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Can Sears Survive by Opening Smaller-Format Stores?

Amid bankruptcy, lawsuits and uncertainty, Eddie Lampert and ESL are trying to revamp the chain with small-format stores.

It has been a tumultuous situation ever since Eddie Lampert, former Sears Holdings Corp. CEO, and his ESL Investment Inc. hedge fund gained control of Sears in February, in an effort to give the iconic retailer a second chance.

Earlier this year, Lampert and ESL said the $5.2 billion deal to acquire the company would save 425 stores and approximately 45,000 jobs. Sears Holdings, which owned Sears and Kmart, filed for bankruptcy protection last October. The retailer has closed hundreds of stores in the past several years.

Now, the former holding company for Sears is suing Lampert and the company he formed to operate the “new Sears”—called Transform Holdco LLC—alleging that he “stripped assets and left it broke,” as the retail chain spiraled into bankruptcy, the Wall Street Journal reported.

In turn, Lampert and Transform are suing the “old Sears,” claiming violation of the sales agreement. Adding even more turmoil, Democratic presidential candidate and U.S. Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez recently criticized Lampert for backing out on his promise to pay severance to former Sears and Kmart employees who lost their jobs following the bankruptcy, Bloomberg reported. As part of the terms of the deal to acquire the bankrupt chain through Transform, Lampert said he would cover those payments. (Here’s the letter Warren and Ocasio-Cortez wrote to Lampert).

And the saga continues as just this week the New York Post reported that Sears’ suppliers have been “caught between the bankrupt retailer and Eddie Lampert,” and the bankruptcy has “burned thousands of vendors.”

Despite turmoil, what’s next for Sears?

Outside of the court battles, the former retail giant is working to revitalize and reinvent the Sears brand and try to make it relevant in today’s changing retail environment.

That likely won’t be an easy task as bricks-and-mortar retail continues to flail. In fact, 7,215 store closures have already been announced by U.S. retailers in 2019, according to global market research firm Coresight Research. Coresight estimates that announced U.S. store closures could reach 12,000 by the end of 2019.

In an effort to stage a comeback, Sears unveiled a new, small-format store called Sears Home & Life. Three locations are now open in Overland Park, Kan.; Lafayette, La., and Anchorage, Alaska. The new stores will typically be around 10,000 to 15,000 sq. ft., which is significantly smaller than Sears’ traditional stores, which are in the 150,000-sq.-ft. range. (The Anchorage store is only 7,500 sq. ft).

The concept won’t carry any apparel, but instead will sell major and small kitchen appliances, tools, mattresses and home services.

“We've been listening to our customers [and they ] have told us they want our best categories—appliances, smart products and our Home Services offering,” said Peter Boutros, chief brand officer for Sears and Kmart, in a statement.

Shoppers can meet with experts to explore how new appliances will look in their kitchens. The new stores will also provide “Sears Search Bar” kiosks, where customers can order all products available online from Kmart and Sears and have them delivered to their home or store.

The new Home & Life stores carry Sears’ signature brands like Kenmore, Craftsman and DieHard, as well as additional major brands like Sealy, Serta and Tempur-Pedic.

Stores will also offer an assortment of smart products where shoppers can learn how to set up a smart home with appliances that are compatible with Alexa and Google Assistant. These will include smart speakers, video doorbells, smart bulbs, smart thermostats, alarm systems and cameras, a company spokesperson told NREI.

The company hasn’t disclosed how many more Sears Home & Life stores are in the works or where they’ll open. The three already-opened locations are in neighborhood shopping centers where the company has leased space. 

“We have other locations identified; however, we cannot share details at this time,” the spokesperson says. “Our target demographics are young-forming families and boomers in vibrant communities, which we’ve gathered from customer and member data based on our product and brand focus.”

Through these new concepts, the company is reinvigorating the Sears name, the spokesperson adds.

“We want to make sure we’re integrating key aspects of our legacy, while still emphasizing our move into the future,” he notes. “We’re confident we’ve found a sweet spot and our shoppers will be pleased. One challenge has been finding available real estate in the markets where we want to locate.”

Will a slimmed-down footprint draw shoppers and help Sears be more competitive?

Sears faces growing competition from retailers like Walmart, Home Depot and Best Buy, as well as Amazon and other online players, and the question is whether it’s doing enough to differentiate itself.

“The smaller concept is a logical move as it is designed to reduce the cost of running stores by focusing on Sears’ stronger categories such as appliances and beds,” says Neil Saunders, managing director at research firm GlobalData Retail. “However, there are a lot of question marks over whether the new concept will work.”

The brand name has now been tarnished by years of underinvestment and the bankruptcy filing and opening new stores won’t do much to undo that level of damage, he adds. “It is also the case that while the new smaller stores look better than the old department stores, what they stock and how they sell it is not unique, so they still face a lot of competition from other players in the market. This includes the drive to online, which is becoming ever more important.”

Saunders notes the biggest challenge for Sears is whether it can differentiate itself and ditch the baggage of the old business. “Leadership proved itself unworthy of that challenge in the old business, so there is nothing to suggest they will engineer a better outcome as they try to rebuild.”

Customers trust in the company has been damaged, notes Stefanie Meyer, senior vice president and principal at retail real estate brokerage Mid-America Real Estate – Minnesota LLC. She also says there will be many landlords who are not willing to take the risk in leasing to Sears. Landlords who are struggling to fill space, however, would be glad to lease to them, because they don’t have a lot of choices, she adds.

Transform to acquire remaining Sears Hometown and Outlet stores

In yet another chapter to the story, Transform—the now-parent company of Sears and Kmart—announced it will buy the rest of the Sears Hometown and Outlet Stores that it doesn’t already own and reunite the businesses with its Sears and Kmart stores. Sears Hometown was spun off from Sears Holdings in 2012.

Transform will pay $2.25 a share in cash. ESL Investments and its affiliates—the majority owners of Transform—currently hold 58 percent of the outstanding shares of Sears Hometown.

Company officials say having these businesses under one ownership will accelerate Transform's strategy of growing its smaller-store format. The deal will “expand the company's footprint as a multi-channel business” that can serve customers through a variety of shopping experiences, they note.

“We believe that reuniting our Sears Hometown segment stores with Transform's Sears full-line stores will result in a more consistent customer experience across Sears branded storefronts, generate higher total revenues and leverage efficiencies of scale to improve costs and margins, all of which could lead to improved profitability for Sears Hometown's dealers and franchisees,” said Will Powell, CEO and president of Sears Hometown and Outlet Stores, in a statement.

Under the terms of the agreement with Transform, Sears Hometown has the option to sell its Sears Outlet and Buddy's Home Furnishing Stores (together, the “Outlet Segment”) for no less than $97.5 million and the sale must close by Oct. 23.

Sears Hometown operates 491 Hometown stores and 126 Outlet stores. The deal is anticipated to close in November.

 

 

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