How Sears Can Save Itself: Buy (and Sell) American

Sears does not need to fail
Sears does not need to fail

On Tuesday, Sears Holdings (SHLD) shocked the world with news that it would close as many as 120 of its iconic Sears and Kmart stores. The reason: As the rest of the retail industry enjoyed a modestly successful holiday sales season, Sears, well, fell on its face.

According to the National Retail Federation, sales for American retailers are expected to increase 3.8% this holiday season. Meanwhile, Sears posted a 5.2% decline in same-store sales for the eight weeks ending Dec. 25. That's a combined nine-point loss to the overall industry.

Despite weak sales, Sears is still one of the largest broad-line retailers in the United States. Though it trails Costco (COST), Walmart (WMT), and Target (TGT), Sears is big enough that its underperformance may have even dragged down the overall industry number. Back out Sears' anemic results, and retail as a whole probably would have

grown even more.

Sears Graph
Sears Graph

Icons in Decline

Ever since hedge fund honcho Eddie Lampert bought Sears and merged it into his already-owned Kmart back in 2005, the combined Sears-Kmart chain has been a business in decline. Same-store sales numbers have dropped consistently since the retailers linked arms.

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Explanations for the decline vary. Professional analysts will tell you Sears' problem is that it doesn't invest enough in store upkeep. If your average chain store spends $6 to $8 a year per square foot of retail space, then Sears' lackluster maintenance budget of $1.90 guarantees that its stores will be dingy, dark, and generally lacking in Christmas cheer.

Other industry watchers blame CEO Lampert, who famously dismisses investor obsession over "same-store sales," and tells folks to focus instead on how he grows the firm's earnings before interest, taxes, depreciation, and amortization. (Note to Eddie: We have been watching... as your EBITDA dropped from $3.6 billion in 2007 to a projected $400 million this year.)
Simply put, Sears is broke. But can it be fixed?

Can Sears have a comeback?
Can Sears have a comeback?

A Store in Search of a Reason

At the risk of copyright infringement, allow me to say, "Yes, it can." But first, Sears needs to give some serious thought as to why it exists. I mean, consider the competition. We already know that...

  • Walmart means "Always low prices."

  • Target is Walmart... but with style.

  • Costco is a treasure hunt.

  • Kohl's (KSS) and J.C. Penney (JCP) have carved out niches where they're cheaper than Nordstrom (JWN), but more upscale than Target.

But where does Sears fit in this pecking order? If you ask me, Sears is three things:

  • Sears is Craftsman tools – high-quality wares, priced reasonably.

  • Sears is also Kenmore appliances, a way to buy a Whirlpool washing machine (Whirlpool is one of the companies making the machines behind Sears' private label) at a better price.

  • And of course, Sears also has a softer side, as represented by its Lands' End clothing line.

At least, that's what Sears was "once upon a time."

The Skimpy Side of Sears

Lately it seems as if Sears' decline can be ascribed to its lowest-common-denominator approach to retailing: Skimp on the things customers want (attractive stores, quality merchandise). Instead give them what they hate (dirty stores, with cheap wares lining the shelves).

Is this any way to run a retailer? Couldn't Sears do better?

It can, and the solution to Sears' sagging sales lies in playing to the company's strengths -- and giving customers what they want: a return to American exceptionalism.

The Solution That Could Save Sears

Made in the USA
Made in the USA

Once upon a time, America had a manufacturing base. We made things -- quality, affordable merchandise -- and we sold these things in our stores. But at some point, the drive to grow corporate "EBITDA" gave rise to a perverse business model: Outsource our manufacturing (and our jobs) to Third World countries, then import their goods and resell them on American shelves.

Clearly, this isn't working for Sears anymore. Sears is selling the same stuff as the other guy, but not always at better prices. Consequently, it's losing the battle for customer dollars.

But what if Sears tried something different? What if, for example, Sears promised to stock its stores at least 51% with "Made in the USA" merchandise?

%Poll-72405%It wouldn't cost as much as it used to -- not with wage inflation driving up the cost of Chinese goods. It would entitle Sears to advertise itself as the one store selling "majority Made in the USA" merchandise. It would win the company a major PR coup ... and may even be enough to save the chain.

Sound off: How do you think Sears can save itself?

Motley Fool contributor Rich Smith does not own shares of, nor is he short, any companies named above, but The Motley Fool owns shares of Costco Wholesale and Walmart Stores. Motley Fool newsletter services have recommended buying shares of Costco Wholesale and Walmart Stores, as well as creating a diagonal call position in Walmart Stores.