WASHINGTON, Nov. 17 (UPI) -- Can two legendary U.S. retailers successfully join forces to defeat an onslaught of cheap big-box competition? Sears and Kmart are going to try.
On Wednesday Troy, Mich.-based discounter Kmart Holding Co. announced it is buying Hoffman Estates, Ill.-based department store Sears, Roebuck and Co. for $11 billion. The deal will create Sears Holdings Co., to be the third-biggest retailer in the country -- only trailing Wal-Mart and Home Depot -- and one where the troubled retailers will try and leverage their combined brands and prime store locations to compete against big-box rivals like Wal-Mart and Target.
Retail hegemon Wal-Mart's sheer size -- more than 5000 stores worldwide and annual revenues of $203 billion as of third-quarter 2004 -- allows it to wrangle with suppliers and sell to consumers at rock-bottom prices, something that hasn't escaped Sears and Kmart execs.
"It's probably obvious that size is important to be able to compete effectively," Kmart chairman Edward Lampert, who is to head the new company's board, told reporters during a conference call Wednesday. "We need to have a very low cost structure in order to compete with our biggest competitors."
The new company's board will be made up of seven members of the current Kmart board and three members of the current Sears, Roebuck board.
The new company, Sears Holdings Corporation, will have annual revenues of $55 billion and bring about 3,500 stores to the table. It expects to save about $300 million through merchandising, purchasing power, and more efficient operations via the merge, and by converting a number of off-mall Kmart stores to Sears stores, including 50 Kmart stores Sears acquired earlier this year.
The collaboration makes strategic sense given Kmart's prime off-mall locations, the fact that Sears has only opened four of its new big-box Sears Grand stores, and the fact that Sears has virtually the same number of stores now as it did 30 years ago.
Thanks to the merge, "in 2005 we will be opening more than 60 new stores -- the biggest net store growth addition this company has ever had," Sears CEO Alan Lacy said, but admitted that's still not enough when compared to the 8000 big-box stores of likely competitors, and which are growing by about 700-800 more a year, he said. But the move will allow Sears to grow off-mall and also allow Kmart to differentiate themselves from similar retailers, Lacy said, and would allow Kmart and Sears stores to switch or combine brands depending on what would be best for the location. Company representatives are eyeing several hundred stores for possible changes, they said.
"The true value I see in this combination is that we're going to be able to optimize the format for each individual property to connect with that customer base," Lacy said.
"The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own," Lampert said.
Indeed, the companies estimated that as Sears Holdings they would make $200 million in cross-sales of Sears and Kmart brands alone.
"The combination of these two great American retailers will allow us to turbo-charge our business," said Aylwin Lewis, president and CEO of Kmart. "The combination of the best of both companies in a big-box setting will allow us to be tremendously competitive ... both brands in the same retail space will provide our consumers with a choice that they can get no place else."
The merge is a move by the two former retail stars to regain their once-mighty status. Venerable retailer Sears, established in 1886, launched its catalog in 1893 and its first store in 1925. Kmart, famous for its spontaneous "blue-light special" discounts, was launched in Detroit in 1899.
But the stores' images have suffered, with Kmart losing business despite a slew of popular apparel lines due to messy stores and bad service, and Sears launching a disorganized campaign for its "softer side" instead of focusing more on its successful hardware and appliance division.
In keeping with the new company's cost-conscious stance, Lambert said the Sears Holdings would take a hard line on profitability.
"We're going to have an ability and a willingness to monetize non-core and non-productive assets ... we want to make sure that the businesses we run are going to be able to produce real value for shareholders over time," he said. "To the extent that we have stores that can't produce the kind of profits that we're looking for, we'll have to consider other alternatives," such as real estate opportunities.
But representatives would not comment on possible layoffs.
"Certainly there will be some head-count changes that come out of this particularly as we consolidate ... but it's important to say that we've got two brands that need to be very well supported going forward," Lacy said. "We're looking to give both teams more resources to compete and grow, as opposed to an overly narrow focus on head-count reduction."
Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears, Roebuck shareholders will have the right to elect $50.00 in cash or 0.5 shares of Sears Holdings The current value of the transaction to Sears, Roebuck shareholders is approximately $11 billion. Sears Holdings will act as holding company for the Sears and Kmart businesses, which will continue to operate separately under their respective brand names.
Kmart gained close to 8 percent to close at $109 on Wednesday, up $7.78, and Sears gained more than 17 percent to close at $52.99, up $7.79.
