4/17/2012 7:47 PM ET|
Why Sears is on its last legs
More store closings and key departures have some wondering if the long-struggling icon is finally going away. Despite turnaround efforts, it is dying -- slowly. Here's why.
Founded as a catalog business by a railway clerk in 1886, Sears firmly held its ground as an iconic retailer in the lives of U.S. households for more than a century.
Any kitchen in middle-class suburbia may well have a Kenmore appliance humming in the background. The car in the garage might fire up with a kick from a trusty DieHard battery. I'll always keep my Craftsman tool set as a reminder of my father, who gave it to me for a birthday present years ago. Besides, those tools are good.
Now though, thanks to a combination of neglect, mismanagement, a weak economy and the ever-changing dynamics of retail, the unthinkable may happen. After years on death watch, Sears Holding (SHLD) may actually fall -- joining the ranks of retailers like Borders and Blockbuster as mere entries in the archives of Wikipedia.
A new round of store closings was recently announced. Key executives are leaving. Sales have been in steady decline for years. These are not good signs.
"I don't think Sears is viable. I don't think they can survive in their current state," says veteran retail sector financier Howard Davidowitz of Davidowitz & Associates, who has advised retail greats like Wal-MartStores (WMT) founder Sam Walton over the years. "Too many things have gone off track. Too many customers have been lost, and it's too expensive to bring them back."
A turnaround that tanked
In short, under the management of hedge-fund kingpin Eddie Lampert of ESL Investments, which took over the show in 2005, a lot of sins have been committed at Sears. Redemption may not be possible.
"It's too late. Something different has to happen to the company, and I honestly don't know what it can be," says Davidowitz.
Goldman Sachs analyst Adrianne Shapira has a $27 price target on Sears stock, which recently changed hands for $59. In other words, Shapira is forecasting a decline of more than 50% from here -- because she's not convinced a turnaround will play out, despite a smattering of reforms by the retailer.
Of course, Sears has a different view. The company believes using technology to improve the shopping experience, such as arming sales staff with iPads to carry out research on the floor for customers, a new loyalty program called "Shop Your Way Rewards," and improving merchandise, among other things, will bring its core customers back.
And there's value in those powerful brands: Craftsman, Kenmore, DieHard and Land's End. As for bankruptcy -- a clear risk at a retailer that's posted six straight years of sales declines -- Sears believes financial wizardry will keep the wolf from the door.
Some investors agree; Sears was actually the best performing S&P 500 stock in the first quarter of 2012.
They may be right, but such financial wizardry -- or the use of tactics like asset sales and balance-sheet adjustments to drain off cash -- goes only so far. It's also a big part of what got Sears in trouble in the first place.
For the past seven years, Sears and Kmart (also owned by Sears Holding) has been in the hands a of hedge fund manager whom many consider to be a financial genius, Eddie Lampert.
The problem is, he's been treating Sears more like a hedge fund than a retailer, say critics. And that simply doesn't work in the highly competitive world of retail. Instead, it leads to one sin after another, and the sins build on each other until - poof! -- an iconic retailer hits the endangered-species list.
Now, I don't think Sears will go bankrupt or close its doors overnight; Lampert has the financial clout and skills to keep it going. More likely, the retailer may simply keep getting whittled down, as Lampert continues to hive off stores, leases, brands and other assets to try to deal with ongoing sales declines. Sears announced 120 store closings late last year, and more than 60 more last month.
But in retail, you can't shrink your way to success. This is why retail experts like Davidowitz now question the viability of Sears.
Here's a look at the five sins of Sears, and how the company is trying to repair the damage.
Sin No. 1: Cutting investments in stores too much
Soon after taking over, Lampert started reducing investments in stores to support cash flow at a time when the recession was hitting cash flow hard at many other companies. From 2007 to 2009, capital investments at Sears declined 37% to $361 million, but cash flow held steady. This may have been some great financial wizardry, but it left stores in shambles -- and customers noticed, say critics. They stopped going.
"Lampert said it was a bad investment to invest in the stores," says Paul Swinand, a Morningstar analyst who covers retail stocks. "That's like saying in the airline business, it's bad to buy planes. That's the wrong way to run a business." in 2010, Sears was investing an industry low of $1 to $2 a square foot in stores, calculates Swinand.
