Sears - PE Lessons

By pjain      Published July 26, 2019, 10:23 p.m. in blog Invest   

Sears the Largest and the Best - What Went Wrong?

xform #1 CATALOG 1900 - Sears Grew as 500+ page Catalog - first "C-Commerce" company!

It began selling mail order watches in 1886 that relocated to Chicago expanded to high value aspirational goods offering watches, diamonds, and jewelry. Basically the gradually growing wealthy pioneers did not have access to such goods, and European and East Coast producers had no market access to the heart of the US.

With a gap of few years, restarted as a full-range catalog company in 1893.

Sears, Roebuck and Company, colloquially known as Sears, founded by Richard Warren Sears and Alvah Curtis Roebuck in 1893

  1. LOGISTICS About 120 years ago, in 1900 - improvements in postal delivery made mail-order a practical way to reach rural Americans who lived far from major stores. This is an unverified claim, as many items in Sears catalogs were large pieces of furniture. Was it also the full national rail network. Sears capitalized on this realizations to build a fantastic catalogue business.

  2. VAST RANGE of Goods - JUST ORDER IT. Similar to today's million items on Amazon, in just a few years, it grew to a 500+ page catalog. It included many new items such as sewing machines, bicycles, sporting goods, mattresses, even automobiles, dolls, stoves, and groceries. The Sears catalog became known in the industry as "the Consumers' Bible".

  3. FAIR ACCESS and FIXED-PRICE GOODS! Before the Sears catalog, farmers near small rural towns usually purchased supplies—often at high prices and on credit—from local general stores with narrow selections of goods. Prices were negotiated and relied on the storekeeper's estimate of a customer's creditworthiness. Basically the markup was substantial. Sears took advantage of this by publishing catalogs offering customers a wider selection of products at clearly stated prices. Later on, American Indians would shop using the Sears catalog to prevent denial at racial biased shopkeepers.


    Sears' partner Rosenwald by 1900 brought to the mail-order firm a rational management philosophy and diversified product lines: dry goods, consumer durables, drugs, hardware, furniture, and nearly anything else a farm household could desire.

xform #2 1925 SUBURBIA/AUTO RETAIL CHAIN - grew to the Largest and the Best retail chain

The mail-order market was based on rural America, with a slow-growing population and as the 1919-21 severe depression showed, was very sensitive to the agricultural economy. By 1925, Sears started to target the far greater spending power of urban America - centered on its industrial, financial and trading centers. It grew from is a chain of department stores from the first retail one 1925 in Evansville, Indiana.

  1. Sears in a brilliant insight, about 90 years ago, the automobile changed Americans’ relationship to retail, making drive-to chain retailers a viable model. They could exploit the rise of suburbia with cheaper land!

  2. STUCK TO LOW COST OUTLETS and AVOIDED CITY CENTER ORIENTED CENTERS - both to get new at demand The first Sears retail stores were opened in conjunction with the company's mail-order offices, typically in working-class neighborhoods Its stores were far from the main shopping center, avoiding competition and serving the rising suburban trend. From the 1920s to the 1950s, Sears built many urban department stores in the US, Canada and Mexico (apart from, but not far from, existing central business districts), and they overshadowed the mail-order business.

  3. MENS GOODS, BUILDING, HARDWARE GOODS - Soft goods always a weakness - less fashion oriented. Sears was a pioneer in creating department stores that catered to men as well as women, especially with lines of hardware and building materials. It de-emphasized the latest fashions in favor of practicality and durability, and allowed customers to select goods without the aid of a clerk.

  4. 1950s SUBURBIA - PARKING FRIENDLY, LARGE A/C STORES. Starting in the 1950s, the company expanded into suburban markets and malls in the 1960s and 1970s. Its stores were oriented to motorists—set apart from existing business districts amid residential areas occupied by their target audience; had ample, free, off-street parking; and communicated a clear corporate identity. In the 1930s, the company designed fully air-conditioned, "windowless" stores whose layout was driven wholly by merchandising concerns.

