How Can Sears Stay Viable in the Long Run?

Sears has been granted another lifeline, with a bankruptcy judge approving the company’s $5.2 million sale to chairman and ex-CEO Eddie Lampert. However, the question remains: Does the beleaguered retailer have what it takes to survive in the long run?

Following three days of hearings, Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York ruled in favor of the billionaire executive’s restructuring plan through his namesake hedge fund, ESL Investments Inc. The deal would allow the department store chain to continue operations at 425 stores and save the jobs of 45,000 employees.

Lampert’s offer intends to return the company — which has not posted positive same-store sales results since 2010 — to a position of profitability. However, Sears’ creditors and employees as well as insiders and experts agree: The Illinois-based company needs a new CEO to help dig it out of the hole.

During the testimony, Sears indicated that it wasn’t in a position to hire a CEO with the business’ future hanging in the balance. Now, as the company approaches restructuring, it is expected to search for fresh leadership, with retail expert Ray Wimer pointing out the need for Sears to hire beyond the financier — a term he used to describe Lampert’s management.

“You need to be a merchant. You need to understand the customer who you’re trying to serve. You need to understand the merchandise,” said Wimer, who is also an assistant professor of retail practice at Syracuse University. “Unless they try to bring someone as CEO who is a merchant and understands the retail business, the consumer and the product, I would be surprised if we’re still talking about Sears maybe five years from now.”

Besides hiring a new chief, Sears would also have to align its business strategy with the needs of today’s consumer. J.C. Penney, for example, recently announced it was dropping major appliances both online and in stores to make way for more apparel and soft home furnishings — categories that the company said represent “higher-margin opportunities.” It marks the first major move by JCP CEO Jill Soltau, who took the post in October and promised a turnaround plan for the struggling retailer.

Sears, which has long relied on its hardware and appliances businesses, has for years faced an uphill battle against bigger home improvement retailers such as Lowe’s and Home Depot. As it seeks to minimize its brick-and-mortar portfolio, the department store chain will likely reassess its offerings to a much more limited state.

“It’s going to be hard, unless they ramp up online, to be relevant to consumers with such a small footprint,” Wimer said. “Their scope has been tremendously reduced. As they were going down this path, they were selling off their private-label brands or their real estate, and none of that money was used to invest in the core business. I am very skeptical, from a retail perspective, on how they would use this scaled-down version of Sears to connect [with] and service that customer.”

Even if Sears manages to make such internal changes, the company’s survival lies in its potential to adapt to the digital age — a sentiment shared by former chairman and CEO Alan Lacy, who explained in an interview with CNBC late January that an online-first approach might be a deciding factor in possibly saving Sears.

“It’s possible, in my view, that [Sears] winds up with a going concern that’s basically based online,” Lacy said. “That area seems to be one area that Eddie [Lampert] has paid a lot of attention to, invested behind, seems to have a lot of interest in … and the stores that are left probably do have some retail value.”

As e-tail behemoth Amazon continues to dominate the online marketplace and change the way consumers shop, an increasing number of department store chains have invested more resources in e-commerce and cut down their physical footprints — or found more innovative strategies that would help them stay relevant. Macy’s, for instance, acquired New York-based concept shop Story last summer in a push toward experiential retail, while Nordstrom, which feted its New York men’s store in April and revamped its loyalty program in October, has been commended for its ability to sidestep the retail apocalypse.

“Even with the best efforts by Sears, in this new era of competing with Amazon, it’s challenging for everyone,” said Davidoff Hutcher & Citron LLP attorney David Wander, who represented four creditors with claims in the bankruptcy. “The big-box stores will not be as huge [as they used to be], and they’re going to be experimenting with other types of small-box stores and online business.”

After filing for bankruptcy on Oct. 15, the 126-year-old retail icon has continued shuttering doors and selling stores. When Sears and Kmart merged in 2005, the company had about 3,500 stores across the country and upwards of 300,000 workers. Last year, it was down to approximately 1,000 locations and 89,000 employees. A business plan filed with the court last week by an ESL executive added the closings of 36 of the 200 remaining Kmart stores.

“Part of the testimony that came out is that Sears intends to sell during the next three years at least $200 million of real estate. We don’t know yet whether they’re going to sell it off completely or retain the stores,” Wander said. “Right away, they’ve gotten rid of stores that they’ve identified as money losers. They’ll also continue to sell off some of the stores and see if they can get to a critical mass that actually is profitable.

“Hopefully they’re not going to sell off too many and that the headcount at the end of 2019 will still be close to what it is now,” added Wander. “If they’re retaining the profitable stores, they may have a fighting chance. We’re rooting for them.”

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