenmore -- and stacks of towels and detergent. The floor of the display was filthy and scratched, and passersby could see around the edge to a dirty workroom.

Inside, in the clothing department, signs touted the fact that Sears could ship an even wider selection of merchandise from its “in-store find-it center,” also known as a computer with an Internet connection. Here, the shortcomings of Lampert’s strategy became instantly clear.

The problem with Sears isn’t that the store runs out of popular merchandise, as Target (TGT) sometimes does when it launches collaborations with hot designers. In that case, having a quick way to place an online order would be a selling point. The problem is that Sears chooses in the first place to stock unsightly styles such as neon-blue, one-shoulder Kardashian women’s rompers. They were on clearance—or “Klearance,” as the display read—discounted to $28.99 from $59.00. And the store had every size in stock, from XS to XL.

Most of the apparel department was equally bizarre, and much of it was on clearance. That’s part of the reason Sears’s profit margins are so sluggish, as this chart shows:

SHLD Profit Margin Quarterly Chart

SHLD Profit Margin Quarterly data by YCharts

Up a dingy flight of stairs, in the appliance department, employees hung around waiting for customers. One of them -- let’s call him R. -- sprang into action to explain the features of a Kenmore 24-inch stainless-steel dishwasher, on sale for $499.99 from $709.99. When it was clear nothing would be purchased that day, R. offered to open a new “Shop Your Way” account, which gives shoppers $1 in Sears credit for every $100 they spend. (In his chairman’s letter, Lampert said members account for more than 60% of sales, but according to Businessweek, customers redeem less than 20% of their points, a low percentage for a loyalty program.)

R. pulled out his balky iPad and fought to get it working. A few feet away sat a perfectly functioning desktop computer. Then he set up a membership account and emailed the specs of the dishwasher, with a link to buy it online. It’s a clever way to circumvent the problem of “showrooming” facing Sears, Best Buy (BBY) and other retailers, in which shoppers browse products in stores, then save money buying through Amazon (AMZN), which Ycharts has dubbed the “suicide bomber of retail”.

Sears hardly looks like a showroom. Passing from one disheveled department to the next, it became hard to argue that Lampert’s technology investments are money well spent. Suppose, conservatively, that Sears purchased five iPads for each of its 800 stores, at a cost of $400 each. (Apple (AAPL) is notoriously stingy with bulk discounts, but Lampert can drive a hard bargain.) That’s $1.6 million. At $10 an hour, Sears could afford to have an employee devote five full work weeks per year, per store, to make it a reasonably pleasant place to shop.

But that’s boring retail 101, and that’s not Lampert. The chairman of ESL Investments is above all a hedge-fund manager; he knows how to move money around, and he gets excited about systems and processes. Those things can help a well-functioning retailer take the next step forward—see Gap Inc. (GPS) for an example, as Ycharts wrote about here )—but they matter little when your store looks like a time-warp garage sale.

For all Lampert’s supposed financial savvy, Sears lags well behind its competitors when it comes to return on invested capital:

SHLD Return on Invested Capital Chart

SHLD Return on Invested Capital data by YCharts

Lampert hasn’t cracked the retail code, which may be why he focuses on buying gadgets and sloughing off pieces of the company. Leaving the Sears store in Chicago, you pass a sign that reads, “This isn’t goodbye.” That might be wishful thinking.

Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  retail stocks   money managers   eddie lampert   

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