Eddie Lampert On Sears CC Discusses Potential Lands’ End Spinoff

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Sears Holdings Corp (NASDAQ:SHLD) conference call, below are comments from Eddie Lampert. Also make sure to see his letter to investors here.

Eddie Lampert – Sears Holdings Corporation – Chairman & CEO

Thanks, Rob. I would also like to thank all of you for joining us today. I am proud of what Sears Holdings Corp (NASDAQ:SHLD) has accomplished in the last quarter and over the past fiscal year. We have made significant progress in important areas of our transformation since we last spoke, and have a clear plan to position the Company for long-term growth and profitability.

I will take this opportunity to provide you with a more detailed discussion of our strategy and what we believe are early signs of success that give us further confidence in our plan. We will then spent some time to update you on our fourth-quarter and full-year results, followed by a discussion of how we are leveraging our rich portfolio of assets and redeploying capital to support our plan.

I want to start off by level-setting where we are. The size and scope of the transformation we are pursuing is substantial. We are in the midst of transforming Sears Holdings into a member-centric business that provides and delivers value by serving its members in the manner most convenient for them, whether in store, in home or on the go.

Transforming a business is always challenging. Add to it a highly promotional and fast-changing retail landscape and a consumer that has drastically changed the way they shop, and you have a significant task in trying to adapt a retailer the size of Sears Holdings. At the same time, we are managing legacy pension obligations while freeing up the resources to invest in technology platforms.

Unlike many other retailers, though, we are taking a proactive approach and we are altering our business model to create a long-term sustainable advantage. This is not something that will happen overnight and not something you measure in small increments of time. As CEO, Chairman and Sears Holdings Corp (NASDAQ:SHLD)’s largest individual shareholder, I am 100% committed to the success of this transformation and have confidence in our associates in the path that we are taking. We hope to accelerate the pace of change to become a leading retailer positioned for continued growth.

On slide 5 we list our five strategic pillars. In my annual letter to shareholders released this morning, I noted that in January The Wall Street Journal ran a prominently-placed story suggesting that beyond all of the retailers reporting poorer profits there is a, quote, deeper malaise at work. A long-term change in shopper habits has reduced store traffic, perhaps permanently, and shifted pricing power away from malls and big-box retailers.

Instead, shoppers seem to be figuring out what they want online, then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average 5 stores per mall trip in 2007, today they only visit 3. Meanwhile, online stores have further sharpened purchase decisions in prices, leaving some shoppers to come into the stores only when they can cherry-pick discounted items.

All of these dynamics are ones for which Sears Holdings has been preparing for years. As I have described before, the 5 key pillars of our strategy are, 1, creating lasting relationships with members by empowering them to manage their lives; 2, attaining best-in-class productivity and efficiency; 3, building our brands; 4, reinventing the Company continuously through technology and innovation; and 5, reinforcing the SHC way by living our values every day.

Our two key platforms, Shop Your Way and Integrated Retail, continue to become more prominent, both in how we run the Company and in how we serve our members.

Slide 6 outlines how we are accelerating our pace of change to position ourselves in the changing environment. We are proactively learning more and more each day about how our members want to shop and what resonates with them. We are utilizing this feedback as we continue our transition and invest in two primary areas, our member-based platform, Shop Your Way and Integrated Retail.

These two key elements represent a different way of doing business at Sears Holdings Corp (NASDAQ:SHLD) and are the foundations of our other programs and initiatives. Within these two key areas we are making substantial investments in engaging members with personalized, relevant content, offering more capabilities to our members, continually enhancing member engagement, and building out our platform technology.

To enable this change, we have been strategically realigning our portfolio of businesses to focus on our core strengths, simplify Sears Holdings and become a more focused Company that is more efficient to manage and easier to understand, all while enabling us to better optimize our allocation of capital and attract the best talent.

We are also enhancing our financial flexibility by reconfiguring our asset base to redeploy capital while we meet all of our financial obligations. Finally, we are providing opportunities for our shareholders to participate in what we believe are value-accretive activities.

