Edward Lampert is talking about the future of Sears and Kmart. The chairman and chief executive of Hoffman Estates-based parent Sears Holdings Corp. is wondering aloud how many physical stores are needed, how large the stores should be and how their role will change.
"The integrated retail part of our strategy is really about how you work between online, mobile and store, not just from a customer standpoint, but from a supply-chain standpoint," Lampert said. "If we have a shirt in the store in four colors, we might have that shirt in 10 additional colors online. To have 14 colors in the store may be too risky because what you don't sell, you end up losing money on, (compared with) having a group of it online that serves all the stores so that if people want more variety, they can get more variety."
Yet for all the talk of transformation at Sears Holdings against the backdrop of a new holiday shopping season, the company's lack of profitability has remained steadfast.
As far as shirts go, Lampert hasn't lost his, but red is not the new black.
"With $30 billion-plus in sales, we don't have a customer problem," Lampert said by phone after the company's latest subpar earnings report. "We don't have a sales problem. What we have is a profit problem, and that's what we're intending to address. … We need to demonstrate that if we serve people well, we can actually make an acceptable amount of money."
Through the first three quarters of its fiscal year, Sears Holdings lost about $1 billion on operations, more than double its operational loss for that span a year earlier. Its 39-week revenue was off about 7 percent, or almost $2 billion from what it was at the same point in 2012. The company racked up a $534 million operational loss in the quarter that ended Nov. 2, as revenue fell $585 million, to $8.3 billion.
Some of that lost revenue may be attributed to the fact Sears Holdings keeps closing stores, having shuttered more than 300 since 2010. But comparable-store sales declined 3.1 percent in the quarter, with domestic Sears down 4 percent and Kmart down 2.1 percent. So, despite its strategy of complementing bricks-and-mortar with digital platforms, it's still struggling with maintaining margins in the increasingly complex matrix of 21st century retail.
The share price is more than 55 percent higher than it was in late August, but many analysts attribute that less to confidence in the company's retail prospects than speculation the company will unlock value by selling off assets, such as its real estate holdings. The company said last month that it would consider spinning off its Sears Auto Centers and its Lands' End brand.
"If they execute well, they can survive this, but they have to execute everything right," Greg Melich of International Strategy & Investment Group said. "The fact is the business has been underinvested in for 10-plus years, and if you look at the strategic actions they've taken, they've been selling assets that generate cash to raise liquidity. What that means is your cash flow only gets worse. You get a shot in the arm, but we call it burning the furniture."
Credit Suisse's Gary Balter, in a note Friday, was even more blunt: "Back in May we likened CEO Edward Lampert's slow dismemberment of Sears Holdings to a player in a game of Jenga, whose goal is to pull out pieces, hoping the overall structure does not collapse. With (the most recent) results, we saw further proof that too many pieces have been removed from the Sears portfolio, and the remaining structure may be too weak to exist as a viable economic model."
Critics argue Sears Holdings has invested too little in its physical stores, which they still see as vital to the revenue picture, as attention and diminished resources shifted elsewhere. But from the moment Lampert engineered Kmart's $12 billion merger of Sears in 2005, the hedge-fund billionaire has pushed the company to carve out territory in the Amazonian wilderness of e-commerce, where it contends with traditional rivals as well as the likes of Amazon, Google and Facebook.
Lampert, who added the role of CEO in January, views integrating digital platforms and initiatives such as the Shop Your Way membership program — a loyalty and discount club — as key to the future: They've "taken years to incubate, and for sure if we were making more money, there are different types of risks we could have taken." He retains interest in nondigital real estate but believes stores ultimately will need to be versatile, often smaller, sometimes a showroom, sometimes a service center, sometimes a fulfillment house.
"It doesn't make sense to have millions or tens of millions of dollars invested in a property that doesn't make money," he said. "What real estate affords us: It's a footprint to serve members, first. It also (gives) us the ability to afford a transformation and to be able to withstand, one, a financial crisis, which we went through, and two, withstand a period of poor operating performance, which hopefully will come to an end soon."
Lampert expected it to have come to an end already.
"The honest answer is we certainly had plans (for a turnaround) and forecasts for this year that it would have happened already, and we haven't delivered against that," Lampert said. "The Shop Your Way membership metrics that we measure, and there are many of them, almost uniformly they've been going in the right direction. Many have exceeded what our expectations were at the beginning of the year. So we see these behaviors that are foundational to the transformation and foundational to restoring profitability. But we haven't been able to connect those behaviors to the actual results."
The membership program figured in 70 percent of sales last quarter, up from 65 percent in the second quarter, but it also cost Sears Holdings $75 million in discounts over those 13 weeks. So in a business in which a penny or two make all the difference, adjustments will be necessary. On top of all the other adjustments.
"In the CEO role, the thing that's most noticeable to me is just how difficult it is to get the talent we need into the company and get the talent in the company to be open to having their competency challenged because they're very good at things that worked for a long time that no longer work," Lampert said. "We've built the platforms. We've built the technology that gives us a real chance to differentiate ourselves."
But this transformation stuff doesn't get any easier, does it?
"It better," he said.