Kmart to acquire Sears for $11B

Lawrence store fits new retail strategy of merging giants

Less than two years removed from bankruptcy, Kmart Corp. announced Wednesday that it was buying Sears, Roebuck and Co. in an $11 billion deal designed to give both struggling retailers a chance to compete against Wal-Mart, Home Depot, Target and other big-box chains.

The new company — to be called Sears Holdings Corp. — would become the nation’s third-largest retailer, behind only Wal-Mart and Home Depot. The deal is expected to close by the end of March, pending approval from shareholders and regulators.

Both chains would retain their independent names and brands, although several hundred stand-alone Kmarts would be likely candidates for conversion into Sears stores. The goal: Pump up sales away from Sears’ traditional presence in malls.

“Off-mall is where we need to move very aggressively,” said Alan Lacy, chairman and chief executive officer of Sears, who is in line to be vice chairman and CEO of the combined company.

In Lawrence, Sears already has a stand-alone store at 2727 Iowa. Kmart’s lone retail store in town, at 31st and Iowa streets, closed after Kmart’s Chapter 11 bankruptcy filing in early 2002.

Dorothy Martin, a Baldwin resident, emerged from Lawrence’s Sears store Wednesday afternoon with a bag of purchases and a renewed hope that both companies could thrive under combined leadership.

“I hope it’s good,” said Martin, still sad that Lawrence lost its Kmart store. “I like Sears. It’s a good store with great prices and great people. I hope they don’t go under.”

Kmart’s Lawrence stake

Kmart may not have a store, but it still has major operations in Lawrence: a 1.5 million-square-foot distribution center north of the Kansas Turnpike that employs 500 people and supplies 84 Kmarts in 10 states.

The complex at 2400 Kresge Road is one of 16 Kmart distribution centers across the country, and the sole location to serve as a “national specialty center” for such products as nutritional supplements, cosmetics and other beauty aides.

Kmart and Sears officials declined Wednesday to speculate about the future of specific stores or distribution centers, but did acknowledge that efficiencies would be sought.

Sears Holdings plans to save up to $500 million a year within three years through store conversions, back-office job cuts, increased purchasing efficiencies and a more efficient supply chain.

“We need to have a very low cost structure in order to compete with our biggest competitors,” said Edward Lampert, the Kmart chairman who orchestrated the deal and is in line to be chairman of the new company. Lampert’s Greenwich, Conn.-based investment firm controls Kmart and is Sears largest individual shareholder, with a 15.8 percent stake.

Lampert declined to discuss details regarding the prospect of layoffs in the new company, but did acknowledge that “there will be some head count changes that come out of this.”

Three years ago, the Lawrence distribution center had 800 employees; today it has 500. Wednesday was the center’s annual Thanksgiving feast, and managers served turkey, mashed potatoes and other trimmings to workers throughout the day and into the night.

Center managers did not call formal, plantwide meetings to discuss the pending merger.

The combined company would have $55 billion in annual revenues and 3,500 retail stores. It would be based in the northwestern Chicago suburb of Hoffman Estates, where Sears has its headquarters, but officials said Sears Holdings would maintain a “significant presence” in Troy, Mich., where Kmart is based.

Stocks advance on news

While shares of both Kmart and Sears surged on the news — Kmart shares soared $7.78, or 7.7 percent, to $109, while Sears stock was up $7.79, or 17 percent, to $52.99 — some analysts remained skeptical about prospects for success.

“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.”

Kmart already has come back from the brink. The company’s filing for bankruptcy protection led to the closing of 600 stores, layoffs 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 per share, in the third quarter ended Oct. 27, compared with a loss of $23 million, or 26 cents per share, for the same period a year ago. Its stock price has risen more than sevenfold from the $15 a share when the company emerged from bankruptcy.

Sears turnaround sought

Sears’ roots date to the late 1800s when it offered merchandise by mail order to farmers. It opened its first retail store in 1925 and eventually became the nation’s biggest department store operator.

Mired in a retail slump, Sears long had fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales for years.

Sears last fall introduced its Sears Grand stores, which offer grocery and convenience items besides traditional Sears fare such as clothing, home appliances and tools. The concept had delivered promising results for the retailer at its first three stores in metropolitan Salt Lake City, Las Vegas and in the Chicago suburb of Gurnee.

Lampert said the goal for the combined company would be to achieve a 10 percent operating profit margin, a level generated by such retailers as Gap Inc. and Target Inc.

A key part of increasing productivity at the stores would be in the cross-selling of brands, though company officials declined to be specific on which they intended to 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 that Sears also could benefit from Kmart’s expertise in its pharmaceutical department and health and beauty products.