Sears, Kmart Merge
November 29, 2004-- Home Textiles Today,
While the merger of Sears and Kmart creates the country's third largest retail company in total revenue, the marriage does not profoundly alter the line-up of top hitters in the home textiles universe.
The positions of both companies within the league of Top 10 home textiles retailers has eroded steadily over the past several years, largely the result of store closings at Kmart and sales declines at both organizations.
In fact, neither has managed a year-over-year gain in home textiles sales since the heady retail spree of 1999. Kmart's home textiles sales have plunged 30.5 percent since then, to $1.23 billion in 2003. Sears' fell off less dramatically, down 16.5 percent to $665 million in 2003 — but the company that in the early 1990s wielded the second largest pencil in the industry, with more than $1 billion in sales, is now number 8, and headed south in the ranking.
The $11 billion merger creating Sears Holding Corporation will result in a retail company generating $55 billion in total annual revenues on a sales base of 2,350 full-line and off-mall stores and 1,100 specialty retail stores. But neither at this juncture has a chief merchant, and speculation persists about whether new chairman Eddie Lampert's primary interest is in leveraging the nearly $6 billion in cash the two companies hold to launch more ambitious investments.
Lampert, a major stakeholder in both Sears, Roebuck and Co. and the majority shareholder in Kmart, told the press and investors that the transaction was not undertaken simply to leverage the real estate assets of both companies.
“I don't think any retailer should aspire to have its real estate be worth more than its operating business,” Lampert said. However, he noted that properties that can neither function profitably as Kmarts or Sears will be sold, adding that, in the long term, he hopes Sears Holding will open more new net stores than it closes.
Sears appears to be the bigger winner in the merger, with executives of both companies predicting hundreds of Kmart stores could potentially be converted to Sears' off-the-mall format.
In addition, executives said they see opportunities to cross-sell their proprietary brands.
When asked specifically whether Kmart's $1 billion Martha Stewart Everyday brand would migrate to Sears, current Sears Chairman and CEO Alan Lacy pointed out that Sears Canada already carries the label, but added that brand issues would be evaluated individually after the merger. Lacy will become vice chairman and CEO of the new Sears Holding Corporation.
Because many Kmart boxes are smaller than the 180,000-square-foot ideal for the Sears Grand format — which offers convenience foods, CDs, DVDs, and health and beauty aids, as well as traditional Sears goods in a racetrack format — conversions may follow a modified version with an edited apparel assortment. The first such “hybrid” opened recently in Pekin, Ill., just south of Peoria, in a former Wal-Mart unit Sears acquired in late summer. The conversion took 75 days and cost $3 million, Lacy said.
Three full-scale Sears Grand stores are now in operation, and Lacy said Sears Holding hopes to leverage Kmart's experience with health and beauty aids, as well as pharmacy operations, as it expands the format.
Nothing was said during a recent post-announcement press conference about growth plans for Kmart, beyond the addition of some Sears brands and a vow to create a single, customer-focused culture for both operations.
That might actually bode well for branded home textiles producers. Although Kmart's home textiles sales are twice the size of Sears', the discounter's mix is heavily proprietary. Its new design group office, with home product development headed by Matthew Morris, divisional vice president of home, is clearly striking off in the direction of heavier direct sourcing.
While Sears' Lacy has talked through the past year about the need to ramp up direct sourcing in the near future, the company does not have the same organizational structure in place. With Kmart conversions a top priority for the nameplate, building a direct sourcing organization may slide to the back burner.
Aylwin Lewis, who joined Kmart in late October as its president and CEO, will become president of Sears Holdings and CEO of Kmart and Sears Retail. Asked whether any or all of the buying functions for the two chains will be merged, Lewis said simply, “To be determined.”
Lampert, Lacy, and Lewis will join a 10-member Sears Holdings board of directors, which will include a total of seven members from the current Kmart board and three members of the current Sears, Roebuck board. Sears Holdings will act as the holding company for the Sears and Kmart businesses, which will continue to operate separately under their respective brand names. The company will be headquartered at Sears' home in Hoffman States, Ill., with a “substantial presence” in Kmart's Troy, Mich., base.
The merger was unanimously approved by the boards of both retail companies. In addition, Lampert's ESL Investments and its affiliates have agreed to vote all Kmart and Sears, Roebuck shares they own in favor of the merger and to elect stock in the transaction with respect to their shares of Sears, Roebuck.
Under the terms of the agreement, Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears, Roebuck shareholders will have the right to elect $50 in cash or 0.5 shares of Sears Holdings for each Sears, Roebuck share. Shareholder elections will be prorated to ensure that in the aggregate 55 percent of Sears, Roebuck shares will be converted into Sears Holdings shares and 45 percent of Sears, Roebuck shares will be converted into cash.
The current value of the transaction to Sears, Roebuck shareholders is approximately $11 billion. The transaction is expected to be tax-free to Kmart shareholders and tax-free to Sears, Roebuck shareholders to the extent they receive stock.
Lampert said, “The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders as it will create a powerful leader in the retail industry, with greatly expanded points of distribution, leading proprietary home and apparel brands and significant opportunities for improved scale and operating efficiencies. The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own.”
The merger is expected to close by then end of March 2005. The combination of the two companies is “conservatively” estimated to generate $500 million of annualized cost and revenue savings to be fully realized by the end of the third year after closing, according to Kmart.
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