As indicated on slide 7, we believe that we are proactively transforming our business to benefit from the changing retail landscape. We believe we are ahead of the game by transitioning to a member-centric, integrated retailer leveraging our Shop Your Way platform. Shop Your Way is unique in that it is a program that rewards members, enhances interaction with members, and delivers useful information to them.

As a result, we are able to be more strategic in how we, 1, invest in capabilities to enable our members to access the widest possible assortment of products and services; 2, use data and analytics on member trends to make targeted offers and decisions delivered in real-time. We are becoming a more fact-based company and are making decisions based on analytic data as opposed to gut feelings. And our members will expect us to provide them with offers that are relevant to them as individuals.

Three, expand our reach through Sears Marketplace, our innovative community that allows third-party merchants to advertise or sell their products on the Sears Holdings family of websites where we now offer over 100 million items and multiple delivery options

Four, enhancing our Shop Your Way membership benefits. Membership is free, and we want everyone to know the significant benefits of membership as our members always get more. And finally, developing digital and social relationships with our members as we aspire to do more than simply transact. We are working to build value trusted relationships with our members by providing differentiated products and services that will be difficult for others to replicate.

At a high level, we are seeing increases in key member engagement metrics, giving us confidence in our strategy and demonstrating tangible progress. As indicated in our release, 72% of sales are now made to Shop Your Way members, up from 58% during the fourth quarter last year. And we experienced year-over-year growth of 10% in online and multichannel sales, showing steady growth in both channels since 2006.

And on slide 8 you can see our framework for investing in Integrated Retail capabilities. Integrated Retail is a business model where members can shop our entire portfolio of offerings anytime and from anywhere. We believe that retail in the future will be about transacting with customers on their own terms, whether it is in stores, in home or on the go. And we believe that we are the best Company to serve members across all of these channels.

We have a physical presence in many communities, something which the pure-play online retailers do not. We are the undisputed leader through our home services business, which has nearly 8000 service associates making approximately 14 million calls into the home each year, providing us with another way we can interact and service our members. And we have a robust online platform that is demonstrating consistent growth.

We believe Sears Holdings is uniquely positioned to win in the world of integrated retail. Integrated Retail combines the best of the various channels: broad product selection, ability to touch and feel the product, and access from anywhere through mobile applications. And all of these capabilities are accentuated through our Shop Your Way platform.

With Shop Your Way we can provide our members with a differentiated and more convenient shopping experience. As our members tell us more about their preferences and unique needs, we can better target these preferences and anticipate and meet these needs.

As shown on slide 9, we are investing heavily in our strategy across an array of fronts in specific applications and offerings. In particular, through shopyourway.com, members can share information on products they like with their friends, post a review of any product, research products from other member reviews, win prizes and execute transactions. Our celebrity partners such as Nicki Minaj and Adam Levine also provide content and interact with our members there.

As you can see on slide 10, we have shown consistent annual growth in our online channels. Approximately half of the business is cross channel — buy online, pick up in store, or order in store, ship to home. We realized higher growth in the cross channel online sales in recent years, which we consider to be a proof point for our Integrated Retail strategy.

We have invested heavily in Integrated Retail, including initiatives such as our SHOPSears mobile app for associates, as shown on slide 11. SHOPSears was launched in early 2012 in over 300 stores. And as of the end of fiscal 2013, we are in more than 400 stores. This solution is currently accessed by our consultative associates in departments like home appliances, consumer electronics, tools, lawn and garden, to name a few, via their assigned iPads and iPods.

This capability now provides our associates the opportunity to have a more engaging conversation with our members on the sales floor. This also enables our associates to have all the information they need to assist members in making decisions on the products to purchase based on the member’s needs.

In 2014, we will continue building and investing further on this solution to provide our associates more tools that enable them to assist our members. SHOPSears is an application that focuses on addressing an important element of Integrated Retail, which is bringing the digital into the physical world. I am proud of the progress we have made in this area which provides a better experience for our members.

On slide 12, you can see another example of how we are marrying the digital and physical worlds through our investments in Integrated Retail. In-vehicle pickup is a new service that we have launched, powered by the Shop Your Way mobile app which enables our members to pick up their online purchases at any Sears store within 5 minutes of arrival without ever leaving their car.