1930s Diversification - Transitioned to a Conglomerate - Retail as a Base

  1. REAL ESTATE - CREATING VALUABLE MALLS BECAME VITAL. In 1959, it had formed the Homart Development Company for developing malls. Often Sears would anchor (ensure essential traffic) in partnership with other majors like JC Penneys and/or Macys. Ironically, to attract these partners, Sears (or mall management) would have to segregate and not outright compete with same goods selection. Again, this kept Sears from competing in fashionable, higher end soft goods esp. for women.

  2. AUTO, TOOLS, APPLIANCE BRANDS. Sears established major national brands, such as Kenmore, Craftsman, DieHard, Silvertone, Supertone, and Toughskins.

Finance, Real estate moves were Blunders to use that "Floor Space"

CEO Ed Telling tried to take Sears in one of those evolutionary directions with the whole idea of the ‘socks and stocks’ purchasing of financial services. Sears was the most trusted retailer, the first credit card that most Americans could get. The idea was that Sears could enter this new arena of 401(k)s, and middle-class America would trust Sears before they would trust a stockbroker.

Finance did create a lot of shareholder value. But there came a time where it had to be unwound. The management team was distracted away from the retail business.

  • ALLSTATE INSURANCE. Sears began to diversify in the 1930s, creating Allstate Insurance Company in 1931 and placing Allstate representatives in its stores in 1934.

  • REAL ESTATE The company became a conglomerate during the mid-20th century, adding Dean Witter and Coldwell Banker real estate in 1981.

  • FINANCE MAJOR CREDIT CARD COMPANY It introducing the Discover credit card in 1985. At this time, the first credit card a new consumer would get was a Sears credit card. Having its own credit card was of course a good idea, but may not have been managed as profitably as Mastercard and Visa were.

  • TECH was just a failure. It started Prodigy as a joint venture with IBM in 1984,

Stabilized as the Largest and the Best retail chain

The company went IPO in 1906 (still as a mail order catalog), with corporate HQ in NY, but merchandizing HQ in Chicago. It traded under the ticker symbol S, and was a component of the Dow Jones Industrial Average from 1924 to 1999.

Many of the company's stores have undergone major renovations or replacement since the 1980s.

Sears was the largest retailer in the United States

1990 Walmart surpassed it as largest retailer.

KIDS. I remember going to Sears as a kid with my parents and the smell of the popcorn and the candy counter. It was the go-to retailer for folks in the middle class. MEN. My dad shopped at Sears. He loved the tools. I was proud to wear Toughskins, the Sears house brand of jeans. They had patches on the knee so you never wore them out.

1974 Downslide: CAUSES of Sears losing out as Retailer

Sears had reinvented itself so many times over the years, and it was in need of changing again and guessed wrong. In a sense, any huge and old elephant danced to too many different tunes. Sears reached its pinnacle in 1972-1974. The Sears Tower, its corporate headquarters was the tallest building in the world taking over that title from the World Trade Center.


Amid changing shopping patterns, technology shifts and Sears’s own missteps, customers fled.

Having successfully transformed twice, Sears worked VERY HARD to try to figure a way out - but maybe it tried too hard, with ballast of existing strategy and stores to change enough.

Sears’s errors went mostly in the other direction: trying too hard to figure out what would be the next big thing, and thereby getting into businesses it wasn’t especially good at.

1980-87 Defocus with Financial Side Business did not go for Low end. Bean Counters in Charge!

In the 1980s, Sears decided it should become a financial services company, adding Dean Witter and Coldwell Banker to its portfolio alongside Allstate, and launching the Discover credit card. It also got into cyberspace, building the Prodigy Internet service with IBM. In 1987, then-Sears chairman Edward Brennan told the Washington Post combining retail and consumer financial services would create a synergistic situation where “two plus two equals six. … We may not be at six right now, but we’re at more than four and growing.” But by 1994, Sears was selling off its consumer finance businesses, even Allstate. “The synergies just aren’t there anymore,” Brennan told the Chicago Tribune. (Prodigy would be sold, at a steep loss, in 1996.) SRC

  1. Selling Financial Investments (Dean Wittier) was a blunder. People were Sears customers were because they did NOT have more money.

