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Sears Canada is in a race against time to turn things around. Photo by Chris Young for The Globe and Mail.Chris Young/The Globe and Mail

The new boss at Sears Canada Inc. has issued a stark diagnosis of the retailer's health.

About a month after taking the helm, Calvin McDonald said in an internal memo to employees that the company faces nothing less than an "identity crisis," and sweeping changes will be required to improve the retailer's outlook.

Stores are cluttered with merchandise and marketing and promotions are ineffective, wrote Mr. McDonald, who has now held the job for about three months. The old-guard catalogue operation drains money from other divisions, customer research and internal business reporting are weak and employees lack accountability, he continued.

"In a time-starved culture, our customers shouldn't have to hunt for what they need," he said in the message, obtained by The Globe and Mail. "Our stores are too difficult to shop. We have inconsistent execution and too much clutter. In many cases, we don't offer the right products in the right market."

The company is now racing to address those problems while facing increased pressure from rivals and a worsening financial picture.

Sears Canada's archrival, the Bay, is ramping up its once-flagging operations under a high-profile, seasoned department-store merchant as its CEO. Nimble low-cost players are stealing away market share. And by 2013, savvy U.S. discounter Target Corp. will arrive in Canada, adding to the competition. At the same time, Sears and its U.S. parent, controlled by hedge fund manager Edward Lampert, are struggling with declining financial results.

In its second quarter, Sears Canada posted a $2.7-million loss compared with a $20.5-million profit a year earlier. Same-store sales, a key retail measure, slid 5.8 per cent.

Mr. McDonald, who has now been on the job for about three months, declined to comment on the memo, but industry insiders said a three-year plan he went on to develop includes reorganizing catalogue operations, re-focusing marketing spending, re-jigging store presentations and investing in customer research to respond more sharply to shoppers' demands.

But some question whether time is on his side.

"Sears looks like it's been marching backward," said Mark Cohen, a professor at the Columbia University Graduate School of Business in New York and a former Sears Canada CEO. "These are the kinds of things you can't fix overnight. The question is: Will he have the time and will he have the support?"

Already, Mr. McDonald has made some key personnel changes, including hiring two veteran American merchants to senior positions. He has created a more positive working environment, some insiders said. "People are having fun again but still worried about the future," noted one former employee who is in touch with current staff.

However, the new leader is on a learning curve, having come from grocer Loblaw Cos. Ltd. and is racing to catch up on the department-store file, Prof. Cohen said. Meanwhile, parent Sears Holdings Corp. doesn't have a track record of investing heavily in its operations, with many of its U.S. Sears and Kmart stores in need of an update, he said.

Mr. McDonald is also trying to patch up soured relations with some suppliers by inviting them to a meeting on Oct. 17. Under former CEO Dene Rogers, the retailer retroactively reduced the price it paid to some vendors on the basis that they were profiting from a stronger loonie because they purchased many of their goods in U.S. dollars and needed to help Sears lower costs. "This could be an encouraging move," said David Schachter, executive director at the National Apparel Bureau, representing clothing suppliers.

In his message to employees this summer, Mr. McDonald said he had visited stores across the country, talked with his staff and conducted consumer research "to identify our areas for immediate improvement …We do have some challenges that are preventing us from achieving our full potential."

He said pricing practices are undisciplined, "adding costs and clutter to our business." Sears is the biggest retail marketer in Canada "but based on sales momentum, we are spending too much to achieve an insufficient benefit."

He referred to "the catalogue hangover," suggesting the business is at the centre of many of the retailer's operations "yet only drives a small percentage of overall sales." More generally, employees' lack of accountability results in inconsistent execution; "poor business reporting" provides "limited clarity on performance metrics, the right reports and one version of the truth."

Sears grapples with "insufficient customer insights," he said. "Despite having 3 million Sears [credit]card holders, we lack clear data about our customers and there are very few customer insights driving our business decisions."

And with more than 30 per cent of sales generated from the retailer's own brands, "it is critical that we manage these more consistently," said the message from Mr. McDonald, whose Loblaw experience with iconic private labels such as President's Choice can give him an edge in this area.

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