Some Aren’t Sold on Retail Deal’s Upside

Wednesday’s announcement that Kmart Holding Corp. would buy Sears, Roebuck & Co. created a buzz among some Wall Street analysts: Two wrongs don’t make a right.

To hear the number crunchers tell it, the discounter and the department store -- which face tough competition from Wal-Mart Stores Inc. and Target Corp. -- may well have needed to band together to stay in the game over the long haul.

But just because it would be the No. 3 retailer in the U.S. doesn’t mean the new company would be able to wrest enough savings or create enough value to seriously compete against the behemoths, the experts cautioned.

“We do not believe that combining two failed retailers will make a viable challenger to Wal-Mart,” Goldman Sachs analyst George Strachan wrote in a report Wednesday. “We do not believe that adding Sears appliances to Kmarts or Joe Boxer apparel to Sears will turn either company around.”

About the nicest thing Strachan had to say was that Kmart Chairman Edward Lampert, who will head the new entity, “has demonstrated a focused ability to extract cash from the share-losing operations of Kmart and undoubtedly has similar plans for Sears.”

Investors were a lot more keyed up. Sears gained more than 17% to $52.99 on the New York Stock Exchange and Kmart climbed nearly 8% to $109 on Nasdaq.

Adam Hanft, chief executive of Hanft Unlimited, a marketing and branding company, said investors saw a better revenue stream from the obvious cost savings of combining the two retail operations.

But he said consultants and financial analysts were scratching their heads over how Sears Holdings Corp., as it would be called, would attract shoppers accustomed to Wal-Mart bargains and Target innovations.

“They need to do something bold and provocative, and to do that with one business is hard,” Hanft said. “To do it with two businesses is near impossible.”

The $11-billion acquisition, which must be approved by Kmart and Sears shareholders and antitrust authorities, would create a concern with more than 3,500 stores and $55 billion in annual revenue.

There are 118 Kmarts and 90 Sears in California, where Sears employs about 28,500 people and Kmart’s payroll is about 10,620. Most Sears stores are inside shopping malls; Kmart is mostly an off-mall retailer.

Sears owns the Orchard Supply Hardware chain, with 82 locations in California.

Two retailers have a good deal to lose in California to a successful Kmart-Sears marriage: Kohl’s Inc., which came to the state in 2003 with much fanfare but has struggled to capture consumer attention; and Mervyn’s, the long-suffering store sold by Target last spring.

For its part, Wal-Mart plans to open 40 Supercenters in California. With annual revenue of $257 billion, Wal-Mart derives its legendary low overhead and high profit margins from its enormous orders and from combining the industry’s most sophisticated logistics systems with a miserly cost structure.

In a research report titled “More, Not Necessarily Better Competition,” Merrill Lynch analyst Danielle Fox wrote that even in tools and other hard goods -- strengths for Kmart and Sears -- the best thing to come of their union might be only better access to customer traffic.

“The combined entity’s success will hinge on execution, where neither company has a particularly good track record,” Fox wrote, adding that neither management team has “a significant track record of operating success.”

Kmart filed for Bankruptcy Court protection in 2002. Since it emerged in May 2003, with Lampert at the helm, its stock has moved upward as it has shed many of its worst-performing stores.

As for Sears, one of the oldest names in retail, it has been caught in between discounters like Wal-Mart and department stores like Macy’s and has struggled to find a niche.

Some shoppers expressed doubts Wednesday that the creation of a Sears Holdings Corp. would change how or where they shop. For a battery-operated drill or an inexpensive power saw “I’ll go to Kmart,” said construction worker William Machen as he stood outside a Kmart in Burbank. “If I want a tool that’s going to last for a while, I go to Sears.”

Machen was surprised Kmart would have the wherewithal to buy Sears. “I thought Kmart was in a real bind, “ he said.

Retiree Glen Ireland thought so too.

“If they can’t manage their own affairs, what makes them think they can manage Sears as well?” asked Ireland, walking into the Burbank Kmart with his wife, Sandra.

Just last month, he said, Kmart closed down the store near his house in Glendale: “Poor Sears.”