Sears and Kmart, Still A Losing Combo

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There was a time when Kmart and its blue light special were dying and a savior came to revive the brand. Achieving some initial success, that knight in shining armor, hedge fund manager Edward Lampert, consummated a merger between Kmart and Sears. Several failed attempts at a turnaround later; Lampert is again trying to play the savior by taking on the role of CEO. However, it looks more likely that he's going to go down with the ship than save the day.

One Plus One...
Kmart and Sears are owned by Sears Holding Company (NASDAQ: SHLD). The company is a large retail industry player with over 2,600 stores in the United States and Canada selling such well-known brands as Lands' End, Kenmore, and Craftsman, among others. There is no question that these two household names have impressive histories, Kmart with its “blue light special” and Sears with its catalog that sold a growing country everything from houses to toys.

The only problem is that both brands have seen better days, a fact that was true before they were joined at the hip by Mr. Lampert in 2005. One need only walk into either store today and this fact will be clearly evident. While two good companies coming together often creates a better company, two struggling companies coming together usually leads to one larger struggling company—often with one bigger collective problem than either entity had before. One plus one in the case of Sears Holding simply didn't add up to two.

Try, Try, Try
Lampert has overseen multiple attempts to turn these once proud brands around. He's brought in hired hands and been hands on in his role as Chairman of the Board. He is well known and tracked closely by investors and the media. It also appears that he likes the spotlight at times. Taking an even more active role is valiant and good for publicity, but not likely to see these businesses turn around. There's simply too much to be done to catch up to industry leaders that are, effectively, in the same space.

Who's Eating Sears' Lunch?
Kmart and Sears are both struggling because they fall into the discount arena. This is a space with two fiercely competitive and impressively run giants in Dow-30 member Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).

No matter how many blue light specials Kmart has going, Wal-Mart is the undisputed king of cheap. Selling quality products at everyday low prices is, basically, the company's mandate. When it strayed from this model a few years ago, its business suffered. After shifting back to cheap, business picked up again.

While neither Wal-Mart nor Kmart stores are particularly appealing, competing on price against Wal-Mart is simply a losing game. As the largest retailer in the world, Wal-Mart has too much clout for Kmart to be able to match it on both price and quality. Moreover, while Wal-Mart isn't known for beautiful stores, they are at least clean and well stocked. This hasn't always been the case at Kmart. In fact, while Wal-Mart was expanding, Kmart's stores were generally falling into disrepair and looking more and more outdated. That's a reputation that Kmart hasn't been able to shake.

On the other side, Sears has some great brands and still has a decent image, particularly in the appliance and tool isles. What it doesn't have is cache. Sears is still viewed as the store in which grandmothers shop. True or not, Target has many of the same products (though it doesn't try to compete in the tool or appliance area that are generally less frequently purchased anyway) and an image as being cool and hip. It is the only notable counterbalance to Wal-Mart in the retail space, competing very well by focusing on customer satisfaction over cheap prices. Sears can't compete on the hip factor and neither can Kmart.

Changing Customer Habits
One of the biggest problems for Kmart and Sears has been a change in customer habits away from department store entities. Both still smack of that, one on the discount side and the other aiming for a more mid-market area. The brands aren't the only ones struggling with this shift, as the troubles at J.C. Penney (JCP) clearly demonstrate. But being in good company doesn't make Sears Holdings a worthwhile investment.

Reinventing a brand is hard and Lampert looks to be fighting an uphill battle against well-heeled and supremely capable competitors. Investors would be better served looking at Wal-Mart or Target than hoping that Lampert can right the ship before it sinks.


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