Lampert May Need 'Merchant's Eye' to Pick Fashions at Sears

Sept. 12 (Bloomberg) -- Edward Lampert became a billionaire hedge fund manager betting on distressed companies. Now he'll have to make the right calls on which jeans will lure teenagers next spring as he directs merchandising at Sears Holdings Corp.

Lampert, who in March became chairman of the largest U.S. department-store chain, on Sept. 8 also took over the company's marketing and its Lands' End business. Lampert has spent two decades at Goldman Sachs Group Inc. and ESL Investments Inc.

""If you're in the merchandising business, you have to have people expert in merchandising," Allen Questrom, the former chief executive of J.C. Penney Co., said in an interview on Sept. 9. "You need to motivate people to get the job done. Not everybody can do that."

Questrom, who retired in December after a 30-year career at retailers including Federated Department Stores Inc., declined to comment specifically on Sears or Lampert. He revived J.C. Penney by selecting apparel and accessories that appealed to consumers.

Lampert will oversee the fashion choices for almost 3,900 stores at Sears and Kmart, whose same-store sales have each declined for at least three years. Sears is adding exclusive apparel such as women's clothing by Max Azria and Liz Claiborne to catch up with Target Corp. and J.C. Penney, leaders in selling affordable designer apparel.

"I don't think he can be a merchandiser," said Tim Ghriskey, who helps manage about $800 million at Solaris Asset Management, including Sears shares, in Bedford Hills, New York. "That's not his training. It's a real specialty." Ghriskey said Lampert will need to rely on fashion experts to succeed.

Lacy Replaced

Lampert also last week replaced Alan Lacy as chief executive with Kmart Chief Executive Aylwin Lewis. Lampert said he was taking a larger role to participate "more directly in the renewal of the company," according to a letter to shareholders posted on Sears' Web site. He declined to comment for this story.

At J.C. Penney, Questrom often sat in on fashion planning meetings. During one spring session last year, he pointed to a black, three-tiered mini-skirt that caught his eye. The skirt turned out to be one of the stronger sellers of the season, the company has said.

"It's very hard to develop the merchandising skills," said Jane Hali, a former Macy's executive who helped select fashions for the department store. "To come up with the compelling merchandise you have to have a merchant's eye in terms of color, silhouette and sellability," said Hali, who runs retail and merchandise consulting at New York-based Coleman Research Group.

Student of Buffett

Lampert, who says he is a student of billionaire Warren Buffett's investment style, created the dominant U.S. department store chain when Kmart Holding Corp. bought Sears, Roebuck & Co. for $12.3 billion and took on the Sears name. He earned $1 billion in 2004 at ESL, the most of any hedge fund manager, according to Institutional Investor's Alpha magazine. His earnings more than doubled from 2003.

The shares of the company that became Sears Holdings have risen more than fourfold in the past two years as Lampert sold Kmart real estate to raise cash. Sears shares gained $4.93 to $132.74 in New York Stock Exchange composite trading on Sept. 9.

The transaction combined two ailing retailers that have lost shoppers to Target, J.C. Penney and Kohl's Corp., which have been faster in introducing exclusive apparel. Comparable sales at Kmart have fallen for 14 consecutive quarters and for 16 of the last 18 quarters at Sears.

Sears' Missteps

In contrast, Target's monthly same-store sales have risen an average 6.7 percent since January as the retailer attracted shoppers with designer merchandise such $45 Isaac Mizrahi black silk faille dresses.

Sears has yet to recover from several missteps, said George Whalin, president of Retail Management Consultants in San Marcos, California. Whalin's clients have included Ace Hardware Corp., Dillard's Inc. and K-Swiss Inc.

Sears bought catalog merchant Lands' End for $1.9 billion in 2002 and failed to broaden its traditional merchandise to appeal to more contemporary shoppers, he said. Sears also moved too fast to introduce Lands' End apparel in stores, stocking too much merchandise in some locations and too little in others, Lacy has said.

Last month, Sears said Lands' End Chief Executive Mindy Meads had left the company and that it had named David McCreight as her interim replacement.

Brands Needed

As Sears struggled with Lands' End, Target won over shoppers with fashionable apparel and accessories from designers including Mossimo, Liz Lange and Cynthia Rowley.

"There are so many better choices" than Sears and Kmart for shoppers, said Candace Corlett, a principal at WSL Strategic Retail, a New York-based consulting firm.

Sears has started to introduce designer women's clothing. In March, the company said it would add apparel from Max Azria and last week it introduced three new brands, Belongings from Liz Claiborne Inc. and c.l.o.t.h.e.s and Latina Life from Jones Apparel Group Inc.

"Why didn't they do this a long time ago?" Whalin said. "Sears has to have distinguishable clothing brands" to succeed as a department store, he said.

Department stores have been developing their own private label exclusive brands of clothing to cut costs and boost margins. By purchasing the merchandise directly from producers, they bypass traditional apparel vendors, keeping more profit.

Diversifying Selection

Lampert is also diversifying Sears's offerings to try to reverse sales declines. He plans to convert as many as 400 Kmart stores to Sears Essentials, a new format with wider aisles, centralized cash registers, and food and clothing.

"It certainly has worked for Wal-Mart and Target," said Ghriskey. "Sears has a good chance at making a name in those businesses and capturing some share, but it's not going to be overnight."

The strategy of expanding Sears, which opened its first retail store on Chicago's West Side in 1925, also carries risk because Sears is faring worse than Kmart in same-store sales. In the second-quarter, Sears, Roebuck's comparable sales tumbled 7 percent, while Kmart's fell 0.3 percent.

Lampert will need to demonstrate he can go beyond his expertise in finance, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting firm and investment bank in New York.

"He's a brilliant financial engineer," said Davidowitz. "His record is always the same: cut costs, sell