Sears Finds Its Core Value; The retailer, which a decade ago made an ill-fated attempt to create a “financial services supermarket,” peeled off its parts to revitalize its department store heart. It worked, not just for Sears, but for the businesses it spun off.

The Washington Post October 20, 1996 | Martha M. Hamilton Sears is back to basics, and with the company’s sales and stock price climbing, basics are looking pretty good.

One of the nation’s oldest retailers, Sears, Roebuck and Co. survived an identity crisis created during the 1980s when it aspired to conglomerate itself into a “financial services supermarket” where customers could shop for stocks, real estate and insurance as well as tools and toasters.

In the 1990s, poor stock performance, a losing retail operation and angry investors forced the company to take the grandly designed conglomerate apart. Out went Dean Witter, Discover & Co., the securities and credit card firm. Out went Allstate Insurance Co., created by Sears in 1931. Already gone was Coldwell Banker, the real estate firm. In came Arthur C. Martinez, from Saks Fifth Avenue, to revitalize the company’s tired retailing operations. And up went the stocks — not just of Sears, but of the companies that were spun off as well. In 1992, an investor could have bought 1,000 shares of Sears stock for about $15,000. Today, that investment would be worth $128,693, assuming shares received in Dean Witter and Allstate were retained. When former chairman Edward A. Brennan brought Martinez in to head the company’s merchandising operations and announced plans to dismantle the conglomerate, Sears stock was trading at around $15 a share. For all the parts. Despite Sears’s success in financial services, Wall Street thought of the company the same way Main Street did — as a retailer. And as a retailer, it was a loser. Specialty retailers, discounters and other department store chains were eating its lunch. The stores and merchandise appeared stuck in a time warp, somewhere in the 1950s. Once the nation’s No. 1 retail chain, in 1992 Sears was in third place behind Wal-Mart and Kmart. In 1992, although some of the financial services parts of the conglomerate were performing well, Sears had a loss of $4 billion. “It was pretty self-evident that Sears was defined by its retail business, and the retail business was in a free fall,” said Martinez. Today, after years spent turning the 1980s conglomerate back into a plain old retailer, Sears stock trades at more than $50 a share. The company is a star with an aggressive chairman, a new focus on its customers, rising earnings and a regular fan club among analysts who once were critical. The companies that were sold and spun out of Sears also are doing well. Dean Witter, Discover & Co. sailed out of the Sears orbit in 1993 at $27 a share, with 20 percent of the company sold to the public and the balance spun off — tax-free — to Sears shareholders. Today, it is trading a little above $60. Shares of Allstate went public at $27 a share, with 80 percent of the company already in the hands of Sears stockholders as a tax-free dividend. It trades today at about $54. “It was clearly the right decision,” said Jerry Choate, chairman and chief executive officer of Allstate. “If you look at the parts, they’re all doing extremely well, including the merchant.” Coldwell Banker was sold in two parts, one residential and the other commercial. Both parts are privately held now, although CB Commercial Real Estate Group will soon conduct a public offering. Both of those companies say they are doing well, although they don’t disclose their earnings and revenue. “Our involvement and being part of the Sears family was important to us at the time,” said Gary Beban, president of CB Commercial. Although the parts have created greater value standing on their own, he said, the connection with Sears was “a very important asset and resource to allow us to grow and to complete our service distribution network, which is coast to coast.” Allstate benefited from its tie to Sears, too, Choate said. Sears’s years of investment in the insurer helped it to grow rapidly, and Allstate was able to use Sears’s massive database to market insurance. But he said Allstate employees got a psychological lift from being separated from Sears because their efforts were successful and they stood out more. Although the financial services parts of the conglomerate benefited from the association with Sears, the retailer suffered from the amalgamation of so many different businesses, said Martinez. “The retail business, for a variety of reasons, began to lose its relevance to the consumer. The company was being bypassed by a number of far more successful and relevant stores,” he said. The financial services components of Sears needed capital and got it at the expense of the retailer, he said. Finally, he said, there was the realization that “the poor and deteriorating performance of the retail sector was dragging down the whole portfolio. The bleeding had to be stopped.” Stopping the bleeding involved some tough decisions by Martinez shortly after he walked in the door. He axed the venerable Sears catalogue; he shut 113 stores; he eliminated 50,000 jobs at the beginning of the turnaround. The restructuring “was deliberately large,” he said. “My objective at the time