To do this, members can simply choose the in-vehicle pickup option at checkout on sears.com. Then upon arrival at the store, they can use the Shop’in feature on the Shop Your Way app to initiate the in-vehicle pickup process, and an associate will deliver the product to their car within 5 minutes.

On slide 13, you can see that we are also investing in capabilities which we believe will help us build digital relationships with our members. Two concrete examples of these applications are eReceipts and Shopper Recap. eReceipts is a program that provides our members with the option to have a digital version of their sales receipt emailed to them instead of a paper receipt, or if the member prefers, in addition to a paper receipt. We believe that this provides our members with a more convenient way to receive and archive their sales receipts.

Shopper Recap is an integrated retail capability powered by the SHOPSears app that allows us to continue the conversation with our members even after they leave our stores. Through Shopper Recap we can send our members a follow-up email with information on the specific items they looked at in-store, providing them with the information they need to make an informed purchase decision in the future. These functions are supported by our investment in technology platforms, as well as our investment in wireless networks and devices at our stores.

Moving to slide 14, one of the primary ways that we engage our Shop Your Way members is through shopyourway.com and the Shop Your Way mobile application. Through our investment in these digital platforms, we are helping make our members’ lives easier by offering them personalized deals, fun experiences, advice from associates, and the ability to connect with other members. Throughout the last year, we continued to see significant increases in the number of members utilizing these platforms to save money, seek information on products and brands, and participate in rewarding sweepstakes.

Turning to slide 15, one of the exciting ways that we attract members to our digital platform is by offering exclusive products and content that reflect current social trends and pop culture. In 2013, we expanded our celebrity relationship with Adam Levine and Nicki Minaj to engage their fans on social media and through all of our channels using Shop Your Way as the platform to bring the social experience in commerce together. Both of these celebrity partners offer a line of exclusive clothing and products to Shop Your Way members. In addition, Adam and Nicki offer exclusive content and allow members to follow their activity.

Turning to slide 16, you can see the traction we believe we are gaining in our member program. While we use many metrics to track our Shop Your Way program and member engagement, one important metric of note is member penetration or the percent of total sales that are derived from our members in Sears full-line and Kmart stores.

Our member penetration has increased for the full year from 59% in 2012 to 69% in 2013, and for the fourth quarter from 58% in Q4 2012 to 72% in Q4 2013. Additionally, we are seeing increased engagement from our members on our shopyourway.com platform ,as well as through increases in the redemption of the points are members are earning every day on every transaction.

As we set ourselves up for success in 2014, we continued our efforts in 2013 to simplify our Company and to focus it, while simultaneously creating long-term value for shareholders. As Rob will detail, we met or exceeded our key objectives related to expense reduction and inventory management, while also generating $2 billion of liquidity.

Also, we have announced we are evaluating the separation of our Lands’ End through a spinoff to shareholders, and have made filings with the SEC to accomplish this through a pro rata distribution to Sears Holdings’ shareholders. We are also considering strategic alternatives for our Sears Auto Centers business, subject to board approval and other conditions.

We expect that through these actions and through working with the Sears Canada board and management with the goal of increasing and realizing the value of our investment at Sears Canada, we will rates in excess of $1 billion in proceeds to Sears Holdings in 2014, creating value and helping to fund our transformation. In short, we believe that we are entering 2014 well-positioned and with what we believe is a clear plan for success.

Lampert on Q&A section

Eddie Lampert – Sears Holdings Corporation – Chairman & CEO

Thanks, Rob. As I mentioned earlier, as the largest individual shareholder and the CEO, I am personally committed to investing in and driving Sears Holdings transformation, improving the profit performance of the Company and creating shareholder value, all while continuing to meet all of our financial obligations.

While I am not pleased with our profit performance, I am pleased with the progress we have shown in our transformation by continuing to improve our member engagement by leveraging Shop Your Way and Integrated Retail. We are working in a very focused and diligent manner to drive this transformation to a member-centric model and achieve improved levels of profit performance.

Thank you for joining us this morning.

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