NEWS ANALYSIS : No More ‘Socks and Stocks’ : Sears Found Few Synergies in Trying to Become Financial Supermarket

It was just a throw-away line, an off-the-cuff quip by a Merrill Lynch spokesman after rival brokerage Dean Witter Reynolds Inc. agreed to be acquired by retailer Sears, Roebuck & Co. in 1981.

Did consumers, asked the spokesman, really want to buy “socks and stocks” under the same roof?

Tuesday, Sears acknowledged what the world had long ago concluded: Socks and stocks don’t mix. In a move applauded by investors, Sears said it would spin off Dean Witter and its associated Discover credit card operation in order to slash corporate debt and “refocus” its business strategy on retailing.

Sears also announced that it will sell up to 20% of its Allstate Insurance Group and all of its Coldwell Banker Residential Services businesses.

Sears’ ill-fated attempt to create a “financial supermarket” proves that “it’s a lot easier to make an acquisition than to integrate it into your existing business and make it work,” said Marion Sandler, co-chief executive of Oakland-based Golden West Financial Corp. and its World Savings & Loan Assn. unit.

“Sears got blindsided by their success with Allstate,” Sandler continued. “Just because they were able to sell Allstate (insurance) to their Sears’ customer base, they thought they’d be able to do the same thing with Dean Witter.”

Consumers of brokerage firm services tend to be much wealthier than the average Sears customer, she said. Also, customers buying tools or gardening supplies aren’t thinking about buying stocks or mutual funds on the same shopping trip, analysts and observers said.

Sears opened 280 Dean Witter sales kiosks in Sears stores between 1981 and 1986, but subsequently closed 200 of them.

All the while, its shareholders saw little benefit on the bottom line and asked: Why is the once-proud merchandiser pouring resources into financial services when it was losing its lead in retailing to Kmart and Wal-Mart?

Sears also learned what many other conglomerates formed during the 1970s and early 1980s have discovered: That when managements try to do too many things at once, they lose their focus on their core business.

Several big, diversified companies have realized that “the sum of the parts is worth more than the whole,” said A. G. Edwards & Co. analyst Philip W. Abbenhaus. ITT Corp., Paramount Communications (formerly known as Gulf & Western), USX Corp. and Coca-Cola Co. have all spun off or sold major operations in recent years.

The “deconglomeration” of Sears is “a wise, value-adding decision,” said shareholder activist Robert A. G. Monks, a frequent critic of Sears management who ran unsuccessfully for a seat on the company’s board. The action, Monks added, was “a blueprint for other companies built through unrelated diversification to study and follow.”

“The issue of how much value the conglomerate structure adds--or subtracts--will be a central issue for shareholders to consider in the ‘90s,” predicted Nell Minow, a partner of Monks in a Washington-based firm called Lens Inc.

“In terms of shareholder value, it’s more important than executive pay or poison pills,” two issues that in recent years have caught fire with shareholder activists, Minow said.

“There are rare companies that can pull off a conglomerate structure successfully,” Minow added, pointing to General Electric as a successful, broadly diversified company.

In announcing the spinoff, Sears Chairman and Chief Executive Edward A. Brennan insisted that the Sears’ financial services strategy had been “a resounding success.”

To be sure, in recent years Sears’ financial services operations have outperformed retailing, but that in part reflected the dismal condition of the merchandising arm, analysts said.

“I’d have sold the retailing and kept the other stuff,” said Stephen McLin, president of America First Financial Corp. in San Francisco and former executive vice president for strategic planning at BankAmerica.

The spinoff will leave Dean Witter, with its Discover operation, the nation’s largest issuer of general purpose credit cards, with more than 41 million outstanding, but far from the most profitable card issuer.

“The number of cards doesn’t mean anything,” said David Robertson, president of the Nilson Report in Santa Monica. “Discover has 30% more cards than (No. 2 issuer) Citibank but is only one third as profitable.”

Still, Dean Witter’s credit services division did chip in a hefty $174-million profit in 1991, a Discover spokeswoman said. As a brokerage firm, Dean Witter now boasts a retail operation twice as big as that acquired by Sears.

“We went from a big full-service investment bank with a massive trading operation to a more retail-oriented firm,” said Dean Witter spokesman Jim Flynn.

“I don’t think we’ve decided yet,” Flynn said, when asked whether Dean Witter would keep its 85 remaining financial centers in Sears stores. It’s a prudent answer, especially when one considers that Flynn, who joined Dean Witter in 1989, is the man who coined the phrase “socks and stocks.”

SEARS’ UNRAVELING EMPIRE

Sears Roebuck and Co.’s decision to divest its residential real estate, credit card and financial services groups--to pay off $3 billion in corporate debt--is a part of trend of big conglomerates spinning off units, decentralizing and focusing on core businesses. Before the restructuring, Sears operated four major retail and financial service businesses.

THE PARTS How each group contributed to the parent company’s net income:

Group Income (in millions) % Sears Merchandise Group $486.3 30 Allstate Insurance Group $722.5 45 Dean Witter Financial Services Group $344.6 21 Coldwell Banker Real Estate Group $60.6 4

Source: Company Reports Stock value has remained stagnant . . . Tuesday close: $44.75 up $3.38 . . . as have earnings

One force behind the restructuring is to “enhance shareholder value and strengthen the balance sheet,” said Sears Chairman Edward Brennan. Both are sorely needed, as the stock’s earnings-per-share show.

YEAR EARNINGS PER SHARE 1981 $2.06 1982 $2.46 1983 $3.80 1984 $4.01 1985 $3.53 1986 $3.62 1987 $4.35 1988 $3.84 1989 $4.12 1990 $2.60 1991 $3.71

Source: The Vale Line Investment Survey THE RESTRUCTURING PLAN Sears Will Retain... * Sears Merchandise Group, including domestic retail store, catalogue and credit operations. The division runs 94 catalogue outlets, 956 specialty stores and 868 other stores. * Homart Development Co., a developer and operator of regional shopping centers, office buildings and other commercial properties--considered a core element in the business of the parent company. At year-end 1991, Homart owned, managed or was a partner in 35 regional malls. * 80% or more of Allstate Insurance Group, the second largest property-liability insurer in the United States behind State Farm. Up to 20% will be sold through an initial public offering. * 61% of Sears Canada--39% is already publicly held. * 75% of Sears Mexico--25% is already publicly and privately held by others. Sears Will Divest... * Dean Witter Financial Services Group will become a separate, publicly traded company independent of Sears. A minority interest in Dean Witter is expected to be sold in early 1993, including Dean Witter Brokerage and Discover Card. By year-end 1991, there were 41.2 million Discover card holders. * Coldwell Banker Residential Group will be sold. Coldwell has 479 company-owned offices, 1,057 franchisees, 24,200 employees, including 17,900 real estate agents. Sears sold Coldwell Banker Commercial Group $305 million in 1989. Source: Reuters; Standard and Poor’s; Sears, Coldwell Banker