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Originally published Wednesday, December 22, 2010 at 10:05 PM

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5 years after Kmart merger, Sears remains a tough sell

Five years after Sears and Kmart merged, Sears Holdings is beleaguered, with sales markedly worse than its rivals'.

The New York Times

This holiday season, Sears and Kmart are pushing a single message: Buy with layaway, buy with coupons, buy now and pay later, buy with loyalty rewards points — but please, just buy.

Five years after the two retailers merged, Sears Holdings is beleaguered, with sales markedly worse than its rivals'.

Revenue dropped more than 10 percent from 2005 through 2009, the most recent full fiscal year. In the same period, Wal-Mart's sales rose almost 31 percent, Target's more than 24 percent and Macy's about 5 percent. Sales at J.C. Penney sales slipped by about 6 percent.

As shoppers seem to be cautiously loading their carts again, Sears Holdings has not benefited. In the first three-quarters of 2010, its sales are down about 1.9 percent compared with the same period last year, while the competition moved into positive territory.

Edward Lampert, the billionaire hedge-fund manager who engineered the merger and is chairman of the company, has promised Sears Holdings will be "unrecognizable" in 30 years. To drive sales, it is emphasizing online shopping, mobile apps and an Amazon.com-like marketplace with other vendors, along with heavy promotions in stores.

Still, its long-term strategy remains murky, analysts say. Sears Holdings is primarily a physical retailer, and many of its 2,200 stores in the United States are rundown and in undesirable locations. Among discount stores, Kmart lags behind Wal-Mart and Target.

Sears is trying to edge out Lowe's and Home Depot in appliances on the one hand, and Macy's and J.C. Penney in apparel on the other.

"People assume that Eddie's got some magic formula," said Gary Balter, an analyst with Credit Suisse. "If you're Sears, you've got a problem because you're trying to sell a product in a dilapidated building," he said.

And Kmart stores are "about a quarter the sales productivity of Wal-Mart," he said. "How do you compete?"

When Lampert combined Kmart and Sears in an $11.9 billion deal that went through in 2005, many of the same analysts considered it a smart move.

Lampert, who became the majority owner of Kmart after it went into bankruptcy, said then he wanted to combine the best of both, putting brands such as Kenmore and Craftsman into Kmarts, and building Sears' presence outside of malls by turning some stand-alone Kmart stores into Sears stores.

Some attractive store locations, particularly in urban areas, led analysts to believe he could sell those to competitors for premium prices.

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But the consumer pullback in 2008 led to lots of empty retail space, at less expensive prices than Lampert's. Today, Balter said, Sears Holdings still has some showcase spots, in high-end, high-traffic areas such as Bergen County, N.J.; South Coast Plaza in Costa Mesa, Calif.; and in Manhattan and Bridgehampton, N.Y.

But much of the remaining real estate in older, decrepit malls is a problem, Balter said. "Of the 2,000, there's 1,500 that you don't want to be in, that nobody's going to buy," he said. (It also has a growing division of about 1,600 specialty stores, such as small hardware stores and outlets.)

The better locations "are where Sears and Kmart are making their money; if you sell those, what are you going to be left with?" Balter said.

Lampert has not invested much in the stores themselves, analysts said. In 2009, capital spending only amounted to 0.82 percent of sales.

That is about half Macy's spending, at 1.51 percent of sales, and a fraction of the spending at Target, Wal-Mart, J.C. Penney and even publicly traded dollar stores, all of which are at 2 percent and above.

David Friedman, Sears Holdings' new senior vice president and president of marketing, played down the importance of appearance.

"The customer's experience is made up of lots of pieces," he said. "The in-store experience is one of those that matters a lot, and we believe that the physical plant is one piece of it, but we believe the associates and the products drive the in-store experience."

Sears Holdings is experimenting with new layouts and fixtures and will introduce those more widely if they are shown to improve sales.

Tom Aiello, a Sears spokesman, said in an e-mail that brightness and cleanliness were priorities, and noted that customer-satisfaction scores had risen this year.

Transforming Sears or Kmart into fashion destinations will be difficult, said Jason Asaeda, a retail analyst at Standard & Poor's.

Friedman said customers were "more willing to purchase fashion at a Sears than at a mass merchant," and described Kmart's fashion efforts as having a "very good response."

Aside from working on appliance and apparel, Sears seems to be putting the most weight behind its promotions and Internet efforts.

Through a program called AdYourWay, shoppers can choose an item online and direct the site to notify them when it reaches a certain price, or ask the site to recommend products.

Mygofer lets people shop online for basics such as eggs or bread along with tools or gifts, and pick up those items in a store the same day.

Sears Holdings has several mobile applications to help people choose gifts or order items. This year, it announced Sears Marketplace, where more than 18 million products were available via third-party sellers. And a single login and profile can be used across all Sears Holdings sites, such as LandsEnd.com or TheGreatIndoors.com.

Analysts said that while they were impressed with the company's forays online, they did not see the websites as a cure-all.

The retailer is also trying to lure shoppers with promotions. It extended its popular layaway program and is running no-interest offers on the Sears credit card and buy-now-pay-later plans with monthly payments.

It began a rewards program at Kmart last year and Sears this year, offering points for buying and activities such as writing reviews online. It is also offering holiday promotions, such as Black Friday-level pricing on weekends beginning in October, and keeping Sears and Kmart stores open Thanksgiving Day.

For longtime shoppers such as Linda Formicola, the rewards are a nice bonus, but it is Sears' history and good discounts that bring her in.

"We've been shopping at Sears since I can remember," said Formicola, 43, of Franklinville, N.J. Her husband is a mechanic, so he gets tools there while she looks at clothes and supplies. "If stuff's on sale, it's pretty much the same price as you'd buy at a Walmart," she said, adding she believed the quality was better at Sears.

Bill Dreher, an analyst with Deutsche Bank, acknowledged the company had maintained some shopper loyalty but said he was puzzled about its future.

While an asset mix including brands such as Kenmore and Lands' End, real-estate holdings and the successful Sears Canada division may be valuable, retailing magic seems to be lacking in Lampert's vision, he said.

"He's got this huge conglomerate of retailing, which is really not doing very well right now, and frankly, if it weren't for Sears Canada, would be in a real mess," Dreher said. "He's focused so much on reducing costs and driving cash flow, and not focusing on sales and market share."

Cheryl Thomas-Gorny, a mother of three in McRae, Ark., may not be concerned with Lampert's strategy, but shoppers like her contribute to Sears' diminishing popularity and sales.

Although she said she sometimes shopped at Kmart, she criticized the quality of its goods and said she often found the employees disagreeable.

"Honestly, I'd rather go to Target," she said.

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