- The Washington Times - Wednesday, November 17, 2004

Kmart, which emerged from bankruptcy just last year, announced yesterday it would buy Sears for $11 billion to create the country’s third-largest retailer.

The new company, named Sears Holdings Corp., would have an estimated $55 billion in annual revenue and more than 3,500 retail locations.

“The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders as it will create a powerful leader in the retail industry,” said Kmart Holding Corp. Chairman Edward S. Lampert. “The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own.”

Kmart and Sears will remain separate brands, but company officials say they will be converting some Kmart stores to Sears locations.

The companies expect an annual cost savings of more than $300 million through the combination of their purchasing power, merchandising and a more efficient supply chain. This would allow the company to effectively compete against “big box” retailers like Wal-Mart and Target Stores.

“We need to have a very low-cost structure in order to compete with our biggest competitors,” Mr. Lampert said.

The deal would put Sears Holdings just behind Wal-Mart and Home Depot as the biggest retailers in the country. Kroger and Target would round out the top five.

“How they manage these brands will determine if this is a great stroke of genius or a disaster,” said Kelly O’Keefe, chairman and chief executive officer of Emergence Brand Labs, a retail branding agency based in Atlanta.

Officials say they will re-examine which brand fits best in each location.

“We want to make sure that the uniqueness of these brands is preserved, but I would say there’s no preconceived notion as to which store is going to be which,” Mr. Lampert said yesterday in New York. “It’s going to be on a store-by-store basis.”

Store closings are a possibility. Kmart has 1,500 stores, including about 70 in Maryland and Virginia. Sears, Roebuck & Co. has 1,970 full-line and specialty stores nationwide, including 45 full-line stores in Maryland and Virginia.

Officials say some Kmarts would be converted to Sears to speed up the rollout of Sears Grand, an off-mall store concept that sells groceries and convenience items in addition to usual Sears merchandise such as clothing, home appliances and tools. The concept was introduced in last fall.

“The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies,” said Alan J. Lacy, chairman and CEO of Sears. “Off-mall, clearly, is where we need to be moving.”

Officials won’t give details of any layoff plans, but job losses are a possibility when the two companies merge operations. Combined, the company would have close to 350,000 employees.

Analysts say the move is a big win for Kmart, the 105-year-old retailer that has struggled to get out of Wal-Mart’s shadow.

Kmart, once known for its “blue light specials,” filed for Chapter 11 bankruptcy protection in 2002, and closed about 600 stores and fired 57,000 employees.

The retailer has been selling its stores and trimming merchandise to build cash reserves and improve profit. Kmart emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years.

The company reported profits in each of the following quarters this year. However, third-quarter same-store sales, released yesterday, fell about 13 percent.

Sears was established as a watch company in 1886, and then became a catalog mail-order firm before it opened its first store in 1925. In its heyday, the company started the Craftsman and Kenmore brands, established Allstate Insurance Co. and created the Discover Card. It lost its spot as the country’s largest retailer to Wal-Mart in 1991.

Sears has struggled for years with sluggish sales and bought the Lands’ End brand in 2002 to help boost revenue, but same-store sales declined in 13 of the past 15 quarters.

Both retailers sell popular brands. Kmart has relied on Martha Stewart Everyday, Joe Boxer and Jaclyn Smith, while Sears has built its name around Kenmore, Craftsman and DieHard.

The companies would be able to share the private brands.

“By combining these brands, you can build a middle-market powerhouse,” Mr. O’Keefe said.

The deal, expected to close in March, has been approved by both companies’ boards of directors but is subject to approval by Kmart and Sears shareholders and federal regulators.

Under the agreement, Kmart shareholders would receive one share of new Sears Holdings stock for each Kmart share. Sears shareholders can choose $50 in cash or half a share of Sears Holdings stock.

The new, 10-member board would include seven members of Kmart’s current board and three members of Sears’ current board. Mr. Lampert would be chairman of Sears Holdings, and Mr. Lacy would be vice chairman and CEO.

The new company would be based in Hoffman Estates, Ill., Sears’ current home. Kmart will “continue to have a significant presence in Troy, Mich.,” the company said.

Shares of both companies surged on news of the deal. Kmart shares on the Nasdaq Stock Market closed at $109 per share — an 8 percent increase from the previous day. Sears closed at $52.99 per share on the New York Stock Exchange, a 17 percent increase.

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