Will Sears retain a clear identity?

March 28, 2003

BY SANDRA GUY Business Reporter
Chicago Sun-Times

It is a troubling comparison but an inevitable one: After Sears, Roebuck and Co. sheds its credit card business, will it find itself with a muddled retail identity like Kmart and the defunct Montgomery Ward?

Sears, like Kmart and Ward before it, is struggling to find an identity between Wal-Mart's deep discounts and Target's cheap chic.

Though such comparisons are expected, a new and surprising possibility emerged Thursday when the Detroit Free Press reported that a multi-millionaire investor who owns substantial stakes in both Kmart and Sears could try to merge the two retailers or kick them out of their stores and sell the real estate.

Investor Edward Lampert, one of America's wealthiest men who made headlines in January when he was kidnapped from his Greenwich, Conn., home, owns a controlling stake in Kmart and has recently bought enough shares in Sears to become its second-largest shareholder. Lampert was returned safely after the kidnapping plot turned into a comedy of errors.

Steve Lipin, a spokesman for Lampert's ESL Investments hedge fund, said Thursday he could not comment on Lampert's investment in Sears or whether he will buy more shares.

A Sears spokesman could not be reached for comment late Thursday.

Michael Markowski, director of research at StockDiagnostics.com, said Lampert may consider Sears and Kmart more valuable dead than alive.

Another tie between Kmart and Sears is Kmart CEO Julian Day, who left the Hoffman Estates-based retailer shortly after he lost his bid for CEO to Alan Lacy.

Analysts drew comparisons in operational areas, too.

"When traditional retailers get in trouble because they are losing market share, they begin by cutting expenses, and sometimes they sell assets to help compensate for their declining market share," said Sid Doolittle, founding partner of Chicago retail consulting firm McMillan Doolittle.

"All three retailers (Kmart, Ward and Sears) have done that," he said when asked about such a comparison.

Unlike its troubled peers, Sears had $1.2 billion in operating profits last year, a 28 percent increase from 2001. Most of the profits were achieved from cutting costs and shedding operations.

Kmart is in Chapter 11 bankruptcy reorganization and Ward filed for bankruptcy protection for its second and final time on Dec. 28, 2000. Ward sold its credit card business to GE Capital in 1988 to help finance senior managers' leveraged buyout of the Chicago retailer.

Despite Sears' hopes for a windfall from the sale of its credit card business, some financial analysts said Sears is selling at the bottom of the market.

The credit card industry is weaker now because consumers have overextended themselves and, in a weak economy, fallen behind on their payments.

Sears' premium is expected to be 10 percent, though estimates of what its credit card business would fetch range from $2.8 billion to $7 billion.

Sears' portfolio is cause of great concern because its Gold MasterCard accounts are too new to show the full effects of future delinquencies and bad debts. Sears launched the MasterCard three years ago, and converted 23 million of its 60 million Sears cardholders to its more generous lines of credit.

Lacy said the last time he considered selling the credit card business was a few years ago, but the potential value to shareholders wan't compelling and Sears' retail business was in no position to stand on its own.

"We are looking for someone we can work with effectively for a long period, in support of our business and our customers," Lacy said. "It has to make sense economically for (the buyer) as well."