Lampert backs Kmart, Sears; should he broker a marriage?

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Sears, Roebuck & Co. and Kmart Holding Corp. have two things in common: They've been beaten by Wal-Mart, and they have the same top shareholder. Financier Edward S. "Eddie" Lampert owns 45% of Kmart and 12% of Sears. The solution for these also-rans may be to merge.

To be sure, two troubled organizations could make for a troubled marriage. In this case, two wrongs could make a right.

When I visited a local Kmart, it was as if the store had died and gone to Target. I found style, selection and value (if not a lot of customers). I take back almost all the mean things I've said about Martha Stewart, whose name appears on everything at Kmart except the Joe Boxer shorts. But Kmart still conjures up images of the dowdy Kmart of my youth. In the end, it can't compete with Wal-Mart on price and lacks the cheap-chic mystique of Target.

Mr. Lampert, a reclusive billionaire money manager and dealmaker, brought Kmart out of bankruptcy in May, emerging as chairman and lead shareholder. He's taken an active role, helping pick Grey Global Group to do advertising and even cold-calling some people he's wanted to consider for key management posts. Yet it's still Kmart. If it remains a standalone chain, I bet it will fail.

Enter Sears, where Mr. Lampert took a sizable stake in 2002. Sears sells the right stuff: Craftsman, Kenmore, Lands' End. But it cannot easily match discounters on price because its cost structure is too high. It's testing a new format, Sears Grand, with shopping carts and wide aisles. Early reports are mixed: A nice store that matches rival supercenters on selection but not necessarily on price. Sears has to change. As discounters stock better goods at lower prices, there's less reason for a fabled department store like Sears.

Consider what could happen if Mr. Lampert produced a merger of his two big holdings. First, the name: Ditch "Kmart," which has too much baggage; keep "Sears," a resilient brand in search of a viable retail format. Maybe tweak the name to show this is something new-Sears Smart, perhaps.

Then the cost cutting: Watch Mr. Lampert gut merged corporate staffs, slash marketing and close overlapping stores.

Now take Kmart's big boxes in the suburbs and think Target, but with a unique set of strong brands: Craftsman tools, Lands' End clothes, Martha Stewart home furnishings, Kenmore appliances. Take Kmart's older city stores-often far from newcomers like Wal-Mart-and restage them with the best mix from Sears and Kmart, targeting multicultural groups where it makes sense. Add shopping carts and Kmart's soft lines to Sears' old mall locations.

There are big obstacles here. Turning a department store into a low-margin discount store would be tough. Then again, it could be risky for Sears and Kmart to remain as standalones while better retailers race ahead.

Sears and Kmart were once the two biggest U.S. retailers. Sears is now No. 5 and Kmart No. 11, according to Forbes' math. A merger would make Sears No. 2. Sears has about 870 stores; there are 1,500 Kmarts. Wal-Mart Stores has nearly 3,000 U.S. Wal-Marts. Sears' and Kmart's sales last year were $41 billion and $31 billion, respectively. Wal-Mart sales (including Sam's Club) were a bit bigger: $245 billion.

Sears succeeded by making radical moves at the right time. Richard Sears started by selling watches in 1886; he moved into catalogs to serve rural America. Sears opened its first store in 1925, bet right on the post-war boom and became the nation's No. 1 merchant till a small-town retailer, Wal-Mart, swept past it.

Sears can adapt, and Kmart could be the opportunity. Maybe Mr. Lampert should arrange a marriage.

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