Two-For-One Sale

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It's no wonder that so many skeptics think Lampert's latest gambit is more about real estate than retail, part of a long-term liquidation plan to unload billions of dollars' worth of property, as well as perhaps some valuable brands, to the highest bidders. But it's a notion that the notoriously reticent Lampert took pains to reject last week. While acknowledging that some underperforming stores would continue to be disposed of, he told investors, "I don't think any retailer should aspire to have its real estate be worth more than its operating business."

Lampert may have no operational merchandising experience — after Yale, he worked at Goldman, Sachs under the tutelage of Robert Rubin, and went off to start his own fund at age 25 with the help of legendary Texas investor Richard Rainwater. But Lampert does have ideas about how to run a retailer, such as an unwillingness to throw money at updating stores without clear evidence of a return, and a firm refusal to play the short-term, quarterly-earnings game that Wall Street so often demands. In April, he brought in a design team led by former Gap executives to freshen up Kmart's clothing lines. "Eddie is relentless and a harder-nosed operator than most people want to believe," says Henry Miller, a leading business-restructuring adviser who worked with Kmart during its bankruptcy. "In point of fact, he is a retailer, in his mind. He will fight for a nickel, and mind every penny." (If anybody doubted how good a dealmaker or student of risk Lampert was, he proved it in January of last year, when he was kidnapped. He talked his captors, who were holding him for a $1 million ransom, into letting him go with the promise he would pay them $40,000 a few days later.)

Over the past couple of decades, both Sears and Kmart have become mere shadows of themselves, plagued by aging, poorly stocked stores; management turmoil; outdated merchandise; and a lack of sophisticated IT systems — or, for that matter, a clear identity. Whereas Kmart has failed miserably to compete on price with Wal-Mart or on style with Target, Sears has found it harder and harder to stay relevant at its aging 870 mall locations, about the same number of stores it had back in 1970. It has tried everything from financial services (its "socks and stocks" period) to home improvement (the Great Indoors experiment) to returning to its catalog roots, with the purchase of the upscale Lands' End catalog, which has proved to have less broad appeal than Sears had hoped.

In one key sense, at least, there is no denying that the merger is all about real estate. For years, Sears has claimed to be the prisoner of its once pioneering shopping-mall locations, where, in fact, Americans do less and less of their shopping, especially on big-ticket items. By transforming several hundred of Kmart's 1,500 freestanding and strip-mall outposts into New Age Sears stores, at an estimated price of about $3 million apiece, the company hopes it can finally reach its best potential customers. That assumes, of course, that those customers want to reach Sears. For even if Sears and Kmart can assemble a compelling assortment of exclusive product lines to sell, they are still, in a sense, "going to have to transcend their own [weak store] brands," says Kevin Keller, professor of marketing at Dartmouth's Tuck School of Business.