How Sears Came Down With Seasonal Disorder Don't blame logistics. Severe cost cutting left the retailer without the people to make confident decisions.
(Business 2.0) – In February, as every retailer knows, shoppers' thoughts turn to spring. At J.C. Penney, Target, Wal-Mart, and others, this year was no different: Anyone walking into those stores on Groundhog Day saw racks of swimsuits and piles of shorts, and the winter gear migrating to the bargain bin. But shoppers at Sears's 871 stores around the country were still picking through turtlenecks and fleece pullovers at the end of the month. And when the sundresses and sleeveless sweaters finally did arrive--in mid-March--the selection was thin. Not only had Sears ordered late, it simply hadn't ordered enough.
The too-little, too-late goof could not have come at a worse time for Sears Roebuck, the nation's sixth-largest retailer. Coming off several years of brutal cost cutting, the company is trying everything it can to defend itself against Wal-Mart and Target. Yet while other major U.S. retailers reported vibrant apparel sales in the spring season, Sears reported modest declines. And it expects to feel the effects through the summer. "If you miss the first two or three weeks in spring apparel, you really blow it," says Sid Doolittle, founding partner at Chicago-based retail consulting firm McMillan/Doolittle. "Shoppers make their decisions early, particularly women."
So how, in the era of just-in-time logistics and demand forecasting, could one of America's oldest retailers so badly miss the mark? Though Sears declined to make executives available for interviews, speaking during the first-quarter earnings conference call in April, chairman and CEO Alan Lacy blamed logistics snafus, saying the company screwed up by "essentially not having enough product." Critics, however, are more specific, citing management mistakes: Sears had fired too many experienced people who understand apparel merchandising and Sears itself. Those left behind compensated for ordering too much inventory last year by ordering too little this year. Even the secret weapon that was supposed to rejuvenate Sears's apparel lines--the recently acquired Lands' End--misfired.
While Sears sells a hefty $4.5 billion worth of apparel annually, revenue has been sliding for years. That's why shoring up the business was one of Lacy's most serious challenges when he took over as CEO in December 2000. Nevertheless, sales of apparel and accessories continued to decline: down 6.8 percent in 2001, 10.2 percent in 2002, and 4.2 percent in 2003. In the past three years, the company has seen its apparel business shrink by $800 million as Wal-Mart and Target, more attuned to the sartorial whims of budget-conscious shoppers, have grown faster than the overall market.
That's partly why, hoping to give Sears's apparel lines a little flair, Lacy bought Lands' End two years ago for $1.8 billion. He considered the catalog and online clothing retailer's lines a step up from tired house brands like Trader Bay and Crossroads, and decided to turn over all apparel merchandising to executives who were brought in from the Dodgeville, Wis., company. At the same time, Lacy reduced and reorganized Sears's merchandising staff. More than 30 percent of its buyers--the staff that chooses and orders apparel from manufacturers--were forced to leave. As it turned out, Lands' End executives had more trouble than Lacy had expected converting their catalog experience into stocking Sears stores. A catalog, even one with $1.6 billion in annual sales, can continually tweak its orders and vendors up until the book prints. It has a much shorter lead time, and all the merchandise goes to a central warehouse. Items can then be shipped directly to consumers. But a big chain has to figure out how to get the right mix to the right stores at the right time. Lands' End's own spring deliveries arrived late to Sears stores after several of its vendors missed deadlines. Merchandisers had apparently been focused on centralizing operations rather than shipping product on time. "We lost some institutional knowledge," admitted CFO Glenn Richter during the first-quarter earnings call. "The organizational change resulted in some disruption to how we approached spring."
Fighting Last Year's War
The surviving Sears buyers only made matters worse: Burned by overordering last year, they underordered this year. The overbuying had led to more clearance sales and a reduction of the company's gross profit margin for the quarter, though Sears won't say by how much. The buyers were naturally reluctant to risk that again and, despite a healthy growth forecast by the National Retail Federation of 6.4 percent in the first quarter, Sears reduced its spring orders by 14 percent. "You wouldn't expect Sears to make those kinds of mistakes," says Philip Zahn, a retail analyst with bond-rating service Fitch.
One explanation: Sears has been operating with a senior management bench dangerously lacking in large-store merchandising experience. Gwen Manto, who became the third executive to hold the senior apparel job during the past two years, took over in February after Lacy sent the Lands' End executives back to Wisconsin. She arrived too late, however, to undo the damage to the spring line. Manto, the former merchandising chief at Florida-based discount chain Stein Mart, knows the rag trade, but Sears's executive ranks--thinned out as Lacy built his own team--can't make that claim. Eight of Lacy's 14 executive officers have been with the company less than three years, and only a few have retail backgrounds. Lacy himself spent his career in finance, not merchandising. His top department-store executive, Mark Cosby, joined Sears in late 2002 from the fast-food industry, where he was most recently chief operating officer at Yum Brands, which runs KFC, Pizza Hut, and Taco Bell restaurants.
Back to School
Lacy has assured investors that the problems at Sears will be fixed in time for this summer's back-to-school shopping season, the retail industry's most important period other than year-end holidays. "We made some mistakes and corrected the problem and know what we need to do to fix them," he said at a recent press conference. "Our apparel business is on the right track."
To that end, Sears is adding clothing brands and expanding a line specifically for Hispanic women. It recently switched to a "hold and flow" model, in which store managers get less merchandise at the beginning of each season but can tap into inventory held upstream in one of the company's 137 distribution facilities. "This is the first time we're reaching out to stores to ask what types of merchandise they want," says Sears spokesman Chris Brathwaite. "We're giving the stores more autonomy." Come Feb. 2, the groundhog won't be the only one wondering how much longer winter will last.