At Sears, CEO’s Tech Focus Hasn’t Led to a Turnaround

Updated May 28, 2013, 8:03 p.m. ET

At Sears, CEO’s Tech Focus Hasn’t Led to a Turnaround

By SUZANNE KAPNER

Since taking over as chief executive of Sears Holdings Corp., SHLD -2.53% billionaire hedge-fund manager Edward Lampert has spoken eagerly of overhauling the retailer to accommodate “hyper-connected” shoppers with tablets and mobile phones.

Wall Street mainly wants to know when the company might be profitable again.

Bricks-and-mortar retailers face an important shift in consumer behavior and need to innovate. But some analysts worry that Mr. Lampert is overemphasizing his technological ambitions while sales results at his stores suffer.They pressed Mr. Lampert for answers on a conference call on Thursday after the company reported a $279 million quarterly loss that sent the shares down 14%. The stock fell an additional 2.5%, or $1.27, on Tuesday to close at $48.98 on the Nasdaq.

“We’re all interested and view the online and technology investments positively,” Paul Swinand, an analyst with investment researcher Morngingstar Inc., said on the call. “So I guess we’re trying to bridge the gap of how we get to a profitable company from where we are today.”

Mr. Lampert, Sears’s longtime chairman and the founder of the hedge fund that is the company’s largest investor, took over as CEO in February. He has armed store associates with iPads and set about developing online and mobile apps like one that allows customers to text store employees with product questions.

Sears also has reduced the delivery time for online shipments to an average of two days from five days, beefed up ship-to-store capabilities, and taking a page fromAmazon.com Inc.’s AMZN +2.12% playbook, now allows third parties to sell to Sears’s customers through its Marketplace. The chain carries 65 million products online, which according to Mr. Lampert, “is significantly more than what we sell in stores.”

Sears also is using data to track how customers shop through a loyalty program called Shop Your Way to better target promotions to customers in a way that has the potential to increase margins, Mr. Lampert said.

Most retailers are making similar investments to one degree or another. The problem for Sears is that analysts estimate online sales only account for about 2% of Sears’s overall revenue, or about $800 million. And it could take years for ecommerce to reach a meaningful level at the company.

For all the potential the Web holds, Mr. Lampert is still bound by the company’s fleet of more than 2,000 physical stores. And Sears has been investing in upgrades at a far lower level than rivals. Sears spent $378 million on capital expenditures in 2012, compared with $785 million at Kohl’s Corp., KSS -0.54% $810 million at J.C. PenneyCo. JCP -1.37% and $942 million at Macy’s Inc., M +0.43% according to regulatory filings.

“He has got 225 million square feet of space and he needs to figure out what to do with it,” said Gary Balter, an analyst with Credit Suisse CSGN.VX +2.21% . “Sears is going down a good path” with its Internet and membership strategy, “but then the customer goes into the stores and says, ‘Is this really where I want to shop?'”

A Sears spokesman said the company has several initiatives to ensure stores are “clean, bright and inviting for customers.” Store managers must meet maintenance standards and are subjected to unplanned visits by company executives, he added.

Mr. Lampert’s hedge fund, ESL Investments, bought a majority stake in Kmart Corp. during its 2003 bankruptcy and merged it two years later with Sears, Roebuck and Co. to form Sears Holdings in the middle of the last decade.

More than $13 billion in revenue and $9 billion in profits have disappeared since the merger was completed. The company lost $930 million in its most recent year on $40 billion in sales, compared with a profit of $9.57 billion on sales of $53 billion in the first full year after the merger.

Some of that shortfall was due to the sale of businesses such as Orchard Supply and the closure of stores. But Hoffman Estates, Ill.-based Sears has also suffered from a persistent decline in sales at stores open at least a year—a sign that customers are finding less to buy.

“The confidence I had over 10 years of what’s possible, it has been shaken over time,” Mr. Lampert said at Sears’ annual meeting. Last week, he said the company’s results for the fiscal first quarter weren’t acceptable.

One challenge for Sears as it tries to compete with the Amazons of the world is antiquated or cumbersome technology.

Warren Tracy, CEO of Almost There! Inc., which sells gift items under the Busted Knuckle Garage brand, said he has been trying for five months to navigate Sears’s technology so that he can become a third-party seller, but has faced delays and complications. By contrast, Mr. Tracy said it took him a few hours to become a third party seller on Amazon.

“Sears is so far behind in terms of their technology,” Mr. Tracy said.

The Sears spokesman called the situation with Mr. Tracy “atypical” and said the company continues “to evolve our processes, using technology, to make the registration as seamless as possible.”

Other vendors say they are encouraged by Sears’ Internet push. Tom Duncan, the president and chief executive of Positec Tool Corp., which sells Rockwell and Worx tools at Sears, said his ecommerce business with the retailer has grown significantly in recent years.

“They’ve done a lot of positive things to create a better online experience for their customers,” Mr. Duncan said.