Kmart to Acquire Sears.
Article from January-March 2005 issue of Business Strategies Newsletter
By Bill Birnbaum, CMC
On November 17, 2004, Kmart and Sears announced their upcoming merger – the largest ever among retailers. Technically though, it’s an acquisition of Sears by Kmart.
For Kmart, it marked a remarkable turn-around. For just 18 months earlier, Kmart emerged from bankruptcy. During that bankruptcy, billionaire financier, Eddie Lambert, through his ESL Hedge Fund, gained controlling interest in Kmart. Through drastic cost cutting, selling real estate assets (poorly performing stores), and ending Kmart’s practice of drastic price cutting, Lambert produced a remarkable turn-around for Kmart.
Some analysts applaud Kmart’s acquisition of Sears. Those most optimistic look to opportunities to cut redundant administrative expenses, increase buying power and cross-sell branded merchandise between Kmart and Sears.
Those more pessimistic about the acquisition fear that Wal-Mart, as the major competitor, will still be five times the size of the combined Kmart / Sears.
As we see it, Eddie Lambert isn’t an operating manager. He’s a deal maker. We expect that during the next couple of years, he’ll continue to squeeze cash from the business and convert some Kmart stores into Sears stores. This because of two reasons. First, Sears stores, historically, enjoy higher per square foot sales revenue than do Kmart stores. A difference of $80 per square foot per year. Multiply that times Kmart’s 100 million square feet of shopping space to arrive at a potential increase of $8 billion annual revenue. Theoretically at least, when Kmart stores become Sears stores, they’ll enjoy higher sales revenue.
Second, 870 Sears stores are located in shopping malls. But Mr. and Mrs. America are, more and more, shopping in larger, stand alone, “Big Box” stores. As most of Kmart’s stores are stand alone, their conversion to Sears stores represents Sears' physical movement toward Mr. & Mrs. America.
Lambert will also move some Kmart brands to Sears stores – like Joe Boxer and Jaclyn Smith clothing, and Martha Stewart linens and kitchenware. For sure, he’ll continue to sell off Kmart’s more poorly located stores. All of this to build cash for acquisition, which he’ll undertake with fervor – especially if he can continue pumping the price of the company’s stock.
Analysts predict he might also move some Sears brands, like Craftsman tools and Kenmore appliances, into Kmart stores. But we doubt it. Instead, we predict he’ll close Kmart. Remember, he’ll convert many of Kmart’s better locations to Sears stores and he’ll sell many of Kmart’s poorer locations. So what will be left of Kmart? Not much. And what’s the Kmart brand worth? Again, not much.
There’s already evidence that Sears will be the surviving name even though Kmart is the acquiring company. The name of the merged company will be Sears Holdings Corp. And the company headquarters will be in Chicago – Sears’ home town.
Here’s the long and the short of it as we see it – the acquisition will work for the deal-makers in the short term. Lambert especially stands to make a lot of money by squeezing costs from the joint company. And yet more money by converting and selling stores. And yet more money by moving Kmart brands to Sears stores.
But don’t count on the company prospering in the long term. For Lambert isn’t an operating guy. He’s not about to solve the systemic problem causing declining sales in both Kmart and Sears stores. He’s not about to do battle – let alone win the battle – with Wal-Mart. He’s not about to find a solution to shoppers’ confusion about the meaning of both brands – Kmart and Sears.
Over then next couple of years, let’s watch for four occurrences…
Lambert and his ESL Hedge Fund will make a lot of money by squeezing costs and selling off real estate.
Lambert will use Sears Holdings Corp to make leveraged acquisitions.
Sears brand will become yet more confused.
The Kmart name will disappear.
Originally published in Bill Birnbaum's Business Strategies Newsletter
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