Kmart, Sears merger will still leave chains struggling, analysts say

Anne D'Innocenzio

Thursday, Nov. 18, 2004 | 9:29 a.m.

NEW YORK -- The $11 billion deal between Kmart and Sears is seen as a high-risk gamble to some analysts, who say the struggling discounter and struggling department store won't merge with quick, or even certain, success.

The dealmaker, Kmart chairman and Sears shareholder Edward Lampert, said he was committed to making the combination work.

"We're really not looking to have two separate cultures. We're really trying to blend this into one great culture," Lampert said at a news conference Wednesday announcing the merger. "We really want it to be very much customer-focused and store-focused."

The new Sears Holdings Corp. would be the nation's third largest retailer, behind Wal-Mart and Home Depot. With both Kmart and Sears having struggled in recent years, some analysts wondered how the two together would compete with those and other retailers.

"Both Kmart and Sears need a long-term strategy for turnaround," said Theresa Williams, a retailing expert at the Kelley School of Business at Indiana University.

"Both have been broken in some sense," said Dan Hess, president and chief executive of Merchant Forecast, a New York-based independent research company. "Kmart has to learn to survive in a Wal-Mart world and Sears needs to learn to survive in a world of Home Depot and Lowe's."

Several hundred stand-alone Kmarts are expected to become Sears stores, though both chains will remain. The goal: a quick kick-start to sales at stores away from Sears' traditional base of shopping malls and closer to its stronger customer base.

"Off mall is where we need to move very aggressively," said Sears chairman and CEO Alan Lacy, who will become vice chairman and chief executive of Sears Holding.

Lampert and Lacy promised up to $500 million a year in savings within three years from store conversions, back-office job cuts, more efficient buying of goods and possible store closings.

Lampert, 42, will lead a new board that will be dominated by Kmart directors.

"We need to have a very low cost structure in order to compete with our biggest competitors," said Lampert, whose Greenwich, Conn.-based investment firm controls Kmart and is Sears' largest individual shareholder, with a 15.8 percent stake.

The new company is expected to have $55 billion in annual revenues and 3,500 outlets. It will have its headquarters in the northwestern Chicago suburb of Hoffman Estates, where Sears has been based, but will maintain a "significant presence" in Troy, Mich., where Kmart is based.

The deal marks a comeback for Kmart, which filed for bankruptcy protection in 2002, leading to the closing of 600 stores, termination of 57,000 Kmart employees and cancellation of company stock.

Lampert gained control when Kmart emerged from bankruptcy in 2003 through the conversion of his debt holdings into equity. In March, Kmart posted its first profitable quarter in three years.

While same-store sales have continued to decline, Lampert has maximized cash flow in part by selling off some of the stores to Sears and Home Depot.

Mired in a retail slump, Sears had long fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales for years.

For years, Sears has been in search of a niche that would connect with consumers. A '90s campaign focusing on Sears' "softer side" fizzled, and the preppy Lands' End clothing line has failed to connect with consumers in inner-city and rural areas.

Lampert said the goal for the combined company is a 10 percent operating profit margin, a level that's generated by such retailers as Gap and Target. He acknowledged layoffs would happen but didn't give details.

A key part of increasing productivity at the stores will be in the cross selling of the brands, though company officials declined to be specific on which they would overlap. Many analysts like the idea of a Kmart or a Sears off-the-mall store that sells Kenmore appliances and Craftsman tools, two top Sears brands.