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News > Companies
Sears looks ahead
July 10, 2001: 2:34 p.m. ET

Retailer exits cosmetics, signals major strategy shift by fall, analysts predict
By Staff Writer John Chartier
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NEW YORK (CNNfn) - Forget the softer side. Sears Roebuck & Co. said Tuesday it is abandoning the cosmetics business, a move widely seen on Wall Street as the first move in a major strategy shift at the No. 2 U.S. retailer.

Hoffman Estates, Ill.-based Sears (S: down $0.36 to $40.84, Research, Estimates) said it will take a $53 million after-tax charge for exiting its Circle of Beauty cosmetics line. The charge also includes a payment to Avon Products Inc. (AVP: down $0.78 to $44.47, Research, Estimates) to compensate the cosmetics maker for not helping launch its new beComing line this fall.

"I think you can look at it as a preview of coming attractions," Credit Suisse First Boston retail analyst Michael Exstein said. "(CEO) Alan Lacy has made no secret of the fact that, with the exception of the appliance business, he does not consider the core mall business run well."

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Analysts anticipate a major restructuring announcement from the company in the fall. Though Sears is keeping mum at the moment, analysts expect some type of focus shift to the more profitable hardgoods -- appliances, electronics and hardware.

A more streamlined apparel business also is likely, with more of a focus on a niche area such as denims or evening gowns instead of the broad selection department stores traditionally have offered.

"This is really the first major move that Lacy has made," Sears spokeswoman Peggy Palter said. "It's really a starting point. He's been very clear -- we are looking at our lines of business."

The change comes as traditional department stores like Sears, J.C. Penney (JCP: down $0.02 to $24.61, Research, Estimates) and Federated Department Stores (FD: up $0.06 to $38.15, Research, Estimates) struggle amid a slowing economy that has driven consumers to more bargain-priced discount chains like Wal-Mart (WMT: down $0.70 to $47.55, Research, Estimates) and Target (TGT: down $0.31 to $32.89, Research, Estimates).

That shift has left department stores treading water between the discounters, which are beginning to offer the same quality merchandise and upscale niche stores that peddle luxury goods.

But Sears managed to stave off the reaper with its exceptionally strong appliance and electronics business that have helped offset declines in softgoods such as apparel and cosmetics.

Though its monthly sales are down from a year ago, as well as earnings, the company has not been beaten up as badly as Penney or Macy's and Bloomingdale's parent Federated.

Still, analysts anticipate second-quarter earnings for Sears of 92 cents a share, down sharply from $1.05 a year earlier, according to earnings tracker First Call. Fiscal 2001 forecasts are for earnings of $4.15 a share compared with $4.21 a share a year ago.

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"They must do something that's going to leverage traffic in the mall," Bear Stearns retail analyst Steve Kernkraut said. "They can't get totally away from fashion. They've got to come up with something else whether its making the jewelry area bigger or making the denim area bigger."

Changes were in the works long before Tuesday's announcement.

Since taking the helm from Arthur Martinez in October, Lacy has launched the company on a hard review of all its components and made it clear that changes are in store.

Sears already has shuttered 89 under-performing stores and acquired 18 former Montgomery Ward stores. Wards, whose history nearly parallel's Sears, declared bankruptcy and went out of business earlier this year.

Sears has launched a new store concept called The Great Indoors, offering full-line decorating and remodeling services, competing with Home Depot (HD: down $0.16 to $45.83, Research, Estimates). The company is also experimenting with specialty electronics stores to capitalize on its strength in that area.

But questions remain as to whether the company is taking the right direction. Sears' attempt to launch a niche hardware store concept in the mid-1990s in strip malls fell flat in the face of Home Depot and Lowes (LOW: up $0.19 to $34.59, Research, Estimates)

And with its new electronics shops, the company is going head to head with tough specialty chains Circuit City (CC: down $0.29 to $17.00, Research, Estimates) and Best Buy (BBY: down $0.74 to $66.11, Research, Estimates).

Home Depot also has begun selling appliances, adding even more pressure to Sears.

"They're finding themselves in competition on all fronts," said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers.

And though its cosmetics line has never realized the level of hoped-for profit since launching in 1995, some wonder whether Sears can get by without some type of cosmetics offering to help pull in women customers.

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"They are streamlining operations, trying to make it more profitable, productive," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "The real question to my mind is how can they be a full line store without cosmetics?"

Wall Street will have to wait until the fall to learn the answer. graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.