Rumors of stalled Sears strategy grow

BY SANDRA GUY Business Reporter

A Wall Street analyst gave voice Monday to rumors that Sears' ballyhooed strategy of building new stand-alone stores is in trouble.

Sears is counting on its newest store, Sears Essentials, to compete with big-box rivals such as Target, Kohl's and Wal-Mart, while also selling refrigerators, treadmills, lawn mowers and patio furniture.

Sears has denied reports that it is slowing or halting its plans to convert 400 Kmart stores into Sears Essentials stores within three years -- at a cost of about $3.5 million per store. But Sears hasn't yet announced how many Sears Essentials stores it will open in 2006.

Furthermore, two top Sears executives integral to the strategy have left or are leaving the Hoffman Estates-based retailer, Gregory Melich, an analyst at Morgan Stanley & Co., said in a note to investors Monday.

Catherine David, a former Target executive that Sears named to oversee Sears Essentials and two other stand-alone stores, left the retailer in September.

Sears hired David in July 2004 to turn around the struggling Great Indoors home-decor chain, which Sears had downsized a year earlier to 17 stores.

Sears also is losing Luis Padilla, another former Target executive and a merchandising whiz credited with putting the "chic" in Target's "cheap chic" reputation. Padilla is leaving at month's end, following Sears Chairman Edward S. Lampert's decision to install his own top strategists.

Furthermore, Sears is investing less than its retail rivals in its stand-alone stores, and has cut its advertising by more than 40 percent, Melich wrote.

More than 50 percent of Sears Essentials stores are within five miles of a Target, a Lowe's or a Home Depot, giving them tough conditions under which to compete, he said.

Other analysts have questioned the Sears Essentials format as unfocused and underwhelming.

"The store seems a hodgepodge of everything, and there's no clear message to consumers about what to expect," said Kim Picciola at Chicago-based Morningstar.

John Melaniphy III, a Chicago real estate expert at Melaniphy & Associates, said Sears has been noticeably silent about Sears Essentials' performance, in contrast to its bragging about exceeding expectations with Sears Grand, the company's largest stand-alone stores that are twice the size of a Sears Essentials.

Investors were hoping Lampert, a billionaire hedge-fund whiz, would have dropped any designs he had on retailing and sold much of Sears' real estate to turn a quick profit.

As time goes by, investors have gotten impatient. Analysts had estimated that Sears' stock would climb to $169 to $200 by year's end if Lampert sold assets. The stock ended the day Monday at $125.07.

Sears will open 49 Sears Essentials stores by year's end.

In Chicago's suburbs, Sears has converted former Kmart stores in northwest suburban Palatine and in southwest suburban Homer Glen to the Sears Essentials format. A Sears Essentials will open this weekend in west suburban Elmhurst.

Said Neil Stern of Chicago's McMillan Doolittle consultancy, "It's critical to the future of the company as a retailer to make this [Sears Essentials] work."