Sears Braces for Spending Slump

Sears Braces for Spending Slump
By GARY MCWILLIAMSMay 5, 2008 5:44 p.m.
HOFFMAN ESTATES, Ill. -- Sears Holdings Corp. Chairman Edward S. Lampert said the retailer is taking a conservative stance to weak consumer spending, cutting its work force and paring budgets in response to an uncertain outlook.
Sears, with $53 billion in 2007 revenue, is expected to report weaker sales and a sharp decline in profits for its fiscal first-quarter, ended Saturday. It earned $216 million on sales of $11.7 billion in the year-earlier quarter.
Addressing shareholders about the company's outlook at its annual meeting here Monday, Mr. Lampert said the economy "certainly hasn't gotten better" since the fourth quarter, and that it is unclear whether consumers are "pausing" after years of steadily increasing spending, or are "done for a while." In recent months Sears has cut several hundred jobs at its headquarters and U.S. distribution centers to reduce costs, and is shunning capital spending on new stores as part of its more conservative financial tack.
Mr. Lampert, a billionaire hedge fund manager whose funds own nearly 48% of Sears stock, noted consumers are changing their shopping habits, turning online for music, movies and other goods that once drew them into its stores. He said an ongoing restructuring of the company into dozens of semi-autonomous business units would eventually allow the company to develop more nimble and profitable operations. But in the near term, competition could get tougher as rivals continue to use debt to finance store expansion and share buybacks.
"Our strategy ensures we have the financial strength to weather any financial storm that comes our way," he said.
Sears has used its cash flow to reduce debt and buyback shares. Mr. Lampert conceded that $2.9 billion spent to re-purchase shares last year, at as much as $150 apiece, would have been better "deferred." The stock has tumbled since reaching a peak of $183 last spring and was off 3% at $100.08 in 4 p.m. trading on the Nasdaq Stock Market.
Among other organizational changes, Mr. Lampert recently consolidated the company's major brands -- including Kenmore, Craftsman and Diehard -- into a single operation that can decide to license or distribute the brands through other retail outlets. He also created separate operations to oversee Sears's real estate, online operations, retail operations and support.
Under the traditional department store structure that Sears had followed, "it didn't feel like we were getting enough traction in some of these businesses," he said. The new structure, he said, already has helped the company attract more experienced executives, including John W. Froman, the recently named head of its tools, lawn and garden businesses, who had been chief operating officer at Circuit City Stores Inc. Mr. Lampert said he is continuing to search for a new chief executive for the holding company, to replace Aylwin B. Lewis, who was ousted in January, and for an executive to oversee a business unit for Sears brands.
While its shares have tumbled 44% in the last year, Mr. Lampert's strategy got a vote of confidence from fellow hedge fund executive William Ackman, president of Pershing Square Capital. In comments at the annual meeting, Mr. Ackman, who acquired five million Sears shares last year, called the stock "undervalued."
Mr. Lampert dismissed calls for Sears Holdings, which has seen same-store sales fall for more than eight consecutive quarters, to make major new acquisitions or format pushes, saying it must finish improving store operations and merchandising. "We've not been able to develop the big ideas to put our capital behind," he told shareholders.