Lampert used the cash to buy back Sears stock, and a lot of the purchases were at prices much higher than where it now trades. "Sears, Kmart -- they're both wrecked," says Davidowitz. "This was a guy running a hedge fund, not a retail company. The long-term impact of what he is doing is catastrophic."
As another way to generate cash, Lampert has sold off several of the better Sears stores, says Columbia Business School professor Mark Cohen, who was CEO of Sears Canada until mid-2004 and chief marketing officer and president of soft lines in the U.S. before that. A lot of the remaining stores are in economically challenged areas, or in older, declining malls. "Most retailers have come out of the recession with some manifestation of recovery," says Cohen. "But Sears continues to decline, and there's no reason why it should show any positive performance because there's been no strategy or investment. This has been an asset strip."
In fairness to Sears, capital spending has picked up 23.4% over the past two years, to $432 million last year, points out David Trainer of New Constructs. Trainer still considers Sears a dangerous stock because of poor returns on investment and because shares look expensive, given the company's prospects, after such strong performance this year.
Sin No. 2: Prices that are too high
Another problem for Sears is that it rarely offers regular discounts and low pricing like Wal-Mart and Target (TGT) do. "Lampert decided that price doesn't matter; he's going to go for profit margin," says Davidowitz. "In retail, you don't start with profit margin, but in Lampert's world you do. So Sears was not price-competitive and still isn't." Again, customers noticed and went elsewhere.
"We believe it is not just solely about price when it comes to value to our customers," responds Sears spokeswoman Kimberly Freely. Sears also provide value through special offers inside a membership program, a guarantee to process returns in five minutes, free shipping on some products at certain times and "best in class brands at both Sears and Kmart."
Sin No. 3: Hiring CEOs without solid retail experience
Sears needs a CEO with solid retail experience to shake things up by clearly defining a direction and trying out new concepts in test stores, says Davidowitz. Instead, the CEO who joined in February 2011, Louis D'Ambrosio, comes from Avaya, a tech company. Before that, he worked with IBM (IBM). "He has no retail experience, and there's no reason to believe he is anything more than the latest puppet," says Cohen, at Columbia Business School.
Before that, Sears had an interim CEO for a few years, W. Bruce Johnson, who was promoted from inside the company, where he was in charge of supply chain and operations -- more of a tactical than a strategic leadership position. Sears has also had a lot of top management turnover in recent years, which also makes it more challenging to set a clear strategy, says Morningstar's Swinand.
In defense of Sears, it recently put Ron Boire, a solid retail veteran, in the position of chief merchandising officer. Boire had been the CEO of Brookstone and the president of U.S. Toys, North America for Toys R Us. He had also worked in Sony's (SNE) consumer division.
Sin No. 4: Regular sales declines
A combination of the sins above, plus a weak economy, has led to the cardinal sin in retail -- regular sales declines. The key metric to watch in retail, says Davidowitz, is "same-store sales." This gauges sales at stores open more than a year, to strip out the effect of store openings and closings. "That is the most important thing in retail. It proves your viability," says Davidowitz.
Unfortunately, Sears' same-store sales have been in decline for six straight years. The trend continued in the fourth quarter, when U.S. same store sales fell 5.2%. "In other words they are shrinking their market share," says Davidowitz. As a result, the company lost $4.52 per share last year, after accounting adjustments.
In its most recent conference call, Sears outlined several tactics it believes will help reverse the negative trends. It's "arming" sales associates with iPads so they can better help customers figure out which products are right for them. This makes sense with big-ticket appliances. Sears is rolling out a shoppers' loyalty program, and new Kenmore and Craftsman products. It's revamping store layouts to mix up merchandise so that customers who go in for one thing pick up other stuff as they move through stores. Work clothes, for example, have been moved closer to tools.
And Sears' customer-satisfaction level has been improving, says Claes Fornell, a University of Michigan business school professor who tracks these things. But that might be because the most dissatisfied customers have mostly left, which mathematically pushes up the average ratings of remaining customers who are polled, says Fornell. Still, it's a reversal.
Sears also recently announced it is hiring Leveraged Marketing of America to explore how to extend its popular Kenmore, Craftsman and DieHard brands to new products and new regions of the world.
