February, 2006 Contrasting the Models of Sears Holdings and Target Stores in A Changing Retail Landscape The consumer

represents two thirds of the U.S. economy. What we buy and where we buy it are, in a capitalist society, signposts of class and culture. In recent years, consumers have demanded more and more for less and less, and only the stores and businesses able to meet this demand will continue to thrive. This model has given rise to discount stores such as Target, Costco, and Wal-Mart (which, once derided as a poor mans alternative, is now the worlds largest retailer). As these players seize more market share among a range of products from electronics to clothing to household products and groceries many of the traditional market leaders are on the ropes. Chief among these are the erstwhile paragons of middle-class consumerism: department stores. Declining market share and consolidation has moved giants like Sears and Marshall Fields to the relative fringes of the broadline retail universe. Trade publication STORES, in its most recent annual report on the top 100 American retailers, cited a study by market research firm NPD group that found department stores, as a segment, have lost $2.5 billion to other retailers over the past eight years. Sears in particular has struggled to maintain its once-dominant position in the middle class marketplace. Net sales have fallen steadily the past five years, including declines of at least 16% in each of the last three, and high-concept stores like Sears Essentials and Sears Grand have failed to make a dent. Sears has been trying to turn around its apparel business since the late 1990s, creating new private-label brands and then dumping others in an effort to win back middle-income women who no longer view Sears as a place to buy fashionable clothes.1 By contrast, Target has developed an identity by combining the low-cost structure of Wal-Mart with a reputation for quality previously lacking from the discount milieu. Target has seen sales rise by almost 27% in the four years ended Jan. 31, 2005, with earnings up 55% over that period.2 Are the divergent fortunes of these two household names indicative of a broader cultural trend, one that finds consumers abandoning Sunday excursions to department stores in favor of afternoon errand runs to big boxes? The man now running Sears seems to think so. * *
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Put Sears in a K-Mart box and it should do very, very well. With those words, veteran hedge fund manager Edward Lampert signaled the end of a century-old retailing culture. In November, 2004, as CEO of Kmart Holding Corp., Lampert announced an $11 billion merger with Sears, Roebuck & Co., which gave further impetus to the discount trend. The deal created Sears Holding Corp., a 3,870 store giant which ranks third in the U.S. with $55 billion in annual sales according to the companys website.4 While some analysts suspect that Lamperts true intentions rely more on the value of Sears and Kmarts real estate than their cash registers, his actions since becoming CEO of the newly-formed company in May, 2005 suggest otherwise. The company is in the process of rebranding a number of Kmart stores in Illinois, California and other areas as Sears Essentials. Filling the sites of former Kmarts, Essentials are naturally smaller than traditional Sears stores. They are off-mall, bringing Sears experience and products where the Best Buys, Targets and Home Depots are, as Lampert put it.5 And their layout and product selection including consumer goods and groceries are more typical of one-stop-shopping discounters than traditional department stores. Lampert has hinted that Plan B may be to simply insert Sears hardline brands into Kmart stores, a strategy he referred to as Sears inside of Kmart.6 Though operating under both names, Holdings has made efforts to put the Sears name out in front, even going so far as to sell off Kmarts former Troy, MI headquarters in December. Kmart shoppers cant afford- or dont want to pay- $40 for a pair of brocade pants in Sears Apostrophe

1 "Kmart tightens its grip on Sears." Chicago Tribune 8 Nov. 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb? did=923161011&sid=1&Fmt=3&clientidld=31663&RQT=309&VName=PQD>. 2 03 Feb. 2006 <http://www.thompsononefinancial.com>. 3 Bodamer, David. "A S-Mart Retail Estate Play?" Retail Traffic 1 Dec. 2004. 03 Feb. 2006 <http://retailtrafficmag.com/mag/retail_smart_real_estate/>. 4 "Press Release." Sears Holding Corporation. 05 Jan. 2006. 03 Feb. 2006 <http://www.searsholdings.com/pubrel/pressOne.jsp?id=2006-01-05-0004243063>. 5 Bodamer, David. "A S-Mart Retail Estate Play?" Retail Traffic 1 Dec. 2004. 03 Feb. 2006 <http://retailtrafficmag.com/mag/retail_smart_real_estate/>. 6 Chandler, Susan. "Off-Mall idea still puzzling for Sears." Chicago Tribune 7 Dec. 2005. 14 Feb. 2006 <http://proquest.umi/com/pqdweb?did=937906131&sid=1&Fmt=3&clientid=31663&RQT=309&VName=PQD>.

