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What is Kmart doing?

January 28, 2008

Some of us can remember a time, really not very long ago, when Kmart was included in the same sentence with Target and Wal-Mart.  That was when Kmart had more stores and when each store did more business.  That was before Edward Lampert bought the company and combined it with Sears.  That was before the renamed Sears Holding Company was more valued for its retail sales than its real estate holdings.

Early last year I was speaking with an individual who covers Sears Holdings closely.  He expressed concern that though the stock was holding up, retail sales continued to slide.  He pointed out that there had to be a point where the sales would be so low that the company would just cease to exist.  Since that time, the stock has fallen precipitously and my contact looks pretty prophetic.

An important article in the January 27, 2008 New York Times takes on Sears’ falling share price and the continuing downward spiral in sales.  Entitled “Saving Sears Doesn’t Look Easy Anymore,”this article by Gretchen Morgenson, noted that since April of last year, Sears Holdings has lost $14 billion in stock market value.

The article points out the root cause as a declining level of infrastructure investment.  In other words, those bad looking outdated Kmart stores we all recall and loathe are now even worse looking and more outdated. 

An interesting case in point, cited by the article, is the attempt by the company to place higher end Sears products in what the company is calling Sears Essentials.  Here is what the article has to say about that attempt:

“. . . Sears Essentials flopped. It was not because Kmart shoppers rejected Sears products, but because the experiment seemed to consist only of tossing Kenmore stoves and Craftsman hammers into an old Kmart store, rather than creating a vibrant new shopping experience.

The former Kmart in Parsippany, N.J., is typical. Three years ago, it was converted into a Sears Essentials store. By all accounts, the store could have been a success; it sits in a bustling suburban shopping center, surrounded by popular retailers like a ShopRite grocery store and a Bed Bath and Beyond.

But beyond introducing new brands, Sears invested little money in the store. In November, a visitor found mismatched floor tiles in the lobby, Reagan-era beige shelves in the food aisles and a ragged brown carpet in the clothing department.

Near a customer service desk, a broken pipe dripped water from the ceiling into a garbage pail. Workers said the pail, intended as a quick fix, had been in place for two weeks while they awaited repairs. They also said business in the store was terrible.

Making all of this even worse is that the stores are not price competitive.  The article goes on to note:

Customers who did venture into the Parsippany store found that dozens of products — from contact lens solution to dolls — were sold out. The store did not have enough inventory or employees to replace them on the shelves. . . Analysts at Goldman Sachs have found that over the last year, average prices on nationally branded products at Sears Essentials and Kmart stores were 18 percent higher than those at Wal-Mart. “The prices are totally out of whack,” said Adrianne Shapira, an analyst at the firm.  

The consumer products industry needed and needs another powerful retailer.  Shabby stores and high prices seems more like a death wish than a competitive strategy. 

What is Sears Holdings doing?  We’d all like to know.

Posted by Richard Gottlieb on January 28, 2008 | Comments (2)