Despite all these efforts, things don't look good for Sears, say analysts. A sluggish economy, a weak appliance market and high gasoline prices, combined with Sears' self-inflicted wounds, suggest sales will continue to shrink at least this year, if not beyond, they say. Wall Street analysts predict a 5% overall sales decline this year and a 2% decline next year, according to Thomson Financial.
Sin No. 5: A credit scare
Those weak sales trends have been worrying Sears' lenders. Back in December, Fitch Ratings downgraded Sears' debt, explaining that those weak sales, and the possibility that one measure of cash flow could turn negative this year, may force Sears to increase borrowing. Fitch also cited "competitive pressures, inconsistent merchandising execution, and the lack of clarity about the company's longer-term retail strategy." Then in January, a financial firm called CIT Group (CIT) said it would stop acting as an intermediary between Sears and its suppliers.
This was bad news, because small developments like these can quickly snowball, drying up credit for a retailer, says Davidowitz. Lampert reacted quickly. He announced the sale of 11 stores, the spinoff of Hometown and Outlet stores, and improvements in inventory management. Together, these steps should raise mroe than $1 billion. "Lambert's reaction the minute trouble started was magnificent," says Davidowitz. "No one has ever accused him of not knowing finance."
But it also may foreshadow what really may be in store for Sears, as those negative sales trends continue.
So what's the endgame?
Sales trends suggest Sears is dying. Current efforts could turn it around, but the recent track record isn't good, and a big part of the game plan remains store and asset sales to generate cash. Tellingly, a big part of the most recent conference call with investors covered this kind of financial wizardry, as opposed to the basic block and tackle of retail.
"I think it all comes apart. It dissembles," says Cohen, the former Sears Canada CEO. "(Lampert) will continue to sell off pieces and parts. There is no meaningful strategy to manage the business successfully in any conventional way."
That kind of scenario won't necessarily help shareholders. But another option might. Swinand, at Morningstar, thinks Lampert could eventually take Sears private to try to fix it up inside his hedge fund.
Such a move would mean a premium for shareholders as Lampert buys their stock.
The catch is, there's no telling how much the stock might sink between now and when this scenario plays out, if it does. So there's little point in buying Sears now, hoping the stock will jump in a take-under.
For shoppers, the hedge-fund manager's financial wizardry may mean your neighborhood Sears will disappear. They won't all go at once, but they're already going. Of course, retailers go away all the time.
But icons shouldn't.
At the time of publication, Michael Brush did not own shares of any company mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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I've been reading these comments being that I am a Sears employee currently. I've been an employee for 7 years. I was there before the merger with Kmart.We are not happy with no company leadership nor values. I try to give the best service I can for each and every customer that enters my area. I say hello as soon as see someone enter and thank them when they leave. True, working there is a very hostile work environment.For some of us, Sears is all we have for employment. I'm turning 40 this year and where i live, unemployment is through the roof. I apologize to everyone whom has had a bad experience. There's not a company on earth that can please everyone. i read that we employees don't know the products. Sears fires and hire so quickly because the demands for getting numbers is so intense. How is someone supposed to know the stuff if they are new? Plus, if you are asking a cashier about something, then obviously you are going to get a response you will not like. Floor people are the ones to ask.
Sears is dying and we employees know it. I presented ideas on how to change things and it was quickly dismissed. The people in the Sears Tower have no idea what goes on in the stores. But, they care less about the work staff than the consumer. You try to survive on a 14 hour work schedule making $6 plus commision with child support , utilities, and rent. Finally, Sears employees are also customers. So, we understand your points better than most because we get it from both sides of the fence.Consumers come rarely to shop,but we employees are there as our schedule permits. So, if you don't like sears, then I'm truly sorry to lose you as a customer. 130 years of being a retail icon are ending. Without Sears, there wouldn't be Discover card, Kenmore, Craftsman, Allstate insurance, the catalog, etc..What has Walmart provided society but a gateway for the chinese government to grow? I'm not here to defend Sears. I'm here to defend the workers who get beat up , day in and day out, to make $6 and try to make customers feel important when they visit. Instead of trying to be walmart, Sears needs to protect and defend the legacy of 130 years in business.
Sears was the store for young couples starting out, because it was easy to get credit there. It helped a lot of families establish credit. The prices were reasonable and the Sears branded products were reliable.
