The Incredible Shrinking Sears – The New York Times

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For decades, as Americans shifted the ways they shopped, Sears deftly evolved. In fact, it was often at the forefront of changing demands as it moved from catalogs featuring pages of saddles and bridles, to showrooms full of glistening home appliances, to auto-repair shops outside the mall.

As Americans moved from rural communities to larger cities, many no longer needed to shop by thumbing through the catalog; they preferred to visit dazzling department stores. Sears began opening hundreds of stand-alone retail stores, some with soda fountains, dentist’s offices and pet shops alongside tombstones and farm tractors.

The set of “The Donna Reed Show” in the 1960s featured a Kenmore stove, dishwasher and washer and dryer, all must-have appliances in American homes. And as TV culture grew in the ’60s, Sears ramped up its advertising campaigns and signed licensing agreements with celebrities like the baseball player Ted Williams, the golfer Arnold Palmer and the model Cheryl Tiegs.

In the 1980s, as Americans’ fondness for credit grew, Sears introduced its wildly popular Discover card, which was the first to offer cash rewards to customers based on the volume of their purchases. Within four years, 20 million people had the card. Within a decade, credit operations accounted for a big chunk of Sears’s revenues.

When malls became the meeting place of American youth, Sears moved with them. Its stores anchored shopping centers all over the country.

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Crowds at the opening of a Sears store on State Street in Chicago in 1932. Sears was once the store of choice for most Americans, with its famed catalog and large retail presence. Credit Sears, Roebuck and Co.

By the 1990s, however, Sears’s dominance of the retail landscape had ended. It was surpassed by the discount shopping retailers Walmart and Kmart, the so-called big-box stores. By 2001, Walmart’s revenues were about five times that of Sears.

The new players were nimble, able to change inventory and prices quickly. Sears’s overhead costs were higher, and catalog prices were usually set months in advance in order to meet printing and mailing schedules.

But big-box stores were only one threat. Online shopping would soon emerge as an even more powerful force, one that Sears, with its hundreds of brick-and-mortar stores needing constant face-lifts and upkeep, was also ill prepared to compete with.

That’s when the hedge-fund titan came knocking.

Slowing Sales and Leaky Roofs

In late 2004, newspapers were still running articles about the coming $11 billion takeover of Sears by the discount giant Kmart when Arthur Martinez’s phone rang. Mr. Martinez had been the chief executive and president of Sears in the late 1990s.

On the line, he said, was Edward Lampert.

A financial wizard who started his career on the vaunted risk arbitrage desk at Goldman Sachs, Mr. Lampert had just arranged the megadeal that created the nation’s third-largest retailer. Among the new members of its board were Steven Mnuchin, Mr. Lampert’s former roommate at Yale and the current Treasury secretary.

“He asked me if he had just done the stupidest thing in the world by buying Sears,” Mr. Martinez recalled.

Over a 90-minute meeting in Greenwich, Conn., where they both had offices, Mr. Martinez advised Mr. Lampert to focus on high-value businesses like appliance sales, Sears’s crown jewel. He also noted that Sears was a capital-intensive business, requiring steady investments not only in the stores, but also in training and retaining employees.

“He appears to have roundly ignored everything I told him to do,” Mr. Martinez said.

Sears disputed Mr. Martinez’s recollections, saying it was Mr. Martinez who requested the meeting, and denied that Mr. Lampert had made the comment about buying Sears. The company also said Mr. Lampert had not ignored Mr. Martinez’s advice.

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Edward S. Lampert, center, the current chief executive of Sears Holdings, with former executives Alan J. Lacy, left, and Aylwin B. Lewis, in 2005. Credit PRNewsFoto, via Getty Images

At Sears, Mr. Lampert typically led from afar. As the largest shareholder through his hedge fund and, since 2013, the company’s chief executive, Mr. Lampert has overseen the company’s operations via videoconference from his home in Miami. He sets foot inside Sears headquarters in Hoffman Estates, Ill., roughly once a year for the annual meeting, according to interviews with several former executives.

In the early days of the merger, when times were better, Sears used its cash to buy back shares, a move businesses often use to try to drive share prices higher. From 2005 to 2012, the company spent $6 billion buying back its own shares at prices as high as $174 a share.

Today, Sears Holdings stock trades at $9.30 a share, a decline of 95 percent from its highs.

Besides the share buybacks, one of the earliest moves by Mr. Lampert was to decentralize the managements of Sears and Kmart, effectively creating more than three dozen silos of business lines such as men’s wear, shoes and home furnishings, each with its own management team and board of directors.

It is similar to a strategy sometimes used at hedge funds, where different teams compete with one another for scarce company resources. At Sears, though, the design led to infighting between divisions for everything from space in the weekly advertising circulars to floor shelving.

One former executive described how the clashes played out in Sears showrooms, whether in the jewelry or the tools departments. Managers would tell their sales staff not to help customers in adjacent sections, even if someone asked for help. Mr. Lampert would praise policies like these, said the executive, who asked not to be named because he still works in retail.

The company said the descriptions by former employees presented an “incomplete perspective” and that the company had adopted different organizational models. It noted that it had recently consolidated its management structure to speed up decision making.

Mr. Lampert’s grand vision for Sears, many former executives said, was to position it to compete with Amazon. Instead of spending on store upkeep, he plowed investment, new talent and marketing into Sears’s website and a customer loyalty program called Shop Your Way. The program allows customers to earn points, for purchases not only at Sears but at partnering businesses including Burger King, Under Armour and Uber, that can be redeemed for Sears merchandise.

Sears, Mr. Lampert argued, had a big edge: Its hundreds of stores nationwide could act as distribution centers. People could order things online and have them delivered locally.

The problem, former executives and employees said, was that the bulk of Sears’s revenue still came from its stores. And they were rapidly losing traffic.

“Victoria’s Secret has a $1 billion online business selling $25 bras and such because customers are totally comfortable going to victoriassecret.com, because they felt connected to the brand and the store experience,” said Gary Schettino, a former vice president of merchandising at Sears Holdings. “Victoria’s Secret understood the overlap of the store and the online customer in a way that Sears never did.”

Kmart and Sears stores around the country became dilapidated, their personnel demoralized. Employees at some Kmarts didn’t receive raises for several years. Some salespeople who worked solely on commission said that they had been slashed to nearly nothing about three years ago.

Customers walking into a Sears store in Kokomo, Ind., were greeted by stained carpets, broken mannequins and cracked display tables, recalled Amanda Marquand Householder, an assistant manager there before she left in 2014. The Kokomo store closed this spring.

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