  2. DEFOCUS Conglomerate psychology, MBA-at-top was a distraction for top CXOs.

  3. 1993, Sears killed the MAJOR Catalog. It was " the bleeder that we’ve got to cauterize." However, while it saved money, it was a key part of their marketing and identity. So killing it was a very big deal - the customer identified with huge catalog. Replacing with multiple holiday "wish books" did not replace value of RURAL access - plan. The Major Catalog, also had a unique data base of customer information.

    We had antiquated distribution centers and the catalog was too expensive to print and we just closed it versus trying to fix it. It was a turning point. 50,000 people lost their jobs.

  4. MIDDLE-ROAD NOT Speciality Stores like Gap dominated consumers seeking to differentiate themselves. Sears became as the "centrist" goods that EVERYONE BUYS. So Softer side failed.

  5. It wasn’t reinvesting into its stores

  6. SEEN AS STAID not ELECTRONICS/TECH. Changing business direction, which was beginning to change. Computers were starting to take over and people were becoming more mobile. Best Buy, Radio Shack all benefited from the 1980s tech boom. Also, as mid-80s layoffs showed, if you were not tech-savvy, you lost out. Sears was seen as very staid and old-fuddy-duddy.

  7. Wall-street like Arrogance - unwilling to learn from Walmart and other Retailers

    The senior executives at Sears would conclude: Walmart can’t touch us. .. almost an arrogance with regard to the competition. We felt nobody would shop in a warehouse like Home Depot. Nobody would shop at a place like Best Buy where you didn’t have dedicated salespeople.

MISSED Supply Chain, BargainDown - Non-commission - BIGGER BOX-MIDDLE of Road

Walmart developed supply-chain and other efficiency innovations that allowed it to undercut Sears on price, selection, and ubiquity.

Then it became challenged by other retailers such as Home Depot, Best Buy, and Walmart. Sears was ultimately unable to meet these external, and sometimes, internal challenges. By mid 1990s Walmart was three to four times its size already. Home Depot, Lowe’s, Circuit City, Best Buy and Target, and even at that point Kmart, were all growing, and Sears sales were declining. By 2018 Sears was only the 31st-largest retailer in the United States far down from #1 in its position from 1950s through 1990.

  1. Walmart - Everyday Rollbacks - Lowest price, 100k+ Catalog in the store! As rivals like Walmart were bearing down, with vastly better and efficient supply chains, and far cheaper land on which they built bigger stores with more of a selection, essentially they moved consumers to go "a few more miles" and save a lot, but away from the locals malls centered by Sears. Walmart were simply terrible, merciless negotiators; Sears tried to be more like Walmart but by then did not have the scale to do so.

  2. NOT ACCEPTING ALTERNATIVE CREDIT CARDS till Late 1980s. In 1980s And then we started accepting credit cards other than the Sears card.

  3. CONFLICT OF INTEREST IN "STORE BRANDS" Sears had its own brands dominating the most profitable chunks of appliances, tools, etc - and that slowed innovation - how do you knock down your own manufactured goods!

PROBLEM: HE-MANS Store? Softer vs Hardlines Clash - Mid-Road vs Speciality

  • Core seen as Hardlines: Appliances, tools. HOME DEPOT beat it in APPLIANCES. More Convenient Locations Warehousing Appliances.