Sometimes companies just lose their way. It happens when outside managers are brought in who had success as cola managers or in some other unrelated business. There is no incentive for low level managers to excel, because the top jobs will go to outsiders. The fault lies with the company directors, who have zero experience in the business.
Sears used to get a lot of our family's money. Almost all of our tools, appliances and equipment were purchased there. And then like everybody else, they started shipping their jobs overseas, and the quality went downhill.
The first time I noticed it was when a friend of mine and I were stripping down his Cadillac 500 engine. He pulled out his brand new set of Craftsman socket wrenches, and attempted to loosen an exhaust manifold bolt with a 1/2" drive wrench. It broke on the first turn. He switched to his slightly smaller 3/8" drive, thinking the other wrench might just be defective, and that one broke on the first turn. He then got into his toolbox and pulled out an OLD ('50s or '60s) Craftsman 1/4" drive socket wrench that his father had given to him; and wouldn't you know it, we finished stripping down the majority of that engine with that tiny little quality made American product.
I could go on and on about the crappy made snowblowers and lawnmowers, and horrible customer service that they are churning out nowadays, but everybody else seems to be doing a good job of that already.
We all need to start demanding that these companies start bringing these jobs back home. This country was prosperous once, and it was because we manufactured our own goods (we even EXPORTED!!! Can you believe that?!) But we can't just build these things here, we need to give a damn about what we're building. People need to start caring about the effort they put into things again, and they need to re-learn about the true pride of accomplishment in creating quality goods.
And these little pukes behind the service counters need to get off their iphones and start learning about the products they are selling. 'Nuff said.
I worked at Sears over 30 years ago. Back then, a customer could walk into a store and get personal help for as long as he/she needed it... no employee looking at a watch, acting bored, talking with another employee... just flat-out good customer service. We were told our customers paid our salaries, and we sure as heck took that to heart. We really liked helping our customers, seeing them enjoy their shopping time with us, and getting to know them as friends.
I bought a lot of furniture back then, and I still have most of it. Heavy wood, it has really lasted throught the years. I can't find anyone who sells furniture like that now. No one. I also bought some of the most beautiful, well-made clothing then, too. Excellent quality. That was Sears' best selling point... the finest quality. "Satisfaction guaranteed or your money back."
Those in charge of Sears now might as well be conducting business down at the city dump. AND I hate how citibank took over the Sears credit card. The interest rates are sky-high, and if everything isn't followed to the letter, you can be hit with exorbitant rates and fees. I always pay about 5 times the minimum payment, yet, since I made one out-of-town payment one day early and didn't realize I preceded the billing cycle's end by that one day, I was slapped with a non-payment fee, some other kind of fee, and a threat of being turned over to collections. I had the credit card for 35 years!!! Never late, ever, and they treat me like this!
I was going to cut the card up and mail it back, telling them to stick it where the sun doesn't shine, but I figured they would get me on some kind of harrassment thing. So... I am going to use it once a year, to charge the smallest thing I can find. Then, I am going to turn right around and return the item. The card will show activity, but they won't be getting a dime from this old lady. I won't mind seeing the last of the "new" Sears. The sooner, the better.
And now Lampert is buying a $40 million dollar mansion off the coast of FL, he has no care about anyone but himself. He won't listen to complaints, there was one lady on a forum who bravely went to Chicago to one of the annual meetings and she pointed out everything that was wrong and what needed to be done. That lady had worked for Sears for a long time, a lot of good it did her, I admire her for being so brave to confront the top man of the company. Sadly, Lampbert did as he always does, pay no heed to those who are dealing with the customers; because money and being called a so called 'genius' has put him at the head of a company he has no business being in. The lady is no longer working for Sears, because you can't talk to someone who won't listen and make needed changes. Sears is over with and hedge funders are nothing but thieves; taking away the lives of those who really do work hard to take care of customers. Because no will stop them of what use is it?
Someday, it will all catch up and it's not going to be pretty.
As a (thankfully) former Sears manager I was told to make sure that none of my employees reviews were more than meets expectations, this way they got a low raise if any. Sears is notorious for telling employees they are giving them something good while taking something else away. Sears employees live at poverty level if that.
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