Sears/Kmart deal extends Martha's reach

DSN Retailing Today, Dec 13, 2004 by Mike Duff

The marriage of Sears and Kmart may turn out to be a happy event or it may turn out to be the beginning of an unhappy partnership, depending on developments. But Martha Stewart just might be the wedding guest who catches the bouquet, as the deal may signal a coming-out party for her.

As for the retailers, Sears should wind up calling the shots in home. The company's home furnishings and domestics operation--outside of a few specific segments, such as window coverings--hasn't been its strong suit, despite a revamp a few quarters ago. The pairing with Kmart should provide Sears with an opportunity to establish a more credible own-brand strategy in domestics based on Kmart's already popular label with a successful track record.

A stronger domestics program, in turn, could help boost Sears in home furnishings categories where Martha has a presence, such as tabletop, and even where she doesn't, such as kitchen electrics, if her label generates more traffic in the department.

The pairing of Sears and Martha Stewart has had potential for some time. Last year, Martha Stewart Everyday jumped from Zellers to Sears in Canada after negotiations for a contract renewal at the Hudson's Bay-owned discounter went nowhere.

At the time, many observers felt the Canadian move may signal a similar switch in the United States once the Martha Stewart deal with Kmart was up.

Parent company Martha Stewart Living Omnimedia maintained that declining sales in its merchandising division were the fault of Kmart's bankruptcy and store closing. Then Martha Stewart got into trouble of her own when she was indicted for lying about a stock trade, and MSO quickly extended the existing deal with Kmart. Despite the retailers troubles, the Martha Stewart Everyday business at Kmart proved much more stable during Martha's tribulations than did the larger media arm of MSO, which suffered cancelled television deals and, in the magazine division, an advertiser exodus.

Although concerns flurried that the Sears Canada MSE roll out might be impacted by Martha Stewart's trial and conviction, company spokesman Vincent Power said the label has found a following. "It has been well received," he said. "It has been in the stores fully one year since it launched. Some things needed [adjustment], others proceeded well, just like in any other line, but it has been well received in Canada."

MSE's introduction in Sears Canada may have a double benefit for the store's U.S. version. Not only is the rollout proof again of the MSE's resiliency, but it also provides an education about how to merchandise the line outside of the discount store environment. Sears Canada stores are frequently more upscale than those in the United States, although many are similar in basic approach and shopper base. In effect, Sears has been able to conduct a yearlong merchandising test in Canada. Canadian shopping habits are close enough to those in the United States that Sears will have a leg up in any Martha roll out into the American mid-tier.

Although it didn't get specific about just how a deal between Sears and MSO might work in the United States, the retailer's newly formed parent, Kmart Holding, stated that it will consolidate positions in home appliances, tools, lawn and garden, home electronics, and automotive repair and maintenance.

Phillip Zahn, a Fitch Ratings analyst, said the direct benefit from brand synergies isn't proportionally huge--although it comes on top of $300 million in cost synergies--but still is significant.

"They were projecting $200 million in revenue synergies from sharing the brand between chains, $200 million of cross-selling opportunities against a combined $55 billion sales," Zahn said. "There is some benefit to selling Martha at Sears. I'm not sure what brands they're bringing to Kmart. There has been talk about bringing Craftsman to Kmart, but I'm not sure they want to bring Land's End. They might want to protect that brand a little bit."

As some analysts see it, the brand strategy that the new combined Sears/Kmart takes may not be as beneficial to the latter as the former.

"Based on discussions with others in the retail and real estate industries, we believe that Kmart chairman Eddie Lampert is committed to running the business as Sears, but will attempt to dismantle any vestiges of the 'old Sears' and its reportedly complex management hierarchy," said Margaret Cannella, an analyst with J.P. Morgan Securities, in a research note. "Any remaining Kmart stores may be run as 'value' retailers like Value City or Odd Lot. As the best of the best in brands are put in Sears stores, it is likely that softlines content will increase substantially. Currently, softlines comprise about 25% of Sears' offerings, and two-thirds of JC Penney's, so there is a lot of room for this higher-margin product."

Nearly everyone has expected a Martha comeback. Martha Stewart gets out of jail next year and, even if she has to hop right into house arrest, her comeback should begin about the time she returns to Connecticut.