REINVENTING SEARS

By John Greenwald

What do women want? For years, the top brass at Sears, Roebuck and Co. had nary a clue. Store managers saw nothing amiss in displaying intimate apparel from the same rack fixtures that were used to sell paints. "Sears frustrated and disappointed our customers over a long period of time," says chairman and CEO Arthur Martinez, who arrived in 1992 from Saks Fifth Avenue, where he had been vice chairman, with prayerful instructions to save the Big Store. "If we didn't act quickly, the end game was a slow death for the company."

Sears isn't dying, and its female customers aren't turned off--or missing in action--any more. Instead, Christmas is going to be particularly merry for Sears, in what is turning out to be a gratifying season for retailers of all stripes. Mail-order companies such as Lands' End and L.L. Bean are running out of inventory. Snootier luxury sellers such as Gucci and Prada are having to ration their high-priced goods.

Whether Sears would have many more Christmases was in doubt a couple of years ago. Yet just four years after the hodgepodge of retailing, finance, insurance and real estate that was Sears lost $3.9 billion, the company is more than midway through a $4 billion, five-year overhaul and plans to double its size by adding big and small stores alike. Sears is also trying to create a $10 billion service business that will include appliance repairs and home improvements like roofing.

Sears is pulling off a feat that few retailers, particularly of its size, are able to accomplish: a wholesale repositioning of its merchandising and image. The Sears strategy, highlighted in a terrific ad campaign for "the softer side of Sears," has brought back women customers who had defected. Shoppers of both sexes are crowding into Sears' 820 stores this Christmas for everything from brand names like Sony and Timberland to newly stylish private labels such as Canyon River Blues denims and Circle of Beauty lipsticks.

Just ask customers like Barbara Stowe, a caterer in suburban Detroit who got out of the Sears habit years ago. Stowe walked into a remodeled store in Livonia, Michigan, to buy a paintbrush last month and left with an outfit for her 16-month-old niece and a renewed faith in the retailer that has since brought her back twice for Christmas gifts. "The clothes, especially for children, have amazed me," says Stowe, 47, a retailer's dream with a list that includes a grandchild and 26 nieces and nephews. "I used to get so frustrated with Sears. They would advertise items and then not have them when I'd go in. Why should I go to a place and waste my time if they don't have what I want? But now I'm back."

So is Sears, which has been putting up numbers that sparkle like Christmas tree lights. The company says sales, including revenue from its 1,500 automotive and specialty hardware and furniture stores, will rise about 9% to $38 billion this year. (That's second behind discounter Wal-Mart's more than $93 billion in volume.) And profits--about half of which come from the interest on Sears' 60 million credit cards--are projected to reach $1.25 billion, up a solid 25% over the record set last year. Wall Street has been delighted. Sears stock closed last week at $46.75, more than triple the price when Martinez arrived.

Sears is coming off its busiest Thanksgiving weekend ever, and, says Martinez, "this will be the best of all our Christmases." Shoppers have been snapping up housewares, from big-screen TVs to electric massagers to breadmakers.

But Martinez, 57, a native of Brooklyn, New York, and a veteran of five New York City Marathons ("that was 35 pounds ago") takes nothing for granted, least of all his company's recent success. "If you look at the best retailers out there, they are constantly reinventing themselves, planning a way to move beyond where they already are," he says during an interview in the cavernous, seldom-used chairman's suite on the 68th floor of Chicago's 110-story Sears Tower--an all but abandoned monument to grander schemes. (Martinez works out of humbler digs at Sears headquarters in suburban Hoffman Estates.)

When he got there, Sears was moving in the wrong direction. "It was a very uptight, self-absorbed, role-conscious, title-conscious, imperial system," he says. The stores showed it. "They were mostly sad and out-of-date places, as if they had been hit by a neutron bomb: no people--just the building was left standing."

Management was paralyzed by inertia, unwilling to attack the fabled but enfeebled institution that was crumbling beneath them. That's why Sears' chairman Edward Brennan finally went outside the organization for a successor. Jane Thompson, who heads the new home services venture, recalls a typical languid meeting in the grim days back then. "We would sit there and everyone would just stare at each other. We were not even able to get people to admit what the problems were."

To halt the free fall, Martinez took a hard look at who Sears' customers really were. "We had a company run by guys who thought they were in the 'dirty fingernails' business of autos and hardware," he recalls. In fact, Sears' core customers weren't guys at all, but women between the ages of 25 and 54 with average household incomes of $38,000 a year. As the de facto purchasing agents for the household, they were the buyers not just of apparel and home fashions, but of guy stuff such as appliances and electronics--even tools and auto parts. "It was a very big 'ah-hah!' discovery," Martinez says. "Unless we made the store and merchandise attractive to her, we weren't going to break out of the box we were in."

That epiphany led to a two-pronged assault on the calcified culture. Out went the venerable but red-ink-stained catalog. The company also sold or spun off the nonretailing side of Sears, including Allstate Insurance, the Dean Witter brokerage and the Coldwell Banker real estate chain--the elements of a "socks and stocks" diversification strategy that never worked. Out too went 50,000 workers, or 17% of the total. The company also shut 113 stores, the largest shake-out in retailing history.

Many managers can slash their way to profits. Act II, growth, is the tough part, and that's where Martinez is right now. "You can't shrink your way to greatness," he is fond of saying. Sears has gained 10 million sq. ft. of selling space, mainly for apparel, in areas reclaimed from storage rooms and furniture departments that migrated to their own stores. To stock the shelves, new merchandising chief Robert Mettler, recruited from Robinson's, brought in popular national brands such as Champion, Arrow and B.U.M. and launched fashionable Sears-designed garments (imagine!) such as the Canyon River Blues and Crossroads casual wear lines. To unsnarl their flow through Sears' supply lines, Martinez hired his own three-star general, William ("Gus") Pagonis, who headed Army logistics during the Gulf War.

Pagonis got Mettler's new brands in the back door just as customers, lured by the "Softer Side" ads, were marching through the front. "It was actually nip and tuck," says Martinez. "We took a big risk, and customers absolutely loved it." That fairly describes Martinez's feelings about his job. "I'm having more fun than any adult should be allowed to have," he says.

But not everything makes him smile, particularly the company's attempt to expand its brand name into specialty stores. The 145 Sears HomeLife furniture stores have performed so poorly that Martinez has put plans to build more on hold. The company has had better success with the new Sears Hardware chain, and intends to expand it from 80 outlets to 560 by 2000. Martinez has tape-measured the division for more than $2 billion in sales by the end of the decade.

Next year, Sears' 17,000 service vans will begin offering 24-hour on-call repair service for any brand of appliance, whether or not Sears sold it. That way, Martinez hopes to transform a $3 billion repair and improvement business built on Sears' customer base into at least a $10 billion one within three years.

Sears' biggest enemy right now isn't the competition as much as the economy. Any recession could deal the company a double blow: first by hammering sales and then by increasing its credit-card delinquencies, which are already running at an uncomfortably high rate of 5%. Yet Martinez says Sears could recoup any losses simply by beating up on competitors. "Should we encounter a recession, there's still an awful lot of fragile retailers who are at very high risk of failure," he says. "That represents a market-share opportunity for us." Sears bullying the competition--the Big Store really is back.

The turnaround thrills veterans like Allan Stewart, a 28-year Sears executive. "There is nothing sweeter," Stewart says, "than to see the people again waiting at 7 a.m. for the store to open."

--Reported by Wendy Cole/Livonia and William A. McWhirter/Chicago

With reporting by WENDY COLE/LIVONIA AND WILLIAM A. MCWHIRTER/ CHICAGO