    Appliances are just not enough! While the appliance business was our signature, it’s a small business. The appliance category is just not that big. People buy appliances every 10 years, at most. One of the things that Sears had done so well was its distribution and logistics around appliances. A washer could be manufactured at a GE plant in Kentucky, get loaded on a truck to the warehouse that night, and then cross back over to the home delivery pad by early in the morning and be delivered the next day. Sears did an analysis that showed customers would drive 25 miles to buy an appliance. Home Depot in the ‘80s started dropping stores in between two Sears stores. If you’re driving past two Home Depots on your way to a Sears store, you start to wonder, “Why am I driving?”

  • Sears was seen to be a Man's store with hardlines. Sears had come to ignore that it was the woman in the American family who did the shopping for everything. We had to remove the mental block she had about the store not being for her. - Saks exec and Softer Side of Sears campaign.

1993ish Softer Side of Sears - successful marketing campaign - but failed! It did NOT boost sales at Sears stores.

  • CLOTHING NEVER TOOK OFF. Exciting Speciality Stores can do better: Gap dominated consumers seeking to differentiate themselves. Sears became as the "centrist" goods that EVERYONE BUYS. So Softer side failed.

    Sears hired Arthur Martinez, a Saks executive first as Merchandizing chief, then as CEO from 1995-2000. He wanted Sears to be an apparel store in the mall. The Sears apparel business never had the dominance that Sears hardlines did. So we started to take our hardware departments or our appliance departments and move them to the back of the store. It was sacrificing extremely profitable floor space to give to apparel that was underperforming both revenue-wise as well as profit-wise.

  • Everyday prices vs Sales and Impulse Fashion Buys. If you go into a Saks Fifth Avenue, which is where Arthur came from, you see maybe eight or 10 pieces on a rack. The whole perception is, ‘I better buy it today, because it might not be here next week.’ At Sears, there was stock on the floor in bulk, huge quantities. There was no incentive to buy it today at regular price, because it would always go on sale. The whole apparel business was missing a fashion approach.

  • Unfasionable Same-old Not-Hip Clothes. What we had on the floor in apparel didn’t really distinguish itself very much. ‘Oh, you guys are polyester kings.’
  • Sears wanted to appeal to younger customers. Unfortunately, they had older customers. The income level was lower. Ninety percent of what was selling were the same old polyester pants that "men walked in, bought and left 5 minutes later". This was the flaw with Softer Side - it did not attract new sales, or generate cross-overs.

  • Target's Chip Chiq Never took off at Lands End brand purchase. Sears spent $1.9b on Lands End which a LOT of money.

    Lands End was a business that was orphaned child. It never went on sale, on purpose "to retain brand value", surrounded by product in store that was always on sale. Walmart reset prices for the industry. If Walmart is selling a decent pair of jeans for $20, it’s hard to sell a somewhat better pair of jeans for $60.

MISSED Speciality visible Big Box stores in Strip Malls, Self Service

  • Self service and lower expenses. Sears still tried to have a salesman for each little department, just like the luxury city-center retailers (often snobby salespeople), but shopping patterns were changing to value more price and fit rather than "service".

  • Warehouses and Strip Malls killed Malls.

    90% of Sears stores were in shopping malls. Walmart, Target and the others were going to open-parking strip centers. That was increasingly more customer friendly than the schlep from a big parking lot all the way deep into the mall. - Saks CEO Martinez PKJ Take on this .. Sears was right off the parking lot - so this did not apply at least to Sears near me. Its floor layout was confusing .. mid way between luxury Macys yet rough shelves almost like a Home Depot in its hard lines.

  • To Sears credit, it tried the Sears Grand format, basically a big-box store that was right across the highway from Walmart, Target, Home Depot and Lowe’s. Those first few stores that we did, they were doing $45 million and our mall-based stores were doing $25 million in annual sales. We couldn’t build enough stores to really catch up to what was happening at that point with 1,000 new competitive outlets being opened every year by Home Depot, Lowe’s, et cetera.

