Sears, Roebuck and Co. Chief Executive Alan Lacy was riding high seven months ago. The company’s credit card business was cruising along nicely, stores were being remodeled, and Sears stock hit a four-year high of nearly $60 per share.

But now Sears chief has his back against the wall. Sears retail business is losing market share. Its credit card business is struggling with higher delinquencies and investors have headed for the exits. Sears shares fell below $23 this fall, the lowest level in more than a decade.

Lacy, who is in his third year as CEO, hasnt run out of rope yet, but he needs to show some dramatic improvements in the coming year, retail experts say.

“You dont get five years. You get three years for sure,” says Sid Doolittle, partner with McMillan/Doolittle, a Chicago retail consulting firm. “This is a very big year for Alan Lacy. He is not going to get much more out of cutting costs. You better get some sales, Bub.”

George Whalin, president of Retail Management Consultants, believes Lacy deserves more time to see his changes take hold, but he agrees investors patience may be wearing thin. “The board will essentially give him some time. The question is will Wall Street?”

Adding to Lacy’s headaches, J.C. Penney Co., a major Sears competitor, is showing new signs of life in the apparel business, and home centers like Home Depot and Lowe’s Cos. are making a major push to steal some of Sears dominant share in the appliance business.

Boosting sales next year is definitely on his agenda, Lacy says.

“In the second half of 2003, top-line growth needs to show through,” he said in an interview last week.

But he is hardly apologetic about Sears 2002 mixed report card. “We are going to have a record year in terms of profitability for the company, driven by substantial improvement in our core business.”

Lacy is sticking with Sears October guidance to analysts that the company will post earnings per share, excluding one-time items, of $4.86 for 2002. That’s a 15 percent increase over the $4.22 per share racked up in 2001, but it is less than the $5.15 per share Sears was predicting before it restated earnings to add $300 million to its provision for bad credit card debt.

His watchwords for 2003 are simple and concise: Stay the course.

Certainly, Sears 870 department stores underwent a dramatic amount of change last year. New departments for closet accessories and big-and-tall menswear were added. Casual apparel from Lands End Inc., which Sears acquired in the summer, was rolled out to stores in 10 markets. And Covington, a new private-label classic apparel brand, was introduced in the fall.

While all that was happening, Sears sales fell every month through November, sometimes by double digits, and the company predicts they will be down by about 5 percent in December.

The shrinking top line wasnt as big a surprise as it could have been because Lacy had promised investors he would be focused on improving profit margins, not increasing sales, last year.

But now, Sears needs to demonstrate a payoff for all that remodeling dust, retail experts say. New departments had better show sales gains. Centralized checkout registers, intended to get shoppers out the door faster, should be yielding better customer satisfaction scores.

And Lands End’s clothing–Lacy’s nearly $2 billion investment–should be flying off the shelves.

“Sears investors will want to see stores where the new format has produced dramatic improvements in sales and profitability,” says James Drury, who heads his own executive search firm and chairs the Directors College, a two-day program for executives and directors about corporate governance trends and practices at the University of Chicago’s Graduate School of Business.

Although it is too soon to have an accurate read on Lands End, early signs and anecdotal evidence are promising, Sears says.

“Lands End has been a major win,” Lacy said. “It has performed better than we anticipated at the time of the acquisition.”

Lands End khakis and sweaters appear to be accomplishing what Lacy had hoped: bringing well-heeled customers to Sears and introducing them to new offerings like motorized treadmills and plasma-screen TVs.

Before Christmas, Lands End President David Dyer encountered a Sears shopper who had just purchased a $3,000 projection TV. The man hadnt been in Sears for years, and the only reason he had come that day was his wife, a loyal Lands End shopper, had dragged him to the store.

Such tales are encouraging, but they arent enough to convince skeptics that Lands End’s higher prices and better-quality apparel will dovetail with Sears increasing focus on value.

Market share shrinks

Lacy acknowledges the retail side of Sears is far from fixed, and he vows it will continue to be his major focus during the coming year. As it should be, critics say, because Sears is continuing to lose market share to more nimble competitors like Kohl’s Corp., Target Corp. and Wal-Mart Stores Inc.

“If you dont sell anything, you dont have any credit and you dont make any money,” Doolittle said.

While Lacy is trying to rev up Sears sales, he has another challenge ahead: regaining credibility with Wall Street.

When he was promoted to the top job in October 2000, Lacy made a good impression on retail analysts by taking a conservative approach. He didnt put forth a dramatic new vision of Sears, as his predecessor had. Instead, he offered a plan to make Sears sprawling organization more efficient and its department stores easier to shop.

He also promised that Sears credit business, which generates the majority of operating profit, was in good hands. Despite a weak economy and growing unemployment, bad debt and delinquencies were being kept under control by sophisticated software and an aggressive debt collection effort, Lacy said.

But in October, Lacy fired the head of Sears credit business, saying he had not been getting good information about mounting levels of delinquencies. Then, Sears lowered earnings estimates twice in a 10-day period.

Now, some analysts say they dont know what to believe.

Bill Dreher, an analyst with WR Hambrecht & Co., recently advised investors against picking up Sears shares at bargain prices, citing “extremely limited visibility” at the company.

In late October, Roz Bryant, an analyst with Morningstar in Chicago, said she was troubled by the evidence that “management doesnt have a good handle on its primary profit driver–its credit business.” She added that Sears “has lost its retail identity” and that Lacy’s strategy “will lead to anemic sales growth at best.”

Lacy says he isnt surprised at the skepticism. “Whenever you revise your outlook twice in 10 days, you create uncertainty,” he said. But Lacy believes that when Sears delivers its year-end earnings with no additional bad news from its credit business, some faith will be restored.

But fixing its credibility issue may be easy compared to Lacy’s biggest ongoing challenge–figuring out what Sears stands for today and what its competitive edge is.

“It’s not clear to me what their strategy is,” says Robert Blattberg, retailing professor at Northwestern University’s Kellogg School of Management.

“Sears has no cachet,” he said. “Look at what Target and Kohl’s have been able to do. Theyre just so much better in merchandising and marketing. They beat Sears in every dimension.”

ALAN LACY’s CHALLENGES:

  • Increase sales at Sears department store chain.
  • Bring under control rising delinquency rates at credit card business.
  • Boost stock price, which lost more than half its value between June and November.
  • Roll out to all Sears stores its Lands End apparel brand.