Sears on the Wrong Side of the Gap - TheStreet

Sears on the Wrong Side of the Gap

Thursday's same-store sales report shows two retailers that appear to be moving in opposite directions.
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Now that


(GPS) - Get Report

has managed to turn around its same-store sales, can fellow long-term loser


(S) - Get Report

do the same?

That's what many Sears investors may be wondering after the venerable retailer reported its 17th straight month of declining same-store sales Thursday. The Hoffman Estates, Ill.-based retailer has now posted declines in same-store sales, which compare results of outlets open for more than one year, in 22 of the last 24 months.

That's a similar predicament to what


(GPS) - Get Report

found itself in as recently as last fall. When the apparel giant reported then that its comparable-store sales fell in September, the report marked its 29th straight month of declines.

Among the dozens of retailers that reported same-store sales Thursday, these were two of the big retail names that had seemed to be moving in opposite directions. Both faced a similar problem: finding the right mix of products for a market that has shifted beneath their feet.

Since the fall, Gap has reported four straight months of same-store sales growth. On Thursday, the company reported that its comparable-store sales in January grew by 16%.

While Sears may be able to draw some lessons from Gap, it faces some different issues in trying to turn around its sales, analysts say. Sears has been trying for years to turn itself around, notes Marcia Aaron, a retail analyst with Pacific Growth Equities.

"It's harder for Sears. They're in an industry where we've seen a secular decline," Aaron said, noting that department stores have consistently posted the worst same-store sales figures in recent years among all retailer groups.

(Pacific Growth Equities does not have any investment banking business with Sears or Gap.)

Although same-store sales can be a

poor indicator of overall company performance, the companies' differing fortunes in comparable-store sales appear to be mirroring their bottom lines. Gap said on Thursday that it expected its fourth-quarter earnings to beat analysts' expectations of 16 cents a share. Blaming a decline in its credit income, Sears

indicated that its sales would come in below analysts' expectations.

Gap's same-store sales declines were caused by a combination of factors, analysts say. A fall in the cost of manufacturing cotton-based apparel -- Gap's mainstay -- led to widespread discounting and left Gap and other apparel retailers struggling to figure out a pricing strategy, said Richard Hastings, chief retail economist at Bernard Sands. Meanwhile, the company couldn't figure out the right product assortment to attract customers and blurred the lines among its Old Navy, Gap and Banana Republic chains.

"I think the Gap tried be all things for all people," said Rob Wilson of Tiburon Research Group.

Meanwhile, the company had to face momentum that was going against it, Aaron said. Customers tend to shop where they've shopped previously. With increasing numbers of apparel shoppers turning to other stores, Gap needed to find something to turn around that trend. Gap finally did that by stocking its stores with the right merchandise, she said.

"They talked about regaining momentum for a while, but it takes time," she said.

Sears has had similar difficulties in establishing its identity and fighting negative momentum, but the company's problems may be more acute than Gap's, analysts say. A whole generation of consumers has grown up shopping not at department stores but at specialty stores that cater to their individual tastes and music, Aaron noted.

While Sears seems to have determined that it no longer wants to be a traditional department store, the company is going to have to undergo a major branding and renovation effort to draw in new customers.

In recent years, Sears has dropped some product lines, bought Land's End and begun a process of reinventing itself, but the company hasn't gone far enough some analysts say.

"The problem at Sears has everything to do with its excessively conservative approaches to spending. The reluctance to spend more, to invest more, to really style up those stores is holding the company back," Hastings said. "Sears is facing the same option that all face at some point. If you don't spend the money, it's going get you into trouble."

To be sure, Gap's achievement has been

modest. The company's same-store sales in recent months are being compared with year-ago months in which Gap saw substantial declines. The apparel chain's comparable-store sales gain last month, for instance, followed a 16% same-store sales decline in January 2001. Given the steep declines the company saw over the last two years, it has yet to bring its comparable-store sales up to the level they were a year or two ago.

And some analysts argue that despite its ongoing declines, Sears is actually in a better position than Gap. Sears sales have been depressed by an ongoing effort to change the product mix and the layout of its stores, said Kurt Barnard, president of Barnard's Retail Consulting Group and publisher of

Barnard's Retail Trend Report


"Sears is building methodically. They have a clear vision in mind and are pursuing that vision," Barnard said. "It's not clear that Gap has the same vision. They were just lucky in showing fashions that appealed at bargain basement prices."