2001> Central Cashier Model vs Department Commission Representative Commission Model 1. The department-store customer service model was expensive. Sears still had a commission hardware business, a commission appliance, electronics, mattress, carpeting business. 2. In contrast at strip malls and big box stores ... the customer had been conditioned at that point to think that self-service was actually better. 3. In the Softer side goal, Sears simply moved around departments, to create the space that we took out to give to apparel. So sears embraced self-select. I find the tool I’m looking for and put it in a basket. I go to the self-service footwear department. I go to a central cashier. 4. Pricing totally out of whack $60 jeans vs $20 at Walmart. Sears pricing, just didn’t come down on apparel.

  • Speciality won in ELECTRONICS - BEST BUY. Where service matters, Sears clerks ignorant!

    In the late ‘80s Sears finally recognized that Best Buy was a competitor to be dealt with, and we started to add other appliance brands beside Kenmore and Whirlpool.

MISSED: Online Shopping though it had lead in Catalogs for 100+ years

But Sears missed the biggest change in recent history, the shift to online shopping.

CEO Arthur Martinez: We closed the catalog in 1993. The internet hadn’t been created yet. We had to focus on the mother lode, which were the roughly 900 full-line stores. 1999 And Searse did it much sooner than anyone else in the business. We already had the infrastructure to deliver appliances to people from a warehouse. So we launched with the appliance business. PROBLEM: The bulk of its customer base, were lower-to-mid income with non-tech jobs, they weren’t innovators in terms of wanting to try the next new thing. Plus, our online site was cumbersome.

We pushed for a lot of technology investment. We were one of the first retailers to launch ‘buy online, pick up in-store.’ This was in 2001. PKJ - this is a internal thing that just doesn't work for consumers - real convenience is to just get it delivered to home. Without a massive discount, consumer has no real incentive to pickup in store.

MISSED: Ecommerce - the Digital Catalog of 1997+

  • Sears Killed Catalog just before the Internet Era took off!

    Sears was the Amazon of its day. It sold everything for everybody. The catalog was the precursor to the internet. It gave access to everything in the store to people around the country. Over the course of 100-plus years, Sears had accumulated a wealth of customer shopping data.

Amazon was the company with the technology and fulfillment competencies to dominate the second rise of mail-order.

2000 Lampert: Buyback, spinoff to boost share value, Underlying Real estate => 2005 K-Mart Acquired $11b - mismatch

  1. Eddie shows up soon after holding 5%+ of stock. Highly influential, using his Hedge Fund reputation on top of fear as a greenmailer starting from a 5%+ control early 2001 at low prices.

  2. Eddie pushed for invest less in the business to have more free cash flow, or actively divest assets, to buy back stock to raise stock value, to allow hedgies to exit at higher values. Eddie had a point of view that traditional retailers spend too much on stores, spend too much on marketing and probably carried more inventory than they needed.

  3. Vornado the mega-REIT tried to acquire Sears ~2001 for its underlying real estate. This was also a Lampert thesis, however with the 2008 real estate crisis - that killed that motivation!

Eddie was further invited to Sears by Alan Lacy who became CEO, at after first major investor conference was in November of 2000. . "Effectively, Eddie was CEO. I didn’t want to pretend to be the CEO. I stayed another nine months to help in the transition. I stopped being CEO in ‘05, and left in ‘06." -- Alan Lacy

In 2005, Sears was bought by the management of the American big box chain Kmart, which formed Sears Holdings upon completion of the merger. Kmart consumers had far less income than Sears, and seen as poor quality goods that just did not last anywhere like Sears goods did.

By 2007-2008, it was not anywhere close to the same company. The Kmart merger rapidly disintegrated the (Sears) culture. After the merger, I didn’t have time to walk the store, understand the situation and help the management team because I’m doing a check sheet. It was so micromanaged. What it became was everybody was looking at the little things, and the big things fell apart.

  1. The discipline that Eddie brought to those meetings, from his finance background, to debate things on facts, to really explore options, and then to quickly make decisions - theoretically this public discussion could be considered a breath of fresh air.

