DJ Sears Woes Hit Hometown Stores

By Suzanne Kapner

At a Sears Hometown store in Barre, Vt., shelves are bare of Craftsman tools, Whirlpool washing machines and Kenmore ovens. With little product to sell, owner Tom Coulter said he is turning customers away daily.

When the store has merchandise, the prices are often lower on the website of its sister chain, Sears. Mr. Coulter said his commission and bonus will be penalized if he matches sears.com's prices, though he is able to match the prices of other chains without penalty.

Four years ago, the store was profitable. Today, it is barely breaking even. Mr. Coulter and his wife haven't taken a salary since the spring, and they are struggling to pay their bills. If they walk away from their store, they could get sued. A similar story is playing out at Hometown stores across the country, the latest chapter in financier Edward Lampert's dismantling of Sears.

A Sears Hometown spokesman said the company is committed to supporting its network of independent owners and is doing everything it can to help them succeed in the local communities where they operate.

Sears Hometown is a collection of smaller stores selling tools, appliances, and lawn and garden equipment. There are about 375 locations in mostly rural towns, and the majority of them are run by independent contractors such as Mr. Coulter. The Hometown stores had nearly $960 million in sales in its most recent fiscal year, which ended in February 2019. Both Sears Hometown and Sears are controlled by Mr. Lampert, although the smaller stores weren't part of the Sears bankruptcy in 2018.

Originally part of Sears Holdings Corp., the division was spun off into a separate publicly traded company in 2012 called Sears Hometown and Outlet Stores Inc. Mr. Lampert, the former Sears chairman, chief executive and largest shareholder, became a majority investor in the chain as a result of the spinoff.

The Hometown and Outlet chain continued to operate independently after Sears Holdings filed for bankruptcy protection in the fall of 2018. Mr. Lampert blocked an attempt by the spinoff's board to liquidate the money-losing Hometown stores last spring, while he was in negotiations to buy full control of the chain.

In a letter to the Hometown and Outlet board, Mr. Lampert argued that liquidating the Hometown stores would hurt Hometown owners and their families, as well as their employees and the communities that they serve.

In October, Mr. Lampert paid $36 million for the 45% of Hometown that he didn't already own. At the same time, Hometown agreed to sell assets including its Outlet business, which mostly sells used and discontinued goods, for about $133 million.

Sears Hometown and Outlet investors have filed a lawsuit in Delaware Chancery Court that accuses Mr. Lampert of buying the company for an unfairly low price. Mr. Lampert has denied the allegations.

Hometown store owners pay rent and the costs of keeping up their shops but don't own the merchandise they stock. The goods are owned by the corporate parent, which pays them a commission on sales. Several owners said the flow of goods dried up once Mr. Lampert acquired full control of Hometown.

"We were able to work with vendors like Samsung and LG Electronics," said Stan Downey, who operates a Hometown store in Newton, Kan. After Mr. Lampert took over, "our shelves became empty."

Through a spokesman, Mr. Lampert declined to comment.

Mr. Downey's contract expires in 30 days. He doesn't want to renew it but is afraid he will have trouble finding work given a two-year noncompete clause.

Another Hometown owner in Michigan said she is no longer able to honor Craftsman's lifetime warranty. If customers come in looking for replacement parts, she sends them to a nearby Lowe's.

Sears Hometown continues to have its own buying agreements with vendors and sources some merchandise through Sears, according to a person familiar with the situation.

Many vendors, including Whirlpool Corp., stopped or reduced their supply of goods to Sears Holdings as it teetered into bankruptcy protection. Roughly 270 vendors that continued supplying the retailer are getting paid about 33 cents on the dollar, complicating Sears's efforts to keep its own shelves stocked, according to Sears employees.

Mr. Lampert bought 425 Sears department stores and Kmart locations out of bankruptcy this past February. They are owned by a company he controls called Transform Holdco LLC, also known as Transformco. He has continued to close stores, and now operates about 182 Sears and Kmart locations. Mr. Lampert also has continued to divest assets, including the DieHard battery brand, which Transformco agreed to sell in December for $200 million to Advance Auto Parts Inc.

Mr. Lampert last week reached an $18 million settlement with the estate of Sears Holdings, which remains in bankruptcy. He had accused the "old" Sears of intentionally delaying payments to vendors and shortchanging Transformco on promised inventory. The "old" Sears said it was owed $57.5 million by Transformco.

Hometown store owners said they are being kept in the dark about the company's strategy and, in some cases, receiving misleading information.

"All communication has stopped," said Ashley Enfinger, who owns two Hometown stores in Alabama and is a member of an owners council that is supposed to meet quarterly with management. Mr. Enfinger said about one-third of Hometown owners' agreements expire in July. He said many, like him, don't plan to renew.

Sears Hometown leadership has sent several business updates to owners since Mr. Lampert's acquisition and holds frequent calls with the owners council, the person familiar with the situation said. The company is in discussions with a small number of owners who have asked to be let out of their contracts, which isn't unusual following the holiday period, this person said.

One aspect puzzling to Hometown owners is why sears.com is undercutting them on prices.

In December, Tim England was selling a Kenmore side-by-side refrigerator for $1,799 at his Hometown store in Pocatello, Idaho. The same model was listed on Sears's website for $1,299.

Sears Hometown and Sears operate separate websites and have different pricing structures, the person familiar with the situation said.

Mr. England said his store did less than $500,000 in sales last year, down from about $1.2 million three years ago. He said a big contributor to the sales decline was his inability to get products, a situation that Mr. England said worsened after Mr. Lampert acquired the Hometown stores. At the end of December, he tried to order a Maytag oven for a customer and was told it wouldn't arrive until March.

Two days later, on Jan. 1, he closed his store, part of an agreement he worked out with the parent company. The deal required him to pay the freight to ship the inventory to other Hometown locations.

"Anyone could see that Sears wasn't doing well," Mr. England said. "But Hometown was a separate company. The way it was presented to me by management was that even if Sears went away, Hometown would still be around."

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

January 20, 2020 09:35 ET (14:35 GMT)

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