line.7 Yet it is the Kmart store model that Lampert seems to be gambling on to boost sales. (It is worth noting, perhaps, that Target Stores management appears to agree with this strategy. The company recently divested itself of department store properties Marshall Fields and Mervyns scarcely two years after acquiring their parent, May Company.) Lampert makes no secret of the fact that he sees specialty stores like Best Buy and Home Depot and discounters like Target as the chief competition for the reconfigured Sears. For a hundred years, Sears, Roebuck & Co. competed with hometown rival Marshall Fields and high-end chains like Nordstroms and Macys to rule a kingdom of august, crowd-drawing shopping palaces. As Sears Holdings Corp., the idea is to strip away the pomp and circumstance and compete with Target for a new kind of consumer, one who doesnt don white gloves and a hat to shop at a palace. Targets customers are not cheap. They are not poor. They are the 21st century American consumer, a notoriously insatiable entity that wants high quality at low prices, and increasingly knows exactly where to find it. Targets website describes its average customer or guest, in the companys parlance as middle-class and educated. The median guest income is $55,000, and 43% of guests are college graduates, according to the company profile.8 Though perennially second in revenues to the juggernaut that is Wal-Mart, Target Stores have carved out a niche as the chic alternative to the Bentonville behemoth. Though similar in cost structure, the perception surrounding Target is that its merchandise is far hipper than Wal-Marts, particularly in segments such as fashion and dcor, where hipness makes all the difference. One reason Target carries this reputation is its success in cultivating exclusive brands. Clothing lines from noted designers Liz Lange and Isaac Mizrahi, and home furnishings from Thomas OBrien and architect Michael Graves, are key to this image. Target has been extremely successful in bringing brand names to its product lines. When people come to shop at our stores, not only do they know that we can provide them with quality, but our softlines and hardlines departments have in-style products from some of the top designers in the world, says Mark Rottweiler, a STL (store manager) for the Target Greatland store in Glenview, Illinois.9 By striking a balance between fashion sense and affordability, Target is able to appeal particularly to younger consumers, whose moderate level of disposable income is often surpassed by their desire to dispose of it. Sears, too, has profited from a strong branding ability, though one that traditionally appeals to an older demographic. Kenmore appliances, Craftsman tools and Die Hard batteries have loyal customer bases in Middle America. Sears brands have meant a level of quality and durability for many generations. Often, you hear people say that they shop Craftsman and Kenmore because their parents did.10 One in-house brand that has so far failed to light a fire with customers, though, has been its Lands End apparel line. The 2002 acquisition of the upscale catalog brand was a cornerstone of former CEO Alan Lacys plan to revive Sears lagging softlines sales. In many ways, the move laid the groundwork for a Sears transformation. Analyst Cathy Halligan made an oddly prescient observation in an article for MarketingProfs.com shortly after the Lands End purchase: The ultimate brand architecture strategy will be directly tied to Sears' need for its brand to represent more than just appliances and tools if it hopes to successfully compete with mass merchants Wal-Mart and Target; the big box category killers, Best Buy and Bed, Bath & Beyond, and other department stores.11 However, Sears realizes that it must deal with this problem. Unfortunately, our name brands are our only destination products, which is why we struggle in our other departments, such as the softlines area, according to Christina Olivera, a corporate brand manager for the Tools Department at Sears Headquarters.12 Its estimated that soft goods, namely apparel, take up 60 percent of Sears floor, but generate only 20 percent of sales. Sears wont comment on results of its clothing department, traditionally its weakest unit, but one former executive said 7 Chandler, Susan. "Off-Mall idea still puzzling for Sears." Chicago Tribune 7 Dec. 2005. 14 Feb. 2006 <http://proquest.umi/com/pqdweb?did=937906131&sid=1&Fmt=3&clientid=31663&RQT=309&VName=PQD>. 8 "Target Corporation Company Profile." Target Corporation. 03 Feb. 2006 <http://investors.target.com/phoenix.zhtml? c=65828&p=irol-homeProfile>. 9 Rottweiler, Mark. E-mail interview. 10 Feb. 2006. 10 Olivera, Christina. E-mail interview. 15 Feb. 2006. 11 Halligan, Cathy. "Will Sears Be More Like Target than Kmart?" Marketing Profs Today. 03 Feb. 2006 <http://www.marketingprofs.com/2/prophet3.asp>. 12 Olivera, Christina. E-mail interview. 15 Feb. 2006.