  2. Eddie created bitter competition between department heads. The idea was to create these billion dollar - where the independent business units came from and a new kind of operating model. Some of which worked! Sears returned to be No. 1 in appliances, No. 1 in sporting goods.

  3. If the sales increased, they got MORE of the advertising or other finance, etc support but which starved other newer, perhaps more innovative units.

  4. However, Eddie also humbled them in front of everyone in Thursday corporate meets. The weekly Thursday morning teleconferences with Eddie were embarrassing. Eddie got upset because an executive was carrying a shopping bag from a competing retailer. Basically execs were intimidated and could not express their opinions.

2013-18 CEO Lampert stripped assets but cut investments

  1. Operational Cost Cutting all created a downward spiral that predated Eddie

    When you’re not doing top-down revenue growth, you can only squeeze the middle so much until there’s nothing else to squeeze. Some of your fixed expenses never change, and over the last 50 years that’s what’s happened to Sears. In 2011 and 2012, the vast majority of stores were still in pretty good condition. Once they started selling off stores, they also cut off advertising Sears advertising worked. When the advertising was slimmed down, it had an impact on our customer traffic. In the past couple of years, even around Christmas, I don’t remember seeing any Sears TV ads. So the sales volume fell off Then there was even less money to invest in the business .. stores started falling apart

  2. EXPENSIVE GIVEAWAYS. Sears REWARDS, LOYALTY Ideas to build repeat purchasing behaviors - opposite of Prime and Costco membership! Eddie’s idea around creating membership and loyalty were great but by the time those came out, there just wasn’t enough product to drive frequency.

    I never saw a reward card that gave away so much money. You buy $100 worth of merchandise, you got $75 back in rewards points. That encouraged people to come back and buy more stuff, but they were getting a lot of it for free.

  3. SUPPLIERS RELATIONSHIP HURT. In a push for more profits, Lampert squeezed the suppliers, which were already hurting against Home Depot, Walmart, etc. They gave ground but then became uncooperative as Sears got weaker and had less volumes. The suppliers wanted to shorten payment terms as our credit and financial standing became less stable. I

  4. One way spin-off death spiral of Sears iconic brands => no longer a destination store.

    In 2014, with the Lands’ End spinoff, and then the Seritage spinoff .. that’s when it seemed to shift into, he’s managing for cash flow, or liquidation. The sale of Craftsman to Stanley Black & Decker was the ultimate capitulation - its iconic brand got put it into Ace Hardware, in Lowe’s, etc.


    The lack of staff really disrupted the entire operation for at least the last two to three years. They were seriously cutting the payroll. That was a distraction for the commissioned salespeople because we had no cashiers on our particular level. We were on the top floor of a two-floor Sears, and the few cashiers that were left were all working downstairs. At the end, they weren’t even maintaining the registers. A lot of the registers were broken. I didn’t even see a cleaning crew at all.

Lampert closed more than 3,500 stores, shed some of its most valuable assets, including Lands’ End, and laid off thousands.

Lampert, a suit from Sears' unsecured creditors alleges, “caused more than $2 billion of assets to be transferred to himself and Sears’ other shareholders and beyond the reach of Sears’ creditors. .. In an effort to create a false record to cover up their asset stripping, at Lampert’s personal direction, Sears employees repeatedly produced financial plans reflecting fanciful, bad-faith predictions that the company would experience an immediate and dramatic turn-around from deep and mounting losses to sudden profitability.”

Oct 2018 Termination near liquidation

The bankruptcy had a silver lining. It was that we will emerge better capitalized. We cut our debt from over $5 billion to a little over $1 billion. We might be smaller, relative to our store base in the past, but we’re healthier.

Sears filed for bankruptcy in Oct 2018. Lampert bought Sears through an affiliate of his hedge fund ESL Investments, saving it from total liquidation. Sears announced on January 16, 2019 that it had won its bankruptcy auction and would shrink and remain open with 425 stores.


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