On the brink: Sears keeps closing stores
byJun 7th 2009 4:00PM
Five years ago, Eddie Lampert was seen as the next Warren Buffett. Having gained control of bankrupt retailer Kmart Corp. in 2003, the businessman snapped up Sears. Roebuck & Co. for $11 billion.
Wall Street hailed the combination, expecting big things from Lampert. "Sears has its own $2.7 billion cash reserve that will grow as Lampert wrings inefficiencies out of the aging department-store chain," a 2004 BusinessWeek article gushed. "Lampert says the combination will save $300 million annually in costs and add $200 million to profits by promoting each chain's brands in the other's stores."
Unfortunately, things did not work out that way. The company, now called Sears Holdings Corp. (SHLD), has struggled against larger rivals such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT). Many of its mall locations were hurt by the growth in online sales. Plus, the company, enduring the worst climate for retailers in decades, has laid off workers to cut costs. Sears operates 3,900 full-line and specialty retail stores in the U.S. and Canada, and employs 291,000.
Like many retailers, Sears recently posted better-than-expected quarterly results. But investors caution that the retail giant, based in Hoffman Estates, Illinois, is not out of the woods. Consumer sentiment remains moribund, and many economists fear that unemployment may top 10% this year. Sears closed 28 stores in 2008 and another 24 locations this year.
In his letter to shareholders this year, Lampert lamented the state of the economy and did not rule out further store closures. "Our approach has been to continue to operate money losing stores in the past so long as we believed that we could restore those stores to profitability, and that the level of losses could be recovered upon return to profitability," he wrote. "Given that any store we operate has a significant inventory investment and in some cases can have value to others, and given that we operate in a highly competitive industry, we cannot afford to operate stores without the prospect for an adequate return."
While cost-cutting and debt reduction are commendable, those are no substitute for sales, which plunged 12% in the first quarter. It would take a miracle for Sears to escape the recession without laying off more workers or shutting more stores.
See more iconic American companies on the brink.