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

Sears does not need to failOn 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

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?

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 USAOnce 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?

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.

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

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Old Spice, a classic American brand that has been around since 1938, attained huge popularity by the 1970s. By 1990, however, the brand had become tired, associated more with its aging customer base than anything else. In 2000, the company, now owned by Procter & Gamble, came out with Old Spice Red Zone and revamped its advertising campaigns, focusing on the younger generation. Popular online ads featuring the Old Spice Man went viral, propelling Old Spice to the lead in the body wash market. In June 2010, sales increased a whopping 107%.

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In the late 1980s through the 1990s, Japanese game company Nintendo dominated the market with its Gameboy, Nintento Entertainment System, and Super Nintendo. In mid-90s, the company introduced the Nintendo 64 to combat the next generation of consoles that incorporated 3D graphics for the first time. While the N64 sold well, Sony had entered the market and its PlayStation sold more than double that of the N64. Nintendo would continue to struggle against its rivals. The Nintendo GameCube sold less than Microsoft’s Xbox and was blown out of the water by the PlayStation 2. In 2006, Nintendo finally recovered when it released the Wii, blowing out both the Xbox 360 and the PlayStation 3. The biggest reason for the Wii’s success was its new interactive design and ease of use. The Wii was successfully marketed to families with children, rather than just to video game players. To date the Wii has sold more than 86 million units.

Volkswagen was relatively unknown in the U.S. during the 1960s, even though its products were first sold here in 1949. By 1970, the company controlled 7% of the market. It was also the first foreign automobile company to open an assembly plant in the country since the 1920s. Despite their initial success, a number of missteps, including the release of the unpopular Rabbit, caused sales to plummet. According to a Wall Street Journal article, “By 1992, U.S. annual sales had hit a low of 49,000 cars, and VW contemplated pulling out of the U.S. altogether.” Just six years later, following the launch of the new Beetle, the company began its comeback. In 2000, the car company reported its best U.S. sales month in 26 years. In 2010, Volkswagen sold more than 250,000 cars in the U.S. — its best year since 2003.

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