Sears' Christmas: How bad was it?

The Chicago Tribune has an interesting article on the two ways of looking at Sears' Christmas numbers.

At first glance, the figures are disastrous: During the last nine weeks of 2005, Sears' sales were down a stomach-turning 12%. The Kmart half of the merger looked good, by comparison, even with a miserable 1% sales increase. And some analysts weren't slow to point out the obvious:

... the disappointing finish to 2005 raises questions about how long Sears can continue to hemorrhage customers and remain in the game with more nimble players such as Target, Home Depot and Kohl's.

"As a retailer, you can't do what Eddie Lampert is doing and stay in business," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York City.

Big parts of the reason for the miserable sales were the decisions to cut back on promotional pricing and on advertising -- both driven by Chairman Lampert's philosophy on retailing.

A hedge fund operator who lives in Connecticut, Lampert is a strong believer in not giving away merchandise at bargain prices to pump up top-line sales numbers. Likewise, he is leery of spending heavily on advertising. Gross profit margins are what Lampert talks about and cares about. He is willing to sacrifice sales if it means bigger profits at the end of the day.

"It's his strategy to be less promotional," Stern said. "You're cutting advertising expenditures and you are going to sell product at more regular pricing and higher margins. It's very contrary to what most retailers do. It's not about the top line, it's about the bottom line."

Thus far, the retail professionals hate Lampert's approach, but Wall Street loves it:

Davidowitz concedes the strategy is intentional, but he also believes it is misguided. "Cut the inventory, cut the assortment, raise the prices, cut the help, cut advertising and promotions. It's a unique approach to retailing."

That doesn't seem to bother Wall Street.

Sears Holdings stock closed up $1.89, or 1.6 percent, to $117.90. That's a far cry from Sears' 52-week high of $163.50 per share but still well above its 52-week low of $84.51.

It will be interesting to see how this plays out in the long run. Lampert is following one of my core beliefs (profit is more important than volume), but violating another (I have a strong pro-advertising bias), so I'll be watching closely.