Black-and-blue-light special: Kmart, Sears hit hard

The stock has lost nearly half its value from its April high, customers seem unhappy with service and store selection, and the future isn't looking much brighter.

Sears Holdings shld, which owns Sears, Kmart and Lands' End, launched a search for a new CEO Monday after announcing that Aylwin Lewis would leave the company as of Feb. 2. W. Bruce Johnson, executive vice president of supply chain and operations, has his work cut out for him as interim CEO.

Chairman Edward Lampert, who runs the hedge fund ESL Investments, acquired Kmart in 2003, Sears Roebuck in 2005 and merged the two that year. Last week, he announced that same-store sales had fallen 3.5% for the nine-week period that ended Jan. 5. The company also said then that it was overhauling its organizational structure.

Lampert blamed the economy and increased competition — which has hit most retailers hard — even though rival discounter Wal-Mart wmt saw sales increase in the same period. He also warned that his company would likely post fourth-quarter earnings that are well below Wall Street forecasts and could be down nearly 60%.

As sales have sunk, Lampert has been criticized for a lack of investment in the stores, particularly Kmart.

Unhappiness with Kmart

"Our local Kmart is unappealing — not very clean, has poor customer service, poor quality, disorganized displays of products," says Joanne Fowler of Fort Ann, N.Y. "They are the closest department store of their type, but I avoid shopping there, traveling farther to get a better experience."

Cheryl Schultz of Pewaukee, Wis., says she avoids Kmart "at all costs." She echoed several members of USA TODAY's shopper panel by lamenting both the stores' appearance and customer service.

Sears spokesman Christian Brathwaite says the company is "absolutely focused on providing our customers with an improved customer experience" at both Kmart and Sears stores.

Ken Nisch, chairman of retail strategy and design firm JGA, said in an interview that if some of the billions Sears has spent buying back stock was "spent on the consumer experience and a value strategy, the erosion could have been forestalled, if not reversed."

Whoever gets the permanent CEO job will "have to be viewed as a leader, not as second or third player in the organization," Nisch says. He says the challenge will be to gain a "guarantee of autonomy."

Efforts to improve the company's stores have been spotty, though more evident to consumers at Sears than at Kmart. The addition of Lands' End shops in about 20% of Sears stores has enhanced the stores' appeal. Brathwaite notes that both stores are adding new brands that are both "aspirational and inspirational."

Indeed, Fowler "loves" the new Lands' End shop at Sears and finds the atmosphere and selection improved at her Sears store.

The 74 off-mall Sears Grand stores, which feature food, appliances and items found at both Sears and Kmart, Brathwaite acknowledges, have "not met the company's expectations." He notes, though, that the stores are more profitable, and the company thinks the concept is still valid.

Signs of a deteriorating economy aren't making the company's prospects appear any brighter. BIGresearch's consumer surveys show that Sears and Kmart customers are older and more often retired than other shoppers, even at Wal-Mart. "They're (often) on fixed incomes," says BIGresearch President Gary Drenik.

Wal-Mart, by contrast, "is right on with the marketplace," Drenik says. "They've got enough younger people in there who are busy buying things."

Drenik questions whether older customers will allow Sears and Kmart stores to increase sales. "If not, they need to figure out what segments they need to go after long term."

Disgruntled investors might not be willing to wait that long. "You have a disinterested customer base and a highly engaged investment group," Nisch says.

Meanwhile, Sears said Monday that it remains interested in acquiring home goods retailer Restoration Hardware, which has accepted a bid from private-equity firm Catterton Partners. But Sears said it would do so only at a lower price than its earlier offer. Sears already owns 13.7% of Restoration.

Another challenge: While most retailers' traditional customers say they're cutting spending in some areas, Drenik notes that Kmart shoppers say they plan to reduce spending in every area over the next couple of months.

It's only slightly better at Sears: Shoppers who describe themselves as Sears shoppers say they plan to cut spending in every category but home improvement.

Loyal customers leaving?

Kmart may have lost shopper Kathy Glaser of St. Louis. She says she's given up on the store near her in the past year, in part because it seldom has what's advertised, but also because the selections of beauty products and plus-size clothing have diminished. "I don't go there any longer, and I suspect no one else does, either, as the store is always empty, and there are very few employees around to help," she says.

"Kmart is no real competition to Wal-Mart on stock, store or prices," says Lynn Keates of California, Md. There's "no good reason to go there with Wal-Mart Supercenter the next block down."

Kmart still has its fans. Namrata Sun of East Brunswick, N.J., says she likes Kmart's pricing, which is as good as it gets except at Wal-Mart. So why does it compare favorably to Wal-Mart?

"It isn't so crowded," Sun says.