IV.

Issues and Challenges For nearly a century, Sears was worthy of the title "America's favorite place to shop." It was the countrys leading retailer, its catalogue a genuine part of American history. In the 1950s, the company founded Allstate Insurance. The company diversified into financial services in the early 1980s, acquiring the Dean Witter brokerage and realtor Coldwell Banker. The aim of the purchases was to create a giant supermarket of both goods and services, so that consumers could buy a house, finance it, insure it, and stock it with furniture -- all under the same roof. Wall Street referred to the diversification as a "stocks and socks" strategy. The financial services performed superbly -- improving the company's earnings from 1984 to 1990 by 55 percent. But in the most literal terms, nobody was minding the store. The vast chain of over 850 outlets, the flagship division of the Sears Roebuck empire, were failing fast. In the seven years up to 1990 the retail group's earnings declined at an annual rate of 7.7 percent. The decline was reflected in the stock which, between January 1984 and November 1990, offered investors a total average return of as little as 0.1 percent. The company didn't even meet its own targets. Through the eighties, management continued to promise a return of equity of 15 percent a year. Not once did Sears achieve this goal. Indeed, in 1990, Sears produced a 6.8 percent ROE. From 1984-1990 Sears had a total annual return, including dividends, of a mere 0.7 percent. 1990 was a disastrous year for the company with earnings and stock prices at 1983 levels, a return on equity of 6.8 percent, and a loss in the first nine months of $119 million. Sears finally lost its century-long title as America's largest retailer, as Sears customers turned to Wal-Mart, K-Mart, and specialty stores like Circuit City, the Gap, and the Limited. In a survey of

business leaders, Sears management was ranked 487 out of 500. It was no secret that the company's performance was poor, both in comparison to the market as a whole and in comparison to its peers. But all of that was not enough to get management to change direction.

Sears - Kmart merger The Sears Holding Corporations was officially formed in 2005 after one of the largest merger acquisitions in recent U.S. history, combining Sears, Roebuck, and Co. with Kmart. Both of these firms were American retail icons that had existed since the 19th century. At the time of the merger, the architect behind the deal, prominent hedge fund manager Edward T. Lampert, was hailed as a genius and penciled in as the next Warren Buffet. The $12B merger created the 3rd largest retailer in the U.S. However, since the merger, the performance of SHLD has been disappointing, and SHLD has dropped to 9th place among U.S. retailers. SHLD currently trails Wal-Mart, CVS Caremark, Kroger, Costco, Home Depot, Target, Walgreens, and Lowes. Investor confidence in SHLD has been consistently declining over the past few years. In a recent Wall Street Journal article, Credit Suisse analyst Gary Balter was quoted as saying: Put a fork in it. We continue to view Sears Holdings as the most overvalued stock in our co verage. The merger of Sears and Kmart was partially built upon the concept that the combination of Sears' brands and Kmarts' real estate locations could provide a combined boom for both entities. The results, however, were depressing, and by 2008 sales had fallen to levels prior to the merger. The rise of online sales and the growth of competition like Walmart, Macy's, and Target has led to a steady decline of mall customers and sales. This decline

previously led to the sale of their mall development company, Holmart, which was sold to General Growth Properties in 1995. Sears Holdings currently consists of three different reporting segments: Kmart, Sears Domestic, and Sears Canada, a 73% owned subsidiary. The Kmart reporting segment includes approximately 1,350 free-standing store locations, featuring key brands such as Jaclyn Smith, Joe Boxer, and the Martha Stuart Everyday line. In addition, over 1,000 of these locations include in-store pharmacies, and 20 have affiliated auto centers. The Sears Domestic reporting segment consists of about 900 full-line stores (primarily mall-based), and 1,200 specialty stores. Sears Domestic stores feature well-recognized hard line brand names such as Craftsman, Kenmore, and DieHard, and the majority of the full line stores also have attached auto centers. Finally, the Sears Canada segment consists of 120 full-line and 270 specialty stores that are similar to Sears Domestic, with a slightly greater emphasis on soft lines like apparel, footwear, and jewelry.

