Sears Continues Sinking

Sears Continues Sinking

The recent news from Sears regarding more store closings, layoffs, leasing agreements with other retailers and capital raising efforts is a sign that the end is near for the troubled retailer, according to several industry experts. Few, if any, hold out any hope that the 128-year-old company can recover.

“I call Sears ‘the Titanic,’” says Robin Lewis is CEO of The Robin Report and co-author of The New Rules of Retail: Competing in the World’s Toughest Marketplace. “It’s taking a long time for it to sink, but it won’t be long now until it hits the bottom and stays there. In this day and age, where the consumer has hundreds of equally compelling brands and retailers at their fingertips and across the street, once you lose consumers, you aren’t going to get them back.”  

A recent report from Seeking Alpha claims that Sears Holdings Corp. is laying off at least 6,067 workers and closing over 110 Kmart, Sears and Sears Auto Center locations, many before Christmas. The company hasn’t commented on the accuracy of Seeking Alpha report, but the retailer announced it had closed 96 stores during the first half of fiscal 2014—more than the 93 locations it stuttered for the entire fiscal 2013 fiscal year.  

Gary Balter, a research analyst with Credit Suisse, recently wrote a research note about Sears Holding titled “Thinking About ‘The End.’” In the report, he writes: “Unless it sells off real assets while somehow maintaining the cash flow from those assets, this story is not likely to have a happy ending, and that ending continues to depend on suppliers.”

Sad spiral of retailing giant

Sears’ move to close stores and lay off employees shouldn’t surprise anyone. Revenue at the Hoffman Estates, Ill.–based company has declined for 30 straight quarters (that’s 7.5 years). It has posted losses of over $1.8 billion over the past four quarters, and its stock has lost more than a third of its value over the past year.

Lewis says Sears Holding Corp.’s CEO Edward Lampert is “managing the company down” by selling off assets and raising money. “He’s trying to keep it afloat as long as possible, but at this point, he’s just buying time.” 

Given the current state of Sears, it’s easy to forget that at one time it was the “unparalleled master” of retailing, according to Lewis. He dedicated an entire chapter of The New Rules of Retail to Sears, dissecting the retailer’s successes and failures. He points out that in the 1960s, Sears was the equivalent of today’s Walmart.

Sears was bigger than the next five-largest retailers combined with 900 large-format stores and more than 2,600 smaller retail and catalog outlets. It accounted for one percent of US gross national product, and more than half the households in the country had a Sears credit card. A survey at the time confirmed that the brand was the most trusted economic institution in the country.

“Interestingly, Sears was on the leading edge of vertical integration and total control over its value chain, a strategy we suggest is crucial just for survival today,” Lewis notes.

But then, the retailer’s success began to unravel. As Lewis writes in his book: “Though Sears spearheaded and built many of the early centers and malls, rising to its preeminent position as the largest retailer in the world by the mid 1970s, it ignored the new competitors, specialists and discounters alike, that were chipping away from every category of its business. It did not remain responsive to the changing consumer environment. Consequently, Sears continued to operate with a relatively high cost structure, failed to shed categories in which it had lost competitive advantage and began its slow descent in the early 1980s.” 

Lewis points out that between 1998 and 2010, the number of competitors within a 15-minute drive from any Sears grew from 1,400 to 4,300 stores. During this period, Sears stumbled with its e-commerce strategy, too.

“Competitors such as Walmart, Kohl’s, Target, JC Penney, Home Depot, Lowe’s and the multiplicity of specialty chains have a major advantage because of their lower operating costs and real estate flexibility,” Lewis contends. “Thus they gain more pricing leverage and greater profitability, as well as better proximity to the consumer.”

Sears had multiple opportunities to reinvent itself, but failed, Lewis says. “Decade after decade it tried to do something different, but they could never get it right,” he notes. Lewis says other iconic retailers such as Macy’s and Nordstrom succeeded where Sears has failed. “It’s just a matter of who comes in to lead them and who has the vision and evolve them into the next century,” he explains.

Efforts to boost liquidity

Sears is squeezing cash from every available turnip, Lewis pointed out. Last month, the retailer received an infusion of cash in the form of a $400 million loan from CEO Edward S. Lampert’s  hedge fund, ESL Investments. The loan is said to be securitized by Sears’ best real estate.

Earlier this month, it raised $168 million from selling Sears Canada stock to ESL earlier this month. And last week, it announced a $625 million bond offering announced, which ESL will also participate in.

Balter advocates Sears’ liquidation. “If the assets are worth that much, liquidate, as operating is taking over $10 a share of value away every year.”

These efforts to raise money have alarmed analysts, investors, and vendors. “Everyone is wondering if Sears needs nearly $1 billion just to get through the holiday season,” Lewis says.

In the meantime, Sears continues to lease its underperforming stores to other retailers. Earlier this month the retailer announced an agreement with Primark. The European retailer leased seven standalone stores totaling roughly 520,000 gross sq. ft. of retail space in mall-based stores located in the northeastern United States. Primark will take possession of the stores over the next 12 to 18 months.  

According to a statement from Sears, it will continue to have a significant presence in six of these locations with a streamlined store format of up to 100,000 selling sq. ft. at each store.

Primark is expected to open the first of these stores at King of Prussia Mall in King of Prussia, Pa. Primark will join DICK’s Sporting Goods as a subtenant of Sears. Primark will occupy over 100,000 gross sq. ft. on the lower level, while DICK’s Sporting Goods currently occupies approximately 75,000 gross sq. ft. on the upper level. Sears will no longer operate a retail store or auto center at King of Prussia Mall, which is owned and operated by Simon Properties Group.

Primark is also taking over Sears space in Staten Island Mall in Staten Island, N.Y. This mall is owned and operated by General Growth Properties. At this location, Sears will continue to operate in approximately 70,000 selling sq. ft. adjacent to Primark. Primark will lease approximately 70,000 gross sq. ft. and will join Lands' End as a direct tenant of Sears.

“These lease agreements with Primark illustrate how Sears Holdings is strategically transforming one of the largest retail real estate portfolios in the United States over time while continuing to operate its existing stores in large, but rationalized selling space,” said Jeff Stollenwerck, president of real estate for Sears Holdings.

Jason Lail, a research analyst with SNL Financial, says the closures of K-Mart, Sears, and Sears Automotive stores will have a bigger impact on class-B and -C malls and shopping centers than class-A properties. “The closures might be the nail in the coffin for some of these properties that are just barely hanging on,” he predicts. “Finding a replacement tenant will be difficult, if not impossible.”

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