When I was younger, I couldn’t wait for my package to come in the mail.

It would come the same time every year.

Once it arrived, I would open it up and gaze at it for days.

I wasn’t alone.

Everybody in my neighborhood would do the same thing. When the Sears catalog arrived, it was a big deal. Everybody would dog-ear the pages with their favorite items, so they could remember what they wanted when it was time to make their Christmas list.

My dad would take me there to get tools to do various home repairs and even buy me school clothes.

Sears was a pretty big deal in the 70s and 80s.

Then in 2004, they got the bright idea to merge with discount retailer Kmart.

This would create a mega retail giant with approximately 3700 football stadium sized stores across the United States.   

During the lead up to the Sears and Kmart wedding. I remember, all the analysts talking about the real estate Sears and Kmart owned would make this deal a no brainer. Then the great recession took places a few years later, and every aspect of retail shopping changed.

The US economy rebounded but retail shopping changed drastically.

Shopping centers got fancy and internet shopping began taking off.

Sears and Kmart Stores lost a lot of its appeal.

It wasn’t that special anymore.

Like many old school retailers, Sears was late to the party and didn’t adopt internet shopping that quick. Plus, the competition of Home Depot, Lowe’s, Sam’s Club, BJ’s, Walmart and Target is very fierce.

When everyone is in competition for a piece of the customers’ purse or wallet your offering must be special.

Sears and Kmart haven’t figured out why they are special.

The Retail Industry

The retail industry is rapidly changing, and many are saying bricks and mortar stores are dying, but I find that to be a bit of an exaggeration.

Many believe that traditional bricks and mortar retail is dead, but here is some information that shows a different story.

The National Retail Federation said this in an article titled “ RETAIL’S REINVENTION STORY IS JUST GETTING STARTED:

“There are over 1 million retail establishments across the U.S. and retail sales have been growing at almost 4 percent annually since 2010. When news comes of a few thousand retail stores closing, remember that every industry experiences turnover. You’re not hearing about all the stores opening: Dollar General alone plans to open 1,000 stores this year and many more retailers are expanding.

According to the Commercial Real Estate Development Association, 2016 saw 86.8 million square feet of new retail construction, and retail rents were at their highest level since 2008 through the first quarter of 2017. What’s more, availability rates have been steadily declining since the end of the recession. Stores are still in vogue. .

Many online retailers recognize the value of a physical presence — businesses like Amazon, Warby Parker, Bonobos and Blue Nile are experimenting with bricks-and-mortar locations. All retailers, whether purely online or purely bricks-and-mortar, must adapt to how customers prefer to shop in a digital world.”

The Brick and Mortar retail space is growing, clearly, Sears hasn’t gotten the memo.

 

The Financials

Looking through the numbers, its a very bleak story.

I looked at all the financial information dating back to the start of the Sears Holding Corporation (The combination of Sears Roebuck and Kmart), 2005 and this is what I found:

  • Revenue decreased every year, except for the first year.
  • Revenue has declined by 8% on average annually
  • Assets have declined by 11% on average annually
  • Liabilities have declined by 4% on average annually

 

Sears Holding Corporation Revenue

In the chart above you will see a chart illustrating Sears Holding Corporation revenues from 2005 – 2017.

The problem is made pretty clear when you look at the company’s revenues.

In 2007, Sears generated $50.7 Billion, fast forward to 2017, Sears generated $16.7 Billion in revenues.

That’s a 67% drop in revenues since this these two mega companies combined.

In 2015, Liabilities exceed Assets (they have a negative net worth). This is a very dangerous place for any company.

To add to this problem, Sears Holdings has problems with their Pension Plan, since the company has underfunded their obligations to employees. As a result of this underfunding the Pension Benefit Guaranty Corporation (The Pension Police) has placed liens on many of the assets sales Sears has pursued, in order to make employees whole.

The Stock

An image of a burning building comes to mind when I think of Sears Stock.

  • In April 2007, the stock price hit an all-time high of $149.59.
  • In Nov 2017,  it became a penny stock (Stock Below $5).
  • At the close of business on Friday, June 1, 2018, it was a whopping $2.28.

 

Sears future outlook is pretty gloomy.

I wouldn’t be surprised if they were bought by a competitor or even filed bankruptcy in the very near future.

For Sears to potentially survive, they would need to do massive store closings ( which they are currently doing) and layoff most of their 89,000 employees.

However, they would need to accelerate this process.

Along with closing stores, they should reduce the number of items they carry in inventory and focus on the most profitable items.

It is likely too late – Sears has lost its special sauce.

Funny enough, their catalog dominance, would have worked in the internet space had they been attuned to the changing landscape.

The one question that is burning in my mind about Sears, is, why is Eddie Lampert still CEO?

He has not brought much, in the way of value to make this organization the cash cow that everyone predicted.

Investor Takeaways

  1. Be leery of companies that aren’t flexible
  2. Be leery of companies that don’t make money
  3. Totally avoid companies that don’t understand their competitive advantage

It looks like Sears will be following in the footsteps of many other retailers like Toy R US, Radio Shack, and American Apparel.

Do you think Sears, can make a comeback?  What would it take?

 

 

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