apparel sales are down as much as 20 percent.13 The recently completed fourth quarter always the most critical time of the year for retailers, since it encompasses the holiday season offers a good indication of how the companies are stacking up. In January 2006, Target posted an increase in same stores sales of 5.2% over the year-ago period, its 34th consecutive month gaining on that measure; and a fourth-quarter increase of 4.2% over fiscal 2005, its 12th consecutive quarterly gain. Same-store sales picked up 4.7% in December from the year-ago period. Overall, revenue increased 14.1% in January to $3.566 billion; 11.4% in the fourth quarter to $16.57 billion; and 12.2% for the year to $51.271 billion. Holdings reported a 1% gain in same-store sales for Kmart stores and a loss of 11.9% in that category for Sears stores in the November-December 2005 period, the most recent period for which data is available. The company is projecting earnings of between $570 million and $635 million for the fourth quarter ended January 28, 2006, including $15 million pre-tax ($9 million after tax) in one-time gains. The company has not offered pro forma estimates regarding revenue or comparable store sales for either that period, the month of January, or the full year of fiscal 2005, and does not plan to release those results until circa March 15, 2006, according to its most recently filed 8-K report. The National Retail Federation, an industry research group, reported overall retail growth of 6.4% during the combined November-December period over the same time last year.14 At least one analyst sees the marked contrast between Sears and Targets results. A Piper Jaffary report dated January 19, 2006 rates Target Stores an outperform, with a share price target of $62, and notes that challenging top line performance at Sears Holdingscould result in an opportunity for Target to purchase additional real estate, particularly mall locations. Yet, Lampert has talked about leveraging Kmarts good real estate with Sears stronger name.15 Despite one of Sears worst quarterly performances, a Bear Stearns report is encouraged by the results. A report dated January 18, 2006 calls the same-store results in line with our expectations, adding that Kmart same-store sales results were well ahead of our estimate, as was the fourth-quarter guidance. It gives Holdings shares an outperform rating, with a year-end target price of $160. Morgan Stanleys assessment of Holdings numbers was less optimistic. Its report dated January 6, 2006 notes, Retail demand is slowing, and [Holdings] is not the best positioned retailer. As [management] attempts to restructure and re-launch retail formats, a slowing retail market is a tough environment in which to execute while keeping sustainable [free cash flow] positive. It rates Holdings stock as underweight, declining to provide a price target. The new trend seems to be a squeeze on the middle ground of the retail markets. Higher end and lower end retail stores are holding up just fine, while middle class stores are part of the hourglass figure that has come to represent the retail market future. The question is whether Sears can find its niche among middle class consumers who crave high quality with a low price. Target seems to be doing extremely well, with its Expect more- Pay less attitude. Its up to Sears and Lampert to decide what kind of impact Sears will make in the retail market, now that it has the option of a fresh start.

13 Yerak, Becky. "Sears hopes shoppers warm up to 'cool' ads." Chicago Tribune 24 Sept. 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb?did=901879311&sid=5&Fmt=3&clientld=31663&RQT=309&VName=PQD>. 14 Krugman, Scott, and Kathleen Grannis. "News Release." National Retail Federation. 13 Jan. 2006. 01 Feb. 2006 <http://www.nrf.com/content/default.asp?folder=press/release2006&file=jan06sales.htm>. 15 Greising, David. "Setup for a flameout?" Chicago Tribune 10 Sept. 2005. 14 Feb. 2006

Works Cited Bodamer, David. "A S-Mart Retail Estate Play?" Retail Traffic 1 Dec. 2004. 03 Feb. 2006 <http://retailtrafficmag.com/mag/retail_smart_real_estate/>. Chandler, Susan. "Off-Mall idea still puzzling for Sears." Chicago Tribune 7 Dec. 2005. 14 Feb. 2006 <http://proquest.umi/com/pqdweb? did=937906131&sid=1&Fmt=3&clientid=31663&RQT=309&VName=PQD>. Greising, David. "Setup for a flameout?" Chicago Tribune 10 Sept. 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb? did=894302421&sid=6&Fmt=3&clientld=31663&RQT=309&VName=PQD>. Halligan, Cathy. "Will Sears Be More Like Target than Kmart?" Marketing Profs Today. 03 Feb. 2006 <http://www.marketingprofs.com/2/prophet3.asp>. "Kmart tightens its grip on Sears." Chicago Tribune 8 Nov. 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb? did=923161011&sid=1&Fmt=3&clientidld=31663&RQT=309&VName=PQD>. Krugman, Scott, and Kathleen Grannis. "News Release." National Retail Federation. 13 Jan. 2006. 01 Feb. 2006 <http://www.nrf.com/content/default.asp?folder=press/release2006&file=jan06sales.htm>. Podmolik, Mary Ellen. "Retailers try to fit firms with logo apparel." Chicago Tribune 6 Sept. 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb? did892089531&sid=8&Fmt=3&clientld=31663&RQT=309&VName=PQD>. "Press Release." Sears Holding Corporation. 05 Jan. 2006. 03 Feb. 2006 <http://www.searsholdings.com/pubrel/pressOne.jsp?id=2006-01-05-0004243063>. "Target Corporation Company Profile." Target Corporation. 03 Feb. 2006 <http://investors.target.com/phoenix.zhtml?c=65828&p=irol-homeProfile>. Yerak, Becky. "Sears boils down sales strategy to Essentials." Chicago Tribune 17 June 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb? did=855034621&sid=10&Fmt=3&clientld=31663&RQT=309&VName=PQD>. Yerak, Becky. "Sears hopes shoppers warm up to 'cool' ads." Chicago Tribune 24 Sept. 2005. 14 Feb. 2006 <http://proquest.umi.com/pqdweb? did=901879311&sid=5&Fmt=3&clientld=31663&RQT=309&VName=PQD>.