Dingy Stores Hurt Sears' Effort to Clean Up Bottom Line

So with all the ideas that he has brewing, Eddie Lampert must be getting around to fixing up all those graying Kmart and Sears stores, right?

Not exactly. The Sears Holding (SHLD) store strategy is to ignore the stores, at least the big-box stores most closely associated with the main brands. Lampert has other priorities, and those have to do with creating new, lower-cost ways to drive up revenue and improve the value of the enterprise, at least in part because that will boost their value to the ESL hedge fund. In addition to Sears, Lampert is chairman of the ESL hedge fund that owns it. It's an interesting position to be in, serving two masters, both of whom are him. Given the circumstances, it's worth considering if the immediate interests of ESL and the long-term health of Sears Holding correspond.
The store strategy of Sears Holding -- which has parallels to the strategy it is developing with its private labels product lines including Craftsman and Kenmore -- is grounded in company experience. Sears has operated multiple store formats and multiple ways to sell going back to the days when it mailed its catalogs to the frontier. It has enthusiastically launched, then frequently de-emphasized and occasionally subtracted, a number of store concepts including Grand, Essentials and the catalog showroom. The first two launched over the past decade but experienced a cooling of corporate enthusiasm. The catalog showrooms have disappeared.

The latest ideas are outlets and Hometown. Lampert touts the prospects for both in his annual letter to shareholders.

Outlets are popular in retailing right now, developing an audience of devotees. Not having outlets means not selling to that significant group of consumers. Outlets are an efficient way to dispose of inventory, and many retailers seem convinced that increasingly frugal consumers will simply insist on an outlet option. Outlet initiatives by Nordstrom and Bloomingdales demonstrate that luxury retailers already see the need to have a bargain vehicle for those who like their style but see shopping their department stores as too much of an indulgence.

Hometown--until last year it was known as the Sears Authorized Dealer Store--is a different sort of retail operation. The name "Hometown" certainly was a warm and fuzzy quality, perfect for the kind of marketing push Sears is giving it. In this regard, consumers aren't the only target of the campaign. Sears is after franchisees as well.

Then there's the fact that Hometown has something Lampert likes to see these days--other people's money. As with the newly launched Sears Auto Center initiative, he wants to attract partners who will invest in the business and bring certain valuable attributes. With the Auto Centers, Sears is offering the franchises to car dealers who have been cut loose by automobile manufacturers. With Hometown, Sears is making a special, albeit not exclusive, pitch to former members of the military. By recruiting veterans, Sears believes it gets well-established discipline and leadership skills.

It is recruiting franchisees on Facebook, among other vehicles, including franchising websites. Sears has grown more attentive to the Internet and particularly social media, having developed its own MySears online community. Hometown's Facebook page includes the declaration: "Military veterans--we are looking for you!"

Franchising is a tricky business. Getting investment and franchisee expertise are positives, but it's tough to maintain a similar standard of service and experience across a chain of similar independent businesses.

Sears' lack of investment in core stores presents a problem as well. Lampert maintains in his letter that analysts have overestimated the costs of store maintenance, but it's obvious that quite a few Kmart and Sears stores are past their prime. To the degree they fall behind the standards maintained by the competition, the core stores may begin to hurt the overall company brand. That, in turn, will weigh on the private labels.

Lampert may not want to hear it, but shaping up Sears Holdings means scraping the distinctly scruffy look out of its big stores. Long-term -- maybe longer term than Lampert plans to remain involved -- Sears Holding could begin disintegrating from the middle if customers think other stores are neater, in both senses of the world.