Since picking up Kmart, it's been tears for Sears

Both brands endured holiday declines; analysts criticize lack of integration

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mfrazier@crain.com

When eddie lampert boldly set out to turn around Sears, Advertising Age said it would prove him a fearless visionary or a modern-day Icarus.

It looks like he flew too close to the sun.

The hedge-fund manager's strategy was to revive ailing retail chains Sears and Kmart by cross-marketing their respective brands. That has barely happened in the two years following the $11 billion merger, and while Sears Holdings is profitable, the gains have come at a heavy cost: underinvestment in stores, loss of marketing talent and uneven ad spending. In the first three months of 2006, Sears' measured-media spending slid to $262 million, down 13.5% from the same period in 2005, though Kmart's was up 15.4% in the period to $140.3 million.

"The behavior is not what you would see of a retailer trying to turn around two brands," said Kim Picciola, a retail analyst at Morningstar. "There has been some integration, but certainly not what we thought we might see in terms of bringing the two brands together."

Earlier this month, Sears reported same-store sales declined 5.6% over the holiday season, while Kmart's same-store sales fell 1.2%.

Last week, Joan Chow, chief marketing officer at Sears for just 19 months, left. She was the last surviving senior-level marketer since Mr. Lampert took over. "These companies are no longer being run by retail executives, but by businessmen, and they are managing it as a portfolio investment," said Will Ander, a consultant at McMillan Doolittle, a Chicago retail-consulting firm. "Over time the brands are being destroyed as retail entities."

Sears executives have argued that the assessment is unfair and that the company has taken a number of steps to integrate the brands. In fact, the company has rolled out the Sears Craftsman brand at Kmart's 1,416 stores and brought DieHard to Kmart. But it took 18 months following the merger to accomplish the former and 21 months the latter. Only 178 Kmart stores carry Sears' private-label brand Kenmore.

The only Kmart brand introduced into Sears will be Joe Boxer, and not until the second half of 2007.

A spokesman for Sears declined to answer specific questions about the progress on the merger integration, but he noted that in October 2005, the company made the Sears credit card available for use at Kmart.

Still, analysts are not convinced. Mr. Lampert "thought he could do something you can't do," said Britt Beemer, a retail analyst at American Research Group. "How can you merge two mediocre companies and end up with anything but a mediocre company?"
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