Sears to shift to independently run units

Assets easier to sell in pieces, analyst says

By Sandra M. Jones
Chicago Tribune

2:48 PM CST, January 20, 2008

Sears Holdings Corp. is reorganizing the retail company into a fleet of independently run operating businesses, each with its own leader and agenda, in a move that could make it easier to sell off assets.

The change, confirmed by the company on Saturday, comes as billionaire hedge fund investor Edward Lampert attempts to save his biggest investment, salvage his reputation and recover billions of dollars in lost equity. Lampert owns 48 percent of Hoffman Estates-based Sears through his Greenwich, Conn.-based hedge fund.

"We are introducing an organizational structure that provides operating businesses with greater control, authority and autonomy," Sears said in a statement. "Each operating business unit will have a designated leader and an advisory group comprised of senior Sears Holdings executives to provide direction and oversee the business unit's performance."

Sears Holdings operates Sears, Kmart and some specialty companies. Just how many units will be created is unclear. But Sears has in the past studied the prospect of putting its real estate holdings into a separate entity. It also could create individual businesses around its Craftsman tools, Kenmore appliances and DieHard batteries brands and sell or license them.

Sears declined to comment beyond the statement.

The reorganization, first reported in the Wall Street Journal on Saturday, was announced inside the company Thursday.

"It seems to me this is more like asset management than brand management," said Neil Stern, partner at McMillan Doolittle, a Chicago-based retail consulting firm. "It would make it easier to sell the parts in pieces, but harder to run as a retail company."

For example, Stern said, if Kenmore appliances are run as a separate business, it would make sense to sell Kenmore at rival stores such as Home Depot or Lowe's in order to boost product sales. But the move could be bad for Sears retail outlets because the broader department store relies on the brand, which is exclusive to Sears, to bring shoppers into the store, where they will hopefully buy other products as well.

Initially, investors bet that Lampert's track record as one of Wall Street's best performing hedge fund managers would allow him to work some magic on Sears, a retailer with lots of assets but little retail flair. But Sears isn't improving as a retailer and Lampert has so far held on to most of Sears' assets.

Sears continues to lose market share to more nimble competitors such as Wal-Mart, Target and Best Buy. After some initial profit improvement under Lampert, thanks to cost cuts and investments, earnings are in decline too.

Profit dropped 99 percent in the third quarter over the year-ago period, its worst quarter by far since the billionaire took control of the department store chain and combined it with Kmart in March 2005. If not for the money made on investments, Sears would have been in the red.

And it's not getting any better. Last week, Sears warned that fourth-quarter earnings per share are expected to decline 35 percent to 51 percent.

With sales falling, the economy sputtering and little room left for more cost cuts, Lampert faces growing pressure to sell assets to generate cash, something investors have been awaiting for more than two years.

Just how autonomous the new business units will be from Lampert is hard to say. Lampert has a reputation as a micromanager, and that can get in the way of recruiting talented retail executives.

Last week, John Walden, the chief customer officer Lampert hired from Best Buy Co., resigned after less than a year in the job, Sears spokesman Chris Brathwaite confirmed. Walden, who reported directly to Lampert, was hired to help Sears become "more entrepreneurial and customer driven," Lampert said in a news release at the time.

Lampert has said from the start that he intended to run Sears as a retailer first and foremost. That left asset sales as a backstop if things went bad.