was to be able to say with a straight face that this is the only reorganization we need.” The difference in the retailer today compared with its state in 1992 is dramatic. Sears has registered increases in same-store sales — results from stores open at least a year — of 9.2 percent in 1993, 8.3 percent in 1994 and 4.7 percent in 1995. So far, 1996 looks good, too. Sears reported Wednesday that it had earned $704 million ($1.71 a share) up 23.5 percent from $570 million ($1.40) in the first nine months of 1995. During the same period, sales were up 6.4 percent. Sears has come back “with a vengeance — much to the chagrin of most other retailers,” said Kurt Barnard, head of Barnard Retail Marketing Report. “They’ve taken a huge amount of market share away from other retailers.” The new vitality stems from several initiatives: Store redesign and remodeling. Sears has spent $4 billion — which it funded out of its own cash flow — remodeling shabby stores that were stuck in the 1950s. The company also has been able to increase the amount of space devoted to selling by using more efficient approaches to merchandise delivery, reducing the need for storage space. So far, using this approach, Sears has added 2 million square feet, Martinez said. Upgrading its apparel offerings. Sears has focused on bringing women customers into the stores by improving the image of the clothes it sells and by emphasizing “the softer side of Sears” in its marketing. “The apparel business was critical to getting our image problem licked because people laughed at us,” Martinez said. The company brought in brand-name apparel and has heavily promoted its own denim brand “Canyon River Blues,” which Martinez said he believes will someday command as much respect as the longtime Sears brands, Craftsman tools and Kenmore appliances. More recently it has begun promoting the Circle of Beauty line of cosmetics. Adding stores and introducing new formats for Sears retailing. Sears has 2,300 stores today, including new stores that are like stand-alone departments from the old stores. For instance, Sears now sells home furnishings at its HomeLife stores, has opened 128 neighborhood hardware stores, and is operating another 61 Orchard Supply hardware stores on the West Coast. Sears plans to open 27 new mall stores in 1996 and 20 more in 1997. Employment in stores has grown from 187,000 at the end of 1993 to nearly 212,000. Bringing in a team of outsiders and improving operations. Sears was not a store that recruited talent from outside its ranks. Martinez, an outsider himself, brought in William G. Pagonis, a three-star Army general who supervised logistics in the Persian Gulf War, to supervise shipping and distribution and other logistics for Sears, and brought in John Costello, former president of A.C. Nielsen marketing research, as executive vice president of marketing. Selling through specialty catalogues. Although the historic Sears catalogue is gone, Sears has 17 specialty catalogues and is testing 10 more. The specialty catalogues include one that markets clothes to “big and tall” men, a home health care catalogue and a bed and bath catalogue. Promoting the Sears credit card. Although Sears now accepts third-party credit cards, its own credit card operations are going strong. More than 60 percent of its sales are on the Sears card, while 15 percent to 18 percent are on other cards. Credit card revenue rose 19 percent in the most recently reported quarter. Despite the changes, Martinez says that “the engine of our company is a traditional department store — and underline the word traditional. The department store today is an apparel store with some additional fillips on it. We are a now unique combination of departments under one roof, and we’re selling — we’re not self-service.” Apparel sales have increased from 25 percent of sales four years ago to an expected 35 percent at the end of this year, but they’re never going to be 50 percent,” he said. “Different customers have different needs at different times,” and Sears plans to meet them, according to Martinez. The transformation of Sears into a retailer more closely focused on its customers’ needs and the spin-off of the non-retailing parts of the former conglomerate filled shareholders’ needs, said Lawrence Spitzer, an insurance broker who lives and works in Del Ray, Fla. Spitzer bought 1,000 shares of Sears in the 1980s at about $15.25 a share. “I struggled through the 1980s believing all along that some day the Sears story would be told — that they would spin off the Allstate and the Dean Witter and go back to basics,” he said. Spitzer now holds shares in all three companies. Much of the credit goes to Brennan — the man who began the divestiture and who picked Martinez to resurrect retailing, Spitzer said. “Thank you again, Mr. Brennan.” THE LONG ROAD BACK As Sears has shed its non-retail holdings, its stock price has rebounded. 1993: Discontinues catalogue sales. Spins off Dean Witter brokerage and Discover card to share- holders. Sells Coldwell Banker real estate unit. 1994: Transfers ownership of Sears Tower to a trust. 1995: Spins off AllState Insurance to shareholders. Sells Homart Development, a real estate subsidiary. 1996: Announces sale of Prodigy on-line service. site sears coupon code in our site sears coupon code

Martha M. Hamilton