Sears Auto Center Scandal In 1991, Sears unveiled a productivity incentive plan to increase profits in its auto centers nationwide. Auto mechanics had traditionally been paid an hourly wage and were expected to meet production quotas. In 1991, the compensation plan was changed to include a commission component. Mechanics were paid a base salary plus a fixed dollar amount for meeting hourly production quotas. Auto service advisors (the counter people who take orders, consult with mechanics, and advise customers) had traditionally been paid a salary. In order to increase sales, however, commissions and product-specific sales quotas were introduced for

them as well. For example, a service advisor might be given the goal of selling a certain number of front-end alignments or brake repairs during each shift. In June 1992, the California Department of Consumer Affairs accused Sears, Roebuck, and Co. of violating the states Auto Repair Act and sought to revoke the licenses of all Searss auto centers in California. The allegation resulted from an increasing number of consumer complaints and an undercover investigation of brake repairs. Other states quickly followed suit. Essentially, the charges alleged that Sears Auto Centers had been systematically misleading customers and charging them for unnecessary repairs. The California investigation attributed the problems to Sears Auto Centers compensation system.

Sears Class Action Lawsuit Many different compartments and spinoffs with Sears, were attempted over the years and would end in failure (Sears Grand, Sears Essentials, Great Outdoors). They have also attempted various online platforms which have failed to gain ground, including one which prompted a class action lawsuit. The lawsuit has been filed against Sears for their managemyhome.com sites which allowed anyone to type in anyones name and address or phone number and get a record of everything they ever bought at Sears.

Sears and Lands End In 2002 Sears bought catalog retailer Lands End for $1.9 billion in cash to attract new shoppers. Lands' End grew quickly in the 1990s as a respected brand of high-quality, classically American clothes. Customers were loyal to its Oxford shirts and khaki pants. Former Sears CEO

Alan Lacy took a big gamble on Lands' End, hoping its clothes could play a key part in the companys turnaround. What happened? Sears tried to sprinkle Lands' End items around its otherwise forgettable collection of clothing wrote Paul Miller at Retail Online Integration in 2007. He described it as the new "Lands' End ghetto" in Sears' stores. Sears tried to improve the situation, but the end result was the same: Lands' End languished under its new owner. At the time of acquisition the decision was applauded as mutually beneficial one. Lands End will gain access to huge brick and mortar infrastructure, whereas Sears will benefit from highly skilled product development, online channels, ad direct to consumers sales. Now, Sears chairman Eddie Lampert is hoping to find a buyer that will license Lands' End to Sears while expanding the brand in other areas. As for Sears, the move is another sign that the company is shifting away from clothing and focusing more on housewares, tools and appliances. Sears is already pulling clothing out of some stores, perhaps in a test run for a chain-wide overhaul. The company is becoming a smaller, niche retailer, realizing it cannot be the store for everyone it was in the past.

No customer service There are constant complaints that Sears has no commitment to service and no attention to the customers. There are multiple complaints boards on the internet flooded with customers complaints. BBB registered 17,772 complaints in the past 3 years for Sears Holding

Corporation Headquarters and 12,965 are for products and services only1. Sears seams that is not paying much attention to this vital component of business.

Sears and Kardashian clothing line Sears has consistently had negative earnings, posting losses in every quarter so far this year, failed to see a profit and the highly anticipated Kardashian Kollection did little to boost revenue for the struggling chain. Unfortunately, the collection has been besieged by troubles including Sears being forced to pull certain products for copyright infringement. Sears launched the Kardashian Kollection right before Kims Fairytale Wedding when the family was right in the midst of media frenzy over the event and generating tons of fan excitement. Sears wasnt anticipating Kims Nightmare Divorce three-months later, which caused a media and public backlash. Unfortunately Sears has already invested big on initiatives that have not been effective which is industry speak for getting burned by the Kardashian and there is little they can do to recover their losses

Kmart fraud suit In the class-action lawsuit, the plaintiffs alleged that Kmart deliberately understated the value of its real estate assets by several billion dollars, to give Lampert and Day a chance to acquire Kmart shares at less than their true worth. They said that when Kmart then sold some of the real estate to Home Depot and Sears Roebuck, its shares soared, giving it more ammunition to
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buy Sears. The plaintiffs contended that because they were not told what the real estate was really worth, they sold their Kmart shares at artificially low prices. A federal appeals court ruled in 2010 that Sears Holdings Corporation is not liable to former Kmart Holding Corporation shareholders who accused it of trying to drive down Kmart's stock price to let executives buy shares cheaply.