NEW YORK – A resurgent Kmart, home of the blue light special, is buying the once dominant Sears department store chain in a surprising $11 billion gamble it is counting on to help both better compete with Wal-Mart and other big-box retailers.
Led by Kmart Holding Corp. Chairman Edward Lampert, the new Sears Holdings Corp. would be the nation’s third largest retailer. Both chains would survive, but several hundred stand-alone Kmarts are expected to be transformed into Sears stores. The goal is a quick kick-start to sales away from Sears’ traditional base of shopping malls.
Lampert and Sears Chairman and CEO Alan Lacy, in announcing the deal on Wednesday, promised up to $500 million a year in savings within three years from store conversions, back-office job cuts, more efficient buying of goods and possible store closings.
Shares of both Kmart and Sears, Roebuck and Co. surged on the news, but some analysts were skeptical that the merger amounts to a home run.
“Both have been broken in some sense,” said Dan Hess, president and chief executive of Merchant Forecast, a New York-based independent research company. “Kmart has to learn to survive in a Wal-Mart world, and Sears needs to learn to survive in a world of Home Depot and Lowe’s.”
Lampert, 42, was as an assistant to Robert Rubin at Goldman Sachs &Co. before leaving at age 25 to form a hedge fund. He orchestrated the deal and will lead a new board that will be dominated by Kmart directors.
‘We need to have a very low-cost structure in order to compete with our biggest competitors,” said Lampert, whose Greenwich, Conn.-based investment firm controls Kmart and is Sears’ largest individual shareholder, with a 15.8 percent stake.
For Sears, the merger allows the company to move more quickly to its strongest base of customers. “Off mall is where we need to move very aggressively,” said Lacy, who will become vice chairman and chief executive of Sears Holding.
Lacy said he and Lampert have known each other for four years. The idea for a combined company first arose when they were in talks about Sears’ purchase of 50 Kmart stores earlier this year, he said.
The new company is expected to have $55 billion in annual revenues and 3,500 outlets. It would trail only Wal-Mart Stores Inc. and Home Depot Inc. as the biggest U.S. retailers.
It will be headquartered in the Chicago suburb of Hoffman Estates, where Sears has its headquarters, but will maintain a “significant presence” in Troy, Mich., where Kmart is based.
The deal marks a remarkable comeback for Kmart, which filed for Chapter 11 bankruptcy protection in early 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart employees and cancellation of company stock.
Lampert gained control of Kmart when the retailer emerged from bankruptcy in May 2003 through the conversion of his debt holdings into equity. In March, Kmart posted its first profitable quarter in three years.
While same-store sales have continued to decline, Lampert has maximized cash flow in part by selling off some of the stores to Sears and Home Depot.
On Wednesday, Kmart said it earned $553 million, or $5.45 a share, in the third quarter ended Oct. 27, compared with a loss of $23 million, or 26 cents a share, for the same period of 2003. Its stock price has risen more than sevenfold, from $15 a share when it emerged from bankruptcy.
Sears’ roots date to the late 1800s when it offered mail-order merchandise to farmers, opened its first retail store in 1925 and eventually became the nation’s biggest department store operator.
Mired in a retail slump, Sears had long fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales. The company last fall introduced its Sears Grand stores, which offer grocery and convenience items along with traditional Sears fare such as clothing, home appliances and tools. The concept delivered promising results for the retailer at its first three stores in metropolitan Salt Lake City, Las Vegas and the Chicago suburb of Gurnee.
Lampert said the goal for the combined company is to achieve a 10 percent operating profit margin, a level generated by such retailers as Gap Inc. and Target Inc. But he noted that in the meantime, the financial operations will be “lumpy” as it digests the two companies.
A key part of increasing productivity at the stores will be the cross-selling of brands, though company officials declined to be specific on which they would overlap.
Besides Craftsman tools and Kenmore appliances, Sears’ exclusive brands include Lands’ End clothing. Kmart’s brands include Martha Stewart, Jaclyn Smith and Joe Boxer. Lampert said Sears could also benefit from Kmart’s expertise in its pharmaceutical department and health and beauty products.
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