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Sears CEO Eddie Lampert On the Defensive as Sales Slide

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Mark Cohen, a former CEO of Sears Canada, has a few bad things to say about Eddie Lampert, current CEO and majority shareholder of Sears Holdings Corp.

“Sears is slowly and steadily failing at the hands of a ruthless, methodical asset-stripper,” Cohen was quoted as saying in a recent analysis piece from Bloomberg News. “Lampert will come up with some cash every quarter or two to make sure the balance sheet is still viable. It’s a tragedy, because Sears is a legacy brand that needed to be and could’ve been repositioned.”

Lampert says that his strategy will pay off in the long run, and that he knows what the company needs to succeed. He owns a 55 percent stake in Sears.

Analysts have accused Lampert of failing to articulate a clear strategy for Sears and Kmart. He merged the two firms in 2005, along with his RBS Partners LP hedge fund. In the last eight years, the firms have struggled under a series of chief executives. They have made improvements in merchandising, online sales, and customer loyalty, but sales have fallen for six years in a row.

The chain posted a $279 million loss in Q1 and revenue was off 8.8% to $8.45 billion. The shares have risen 14 percent this year, against a 16 percent rise for the broader S&P 500 Index.

The accusation of asset stripping comes as Sears has increasingly turned to selling parts of its business to shore up cash. In 2012, they sold 110 stores and also spun off its small-store format units Hometown, Hardware and Outlet. The company also sold part of its Canadian Unit. In 2011, it sold its stake in Orchard Supply Hardware Stores Corp., which made a bankruptcy filing yesterday.

The firm has agreed to vacate two store leases in Canada to raise $187.5 million in cash, and may also sell its warranty business.

These moves have protected the company against a cash crush. While it is only holding 5 months in reserves at the moment, it has $7.3 billion in rapidly liquefied assets, including $5 in inventory and $1.75 billion in credit.

The risk, say analysts, is that the sales are hurting the long term potential for the company by reducing its ability to generate cash. As the company spins off underperforming assets instead of refurbishing them, it is on a shrinking trajectory.

Building that into the business plan as a cash generating strategy also dampens innovation and raises the risk that the corporate structure might collapse.

Lampert has indirectly said that he wants Sears to be more like Costco by becoming a “membership” retailer, though it isn’t entirely clear what he means. 60% of Sears’ sales come from Shop your Way members, but the company doesn’t charge to join, so makes no money from annual membership fees.

Lampert has also said that the loyalty program is about providing a higher quality of service to customers. It is possible that the firm may take the program in the same direction Macy’s CEO Terry Lundgren has with My Macys, the program that allows Macy’s to customize its offerings by store location and customer base.

Kmart is also struggling, with prices an average of 14 percent higher than competitors. The store once enjoyed a strong reputation as a discounter, but it has now lost ground among its critical demographics of urban residents and Hispanics. They are particularly vulnerable to inroads from Walmart and Target, and same-store sales were down 3.7 percent last year.

Indeed, some investors at Sears Holdings’ annual meeting last month questioned why Kmart should even exist. Lampert defended his decision, saying that moving to a single brand focus would be a “very risky bet.” The two chains still attract different customer bases, he said. Kmart appeals to a lower-income customer, and Sears targets homeowners.

Kmart is still valuable in clothing and home goods, Lampert said, and could use those areas to boost profit. Indeed, the chain’s recent released “Ship My Pants,” commercial went viral, generating much positive buzz for its ship-to-home program. The brand is also expanding its private label food offerings and household goods in order to narrow the price gap with other stores private brands.

On the flip side, some analysts have called for Sears to close hundreds of its underperforming stores, allowing it to plow cash into its remaining properties. Lampert has instead pursued a “fix and see” strategy, making incremental improvements in existing stores to try and preserve a board base.

Analysts say that these incremental measures have not been enough, and Lampert needs to cut the bottom-third of locations for Kmart and Sears. This move, if taken, could burn through cash by requiring Sears to buy out those leases.

As one analyst, Paul Swinand, at Morningstar Inc. in Chicago was quoted by Bloomberg as saying, “Eddie’s got the wrong equation. Loyalty only works when the customer wants stuff you have.”

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