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Back-To-Basics Pays Off For Sears But Challenges Remain As Retail Giant Tries To Forge Ahead

In early 1993 - shortly after Arthur C. Martinez tore through Sears, Roebuck and Co., slashing jobs, closing stores and tossing out its world-famous catalog - he addressed the retailer’s top 250 people and told them they’d better listen up and memorize what he was going to tell them.

Martinez, then the new chairman and chief executive of Sears’ Merchandise Group, revealed what he called his “five strategic priorities” to transform the struggling, stodgy retailer into a successful one.

“I told them they’d better memorize them,” he recalled recently, “because they weren’t going to change.”

They haven’t.

Small wonder. They work.

By relentlessly driving home his business philosophy - tantamount to Retailing 101 - Martinez revived a moribund Sears. Last year’s revenues of $35 billion are projected to reach $38 billion this year. The company had its greatest profit ever last year, at $1.8 billion, and a stellar increase in second-quarter earnings caps 14 consecutive quarters of consistent gains.

Thanks to a captivating advertising campaign, Sears took on a fresh, smart and sassy image, attracting female customers via its “softer side” and brand new shoppers who liked its “many sides.” Renovation of Sears department stores and the addition of specialized stores have drawn customers as well; two-thirds of the country have made purchases at Sears stores over the last year.

Sears stock, valued at $16.83 a share in January 1993 and $32.50 last August, closed Thursday on the New York Stock Exchange at $44.50 a share - a gain of more than 160 percent in 3-1/2 years.

Now Martinez faces a new challenge: What does he do for an encore?

Retail analysts have plenty of nuts-and-bolts suggestions, from offering more private-label clothing to squeezing suppliers to cut costs. But Martinez’s answer is simple: He intends to stay the course.

“Being consistent in those strategies,” he claims, “has been very important in what we’ve achieved.”

This summer, as Sears begins its second year as a stand-alone retailer and as Martinez heads into his second year as Sears’ chairman and chief executive, there will be no new success formula put into action, no brimstone and fireworks akin to the cut-and-slash program of early 1993, when Martinez was fresh from the vice chairman’s job at elite Saks Fifth Avenue in New York.

Instead, Sears will be propelled forward by Martinez’s five priorities: to focus on the core businesses - apparel, home, automotive; to make the stores “more compelling” and interesting places to shop; to become more locally focused; to reduce costs; and to instill a new mindset companywide, that “today, change is a constant.”

Under these guiding principles, Martinez also plans to see his separate, five-year makeover plan for Sears to fruition, concentrating on a $4 billion renovation/building program, plus the rollout of 900 free-standing hardware and home-furnishing stores by 2000.

Martinez’s consistent, back-to-the-basics strategy wins praise from retail analysts.

“A very smart move,” says Robert Blattberg, executive director of the Center for Retail Management at Northwestern University’s J.L. Kellogg Graduate School of Management.

“Successful retailing is 20 percent strategy and 80 percent execution,” he adds. “Most companies don’t do that. Staying focused on execution is critical.”

So is focusing on “core business,” which has become a synonym for Sears ever since Martinez’s predecessor as chairman, Edward Brennan, began the task of divesting the Sears empire of subsidiaries, including Coldwell Banker; Dean Witter, Discover & Co.; Homart; and Allstate.

It was last year’s spinoff of Allstate Corp. that began a new era for Sears, a return to its retailing roots. Gone are insurance, real estate, financial services and, finally, on-line computer services, with the recent sale of its stake in Prodigy.

Things stocked on store shelves and floor displays - tires, car batteries, clothes, Craftsman tools, paint and Kenmore appliances - are once again the stuff that Sears is made of.

Though Martinez says, “We look at every opportunity offered to us,” he has all but donned blinders to acquisitions or business ventures unrelated to retailing.

Just what, then, will Sears be buying, creating and improving upon to keep its financial numbers climbing in the year - and years - to come?

The most dramatic growth will come with the consistent additions of off-the-mall stores and the building of a greater network of services related to homes.

The campaign to add more national brands, such as the current collections by Carter, Healthtex, Champion and Sperry, will continue.

Also on his slate are very typical top-level goals: cost-cutting; strengthening top management; and adding “bench strength behind the top people.”

Then there’s the personal angle of Martinez’s plan, which some have dubbed his own “cultural revolution”: “I am trying to change the way the company thinks and the way the people inside the company think.”

But while generally applauding Martinez for what he has accomplished, analysts contend Sears still has weaknesses.

Robert Buchanan, of New York-based NatWest Securities Corp., one of retailing’s more outspoken and hard-driving analysts, says Sears stores are still too often a hodgepodge.

“Automotive looks good and powerful. Hardware is strong. Then, sporting goods turns out to be an assortment of tennis balls, but not even a dominant assortment,” Buchanan says. “His top priority is to maximize productivity in all segments of that big box called the Sears store.”

Buchanan also challenges Martinez to keep cutting expenses. He cites “wresting favorable terms from major suppliers,” such as appliance manufacturer Whirlpool Corp., as a cost-saving possibility.

Another major area requiring improvement, according to analysts, is apparel. Though strides have been made in upgrading quality, adding fashion looks and offering more brands, Buchanan emphasizes the need for growth of private label, which is now just 15 percent of the mix.

He claims Sears needs more successes such as its Canyon River Blues denims, and more proprietary labels in clothing, “like what Kenmore is to appliances.”

Sears, which acknowledges it’s in the beginning stages of private label, will expand that business from a current $910 million to $1.5 billion.

Retail analyst Richard Nelson, of Chicago-based Nesbitt Burns Securities Inc., believes Sears is aware of weak spots and has done an excellent job of building “underdeveloped businesses,” referring to jewelry, cosmetics, women’s suits and special sizes.

But Nelson, along with Steven Johnson, retail and electronics managing partner of Chicago-based Andersen Consulting, say that there are still many opportunities to improve Sears’ base business.

“What Sears needs for growth is new formats,” says Johnson, suggesting something like “a Williams-Sonoma,” known for high-end kitchen utensils and cookware.

Longer term, one of Martinez’s major challenges, according to Kellogg’s Blattberg, is “attracting the 21-year-old, the Gap and Old Navy customer, then building an aura with that consumer that will develop long-term loyalty.”

But Sears already has a lure it believes will hook and hold this generation: its credit card.

Sears management has been investigating “how to get people thinking of Sears earlier,” says Martinez. Sears hopes to be “more aggressive credit grantors to young people who don’t have a credit history, those just out of college, or getting married, first apartment, first home.”

The current bereft state of the American pocketbook also works to Sears’ advantage, claims Kurt Barnard, of Barnard’s Retail Marketing Report, in Scotch Plains, N.J.

“Sears is flourishing in the middle ground,” says Barnard. “With its prices, plus ambience, it has weaned people up from the discounters and has attracted them away from department stores, which they can no longer afford.”

Is Martinez up to meeting the challenges, topping his own record-breaking increases?

Andersen Consulting’s Johnson says, “His success has raised the bar. But if he weren’t up for a challenge, he wouldn’t have taken this position in the first place.”

Northwestern’s Blattberg cautions against excessive cost-cutting at the cost of service.

“There’s a trick to being cost effective while providing reasonably good customer service and simultaneously offering good price,” something he believes Martinez is accomplishing. A lot of top executives never see their stores, he continues, “certainly not as customers do.”