Sears Should Reorganize Its Operations Along Merchandise Lines Into Separate Subsidiaries

| About: Sears Holdings (SHLD)


Sears' current operations are not organized and structured for achieving its best retail business potential.

Sears' ongoing asset divestment and other financing maneuvers can't turn around its declining business at the end of the day.

Changing the way how Sears organizes its retail business by setting up independent subsidiaries along merchandise lines could help simplify management and promote brand recognition.

Sears Holdings Corporation (NASDAQ:SHLD) currently comprises of three operating units, Kmart, Sears Roebuck and Sears Canada. However, they are not totally distinctive from each other, selling a lot of the same merchandises but with many unshared distribution centers among them. Such an operating structure may have undeservedly led to management at different units competing internally against each other. If similar operations from each unit are pulled together, there may be better results for Sears against outside rivals.

On the other hand, the Sears-Roebuck unit has too many lines of operations within it, from clothing to furniture, appliances, tools, outdoors, etc. If broken apart and reorganized along different lines of merchandises, these businesses could each run as separate, independent units for increased efficiency with clearer performance measures. More importantly, such reorganizations would also benefit customers. It's counter-productive to overwhelm customers with different brands of stores for essentially the same things or vastly unrelated merchandises all in one place.

While Sears has been for some time reevaluating its company-wide operations, it's doing so mainly to find a way of financing its troubled retail operations. In addition to closing both Kmart and Sears stores that are underperforming, to raise cash for short-term operating uses, Sears has sold and spun off certain retail and other assets, including interest in Orchard Hardware, its own Hometown dealer stores, Sears Outlet and Lands' End, a mail-order clothing retailer now separately traded.

However, continually throwing cash at operations that can't seem to ever generate positive cash flows results in only more accumulated losses. Although cash shortage is an ongoing problem for Sears, the underlying issue is how ineffectively the company has been on the business side. Sears can try to line up all the available financing options, but working on raising funds only, however diligently, likely just prolongs its business struggles but helps little in preventing a potential demise of the Sears brand.

To turnaround and stop sales declines that have gone on for 30 consecutive quarters now, Sears must look for better means of running its sprawling retail operations since surviving just another day through financing maneuvers won't change its current bleak prospects. Something strategic rather than tactical is what Sears needs the most to become competitive again. While some of Sears' competitors such as Macy's (NYSE:M), Target (NYSE:TGT) and even J.C. Penney (NYSE:JCP) all seem to have a clear business identity, Sears can't really tell what it now stands for and who its core customers are.

Sears has seen some positive results in pushing online sales and expanding its customer royalty program, but these are more tactical tools, things that its competitors also have. In the old days, Sears used to be a store of choice for women to come in shopping and also enjoying a cup of tea there. Nowadays, some luxury retailers even offer gourmet food services inside their stores. To regain its past importance and resonance with customers, Sears has to find a way to set itself apart again.

As noted earlier, Sears has broad lines of merchandise across more product categories than its traditional peers, setting itself up to be a mass retailer. But having full-line superstores is not the only way to operate a retail conglomerate. Even regular department stores with too many non-complementary divisions could potentially give rise to management inefficiency, while providing no extra value for customers. It would be more effective for Sears to organize its operations along merchandise lines and form separate, independent subsidiaries within a corporate holding entity to include Sears clothing, Sears appliances, Sears furniture, Sears outdoors, Sears tools, etc.

Instead of scrambling for cash by selling assets without a clear business purpose, Sears could now systematically unshelve certain operations not suitable to be placed into new subsidiaries. Conversely, the subsidiary structure would have allowed Sears to potentially incorporate its earlier divestment into the reorganized operations. Under the subsidiary structure, the Kmart brand should be eliminated and its respective operations merged with Sears. The value of Kmart, especially relative to that of Wal-Mart at the time of the merger, has long disappeared and the continuing presence of Kmart is only a distraction from Sears' rebuilding effort. Also, any Sears Canada operations should become part of respective Sears subsidiaries to promote unified Sears brand recognition.

Running a retail conglomerate through separate, independent subsidiaries, Sears could both simplify store management through similar merchandise tasking and better attract customers by conveying clearer brand images. Selling clothing and appliances requires different marketing approaches, and having a dedicated management team at the store level helps create a more relevant shopping experience. Furthermore, with the declining popularity of large-sized mall stores, a series of stand-alone Sears subsidiary stores that are leaner and more responsive to customer demands may provide a much needed intimate shopping environment to counter the impact of online commerce.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.