Sears Holdings Earnings Call Insights: Mobile Investments and Store Closings

Sears Holdings Corporation (NASDAQ:SHLD) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Mobile Investments

Spencer – Bank of America Merrill Lynch: This is actually Spencer in for Bill. I was wondering if you guys could talk a little bit about the mobile investments you’ve made and what exactly those entail, and then whether you think that there is substantial need or desire for investments in the future?

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Edward S. Lampert – Chairman and CEO: Yeah, I mean, I think what we’ve tried to do is a combination of bringing new talent into the Company, engineering talent, that has the ability to work directly on building applications that we are using. In the past, a lot of the technology development would have been outsourced, or would have simply been purchased based upon industry solutions. The time involved, the explanation involved in attracting these talents to our Company has been expensive and the investments that we’ve made include the SHOP YOUR WAY app, the Sears mobile app, the Kmart mobile app and desire to bring that predominantly in-house really relates to the new development cycles around that type of technology as opposed to multi-year projects. A lot of releases are made on a fairly continuous basis. So, we believe that mobile is essential to get right. We believe that we will leverage industry solutions, but we want to make sure that we have the talent and the focus around developing our own applications including patenting applications that we can use with our members.

Spencer – Bank of America Merrill Lynch: Then can you remind us what percent of sales are online, and is it very different either in Kmart or Sears?

Edward S. Lampert – Chairman and CEO: Well, we don’t really break those out directly, but directionally they’ve been growing and the Sears online business is a much larger business than the Kmart online business.

Spencer – Bank of America Merrill Lynch: Then one more. Can you remind us or tell us how many stores you guys closed in the quarter, and then how many you guys are thinking about closing this year?

Robert A. Schriesheim – EVP and CFO: Just to clarify, you are talking about last year’s quarter, about 100 stores.

Spencer – Bank of America Merrill Lynch: Then you guys plan on closing any stores this year?

Robert A. Schriesheim – EVP and CFO: We don’t have a specific plan as ordinary course as we continue to review our geographic physical footprint, particularly in line with our migration to a more member centric driver organization. We’re continually reviewing the physical footprint and we made decisions as the business proceeds, so nothing specific at this point.

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Store Closings

Paul Swinand – Morningstar Investment: Just wanted to Clarify on the last question with store closings. It’s a 100, year-over-year quarter comparable quarter store closings with main line stores?

Edward S. Lampert – Chairman and CEO: No, I think what Rob was referring to really was 2012. In terms of Q1, 2013, it’s substantially less than that. So, I think, we can get you the numbers off line, but I think Rob was referring mostly to the stores that were closed in 2012.

Paul Swinand – Morningstar Investment: So that’s the total for the year?

Edward S. Lampert – Chairman and CEO: Correct.

Paul Swinand – Morningstar Investment: Then, I’m just trying to – you made some comments about the inventory and I’m trying to break out how much of that is due to store closing and how much is, is it focused in any other one area or is it pretty much shared equally across the departments…

Edward S. Lampert – Chairman and CEO: I’ll let Rob answer that as well. I think it’s a combination of store closings, changing the business model to integrated fulfillment, where we carry the inventory and how we fulfill the inventory, whether it’s from store or online and it’s also taking a much harder look at inventory turns, return on inventory investment the ageing of inventory where we are taking much a harder look and more disciplined look at that and we think we have some good opportunities to reduce inventory without impacting the business. I think Rob has referenced in the past and in this call that we have $4 billion to $5 billion of inventory with no payables against them, that’s fairly unusual for a large retailer. Most retailers have higher inventory turnover and high return on inventories. So as we get more granular in looking at that, we think we have some opportunities to reduce inventory without impacting the business.

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Paul Swinand – Morningstar Investment: Would you say that none of the same store sales decline was due to tight inventory?

Edward S. Lampert – Chairman and CEO: I think it’s hard to break that down specifically. But I’m not sure we have any evidence that for example stocks have had any material impact on our sales.

Paul Swinand – Morningstar Investment: I guess, we are all interested and view the online and technology investments positively I guess we are trying to bridge the gap of how we get to a profitably company from where we are today, could you maybe comment on the gross margins generated by the online side of the business, are they above the stores or is there some way that you could see as this grows the profitability will increase?

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Edward S. Lampert – Chairman and CEO: I don’t think we break that out specifically, but I will tell you category-by-category, it varies. There are some categories where online margins can be higher than store margins and vice versa when you consider markdowns – clearance markdowns, promotional markdowns, etcetera. I think that one of the things that we’ve been very focused on is the sensitivity of our gross margins to small changes in price. A 2% price change, plus or minus, on $8 billion a quarter is $160 million. So, when you are selling product at 40% and 50% off, the opportunity to do better than 40% or 50% off to get 38% off or 48% off is a big variable. And I think that the broad-based ‘everybody gets the same deal’ marketing that Sears and Kmart and many others have engaged in for a long time will be changing. I’m not predicting that the retail industry will become like the airline industry where 10 people across the row in plane all pay different prices for their seat or five people on the floor of a hotel room all pay different prices for their hotel room. But I do think there’s going to be a lot more variability and it tips both ways. Better price realization doesn’t mean raising prices. It can mean being more accurate in where you place your inventory, being less general and less long lead time in terms of the promotions. The ability that we have now to target our promotions to specific geographies to specific members, groups of members gives us an opportunity to realize a much better answer. Having said that, and what Rob referenced is, as we run both systems simultaneously, there have been instances, more than – it’s instances where we’re running, not sure it’s promotions, but we’re also giving away significant SHOP YOUR WAY point which is real money that has the impact of hurting our margins. And I think that that, bringing a much more heightened awareness to our merchants and to our marketing people about how these things can work together rather than – not being additive, but being substitutional, if that’s the word. I think we have an opportunity to do much, much better in terms of price realization. And the leverage there if you run the math, it can be very substantial.

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