Sears, Kmart Huddle in Wal-Mart's Shadow

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One catalog expert offered some advice for Kmart chairman Edward Lampert regarding yesterday's news that Sears and Kmart will merge into a single entity: Don't touch Lands' End.


"Sears and Lands' End are such disparate brands that a person looking at a $35 Lands' End shirt is also faced with a $9 Sears shirt 30 feet away," said Donald R. Libey, managing director of Libey-Concordia, Philadelphia, an investment banking firm for the catalog industry. "The customer base is very different. Now you add to the mix an even lower-end customer with the Kmart brand, and what does this really do to the Lands' End franchise? It's approaching the point where the equivalent would be putting Lands' End inside of Wal-Mart, for God's sake. I hope they have the common sense to leave Lands' End alone. Don't cheapen the brand."


Several analysts viewed the Kmart-Sears merger as a real estate deal. Large retailers such as Wal-Mart, Target and the newly combined Sears-Kmart entity are "playing market share, real estate and saturation games, and direct marketing doesn't fit well into their strategies," said Libey, who described himself as being thankful for that.


"I would not want to see these huge retailers entering the catalog world and squashing so many wonderful brands that we have built up over the years," he said. "I don't want Wal-Mart doing to our wonderful catalog industry what it did to Main Street America."


The $11 billion merger is to close by the end of March.


Lampert's investment company, ESL Investments Inc., owns a 52.6 percent stake in Kmart, Troy, MI, and is the largest shareholder in Sears, Roebuck & Co., Hoffman Estates, IL, with 15 percent.


The deal will create the third-largest U.S. retailer. The combined company, with $55 billion in annual revenue and 3,500 store locations, conservatively estimates it will generate $500 million of annualized savings from improved operational efficiency in procurement, marketing, information technology and supply chain management.


Lampert will be chairman of the new company, Sears Holdings Corp., which will be based in Hoffman Estates. Kmart, which emerged from bankruptcy last year, will retain a significant presence in Troy.


Alan J. Lacy, current chairman/CEO of Sears, will be vice chairman/CEO of Sears Holdings. Aylwin B. Lewis, current president/CEO of Kmart, will be president of Sears Holdings and CEO of Kmart and Sears Retail. A 10-member Sears Holdings board of directors will include seven members of the current Kmart board and three from the current Sears, Roebuck board. Sears Holdings will act as the holding company for both businesses, which will operate separately under their respective brand names.


Sean Egan, managing director of Egan-Jones Ratings Company, Haverford, PA, an independent credit ratings company, acknowledged that Wal-Mart continues to beat up on Sears and Kmart.


"I don't think Lampert has any delusions of grandeur of competing with Wal-Mart over the next couple of years," he said. "He is likely to reduce expenses, redeploy cash to other investment opportunities and scale back the number of retail units. For the existing units, you are likely to see a reduction in expenses and ongoing capital expenditures."


Egan described the deal as a change in the history of both companies as they fade further from the retailing landscape in the coming years.


"You're not going to think of them in the same breath as Wal-Mart," he said. "They are going to pick their spots more carefully and not put as much cash in the game as before. They will reduce advertising expenditures and administrative costs."


Egan also suggested that more changes may be in store for Lands' End.


"The overriding [factor] is whether the value of that operation is greater now than it will be in a couple of years," he said. "If Eddie Lampert could realize a lot more money by selling now rather than keeping it, he will not hesitate to dispose of an operation as opposed to building up the brand. He's a pure capitalist. It's all about making a buck."


Kurt Barnard, president of Barnard's Retail Consulting Group, Upper Montclair, NJ, said the merger takes attention away from Wal-Mart, "the big daddy all around, and it will give both companies a completely new target -- and that is Target and Kohl's."


Barnard acknowledged the real estate aspect of the deal.


"I think it's a win-win deal for everybody because, even in the remote event that the deal should not work, they still have the real estate value to fall back on," he said.


Regarding Lands' End, which Sears bought two years ago for about $1.86 billion, Barnard said, "Kmart customers can become customers for Lands' End."


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