Sears Holdings Corp. (SHLD, Financial), the operator of the Sears and Kmart chains, has been dying for a long time. Efforts to turn around its once mighty department store operations have failed consistently to alter a decades-long downward trajectory. The rise of Walmart Inc. (WMT, Financial) in the 1990s disrupted all of retail, and department stores were major victims.
Sears was certainly not the only one to be devastated by Walmart’s ascent to dominance. Indeed, Kmart had been an early victim, and was scooped up by Sears in what has ultimately proven to be a vain attempt at copying the Walmart model.
Now, Sears is facing imminent bankruptcy. Let’s take a look at the death of Sears and see if we can draw some useful insights to inform our future investing strategy.
End of the line
Facing billions of dollars in losses and closing thousands of stores to conserve rapidly depleting cash, Sears has spent the last several years and months in a desperate fight for survival.
On Monday, Oct. 15, the struggling company will likely face the end of the line. That is the deadline for a $134 million debt repayment. As of Aug. 4, Sears had just $193 million in cash, but its chronic losses have likely whittled away at that figure in the two months since its last regulatory filing. At the time it did still have access to a further $269 million from lenders, but even that now looks insufficient to keep the lights on much longer.
The long twilight struggle
CEO Eddie Lampert has been trying to lead a last-ditch restructuring of Sears’ $5 billion debt load, but those efforts have thus far proven insufficient. And the signs of imminent bankruptcy are getting clearer.
On Oct. 11, Sears shares fell 30% on reports that it had stopped paying vendors, a clear sign of the end, which follows on from an Oct. 10 report that the company has hired advisors to prepare a bankruptcy filing.
It seems as if there is no way out for Sears.
From leader to imitator
In the 1990s, the company, like the whole department store industry, was reckoning with the rise of Walmart. It was uncomfortable position for a company that had spent a century at the cutting edge of retail innovation, as Crain’s recently reported:
“Like so many established companies threatened by newcomers with innovative business models, Hoffman Estates-based Sears tried to beat the interlopers at their own game, rather than looking ahead to the next big thing. The company that recognized the potential of railroads to support a nationwide retail operation and foresaw that postwar suburban sprawl and shopping malls would redefine retailing for a new generation failed to appreciate the implications of internet technology for the industry it dominated for more than a century.”
At the time, Sears made the fateful decision to try to emulate Walmart’s success. It is readily apparent the company did not succeed in that effort.
It didn’t have to be like this
As analysts and commentators prepare their eulogies for Sears, it is worth taking a moment to consider how things might have actually turned out differently. Indeed, its decision to try to emulate Walmart, rather than to look to the next stage of retail’s evolution, may have doomed the company. Instead of emulating Walmart, it might have found new life by doing what another disruptor, Amazon.com Inc. (AMZN, Financial), eventually did:
“Sears stores were still throwing off gobs off cash in those days, and the company still had access to outside capital on favorable terms. Lampert could have deployed those resources to build a top-flight e-tailing operation. Maybe Sears wouldn't have overtaken Amazon as king of e-commerce, but it could have been a strong contender—an online Target to Amazon's digital Walmart. More importantly, it could have positioned itself to profit from the industry's evolution.”
Sears had the resources and know-how to take the plunge into the online retail market. But rather than investing in the future, it opted to spend its cash on share buybacks.
A lesson to others
If Sears had looked to the future instead of settling into a comfortable cash-producing rut, it might well be bigger than ever, a true business titan of the 21st century. But Sears did not do that, and now it is a withered husk bound for the grave.
Lampert is undoubtedly a major factor in the death of Sears. As a private equity operator, he took over Sears as it was struggling hopelessly against Walmart. But rather than try to modernize the business, he chose share buybacks. In the course of just five years, he bought back $6 billion in stock. That money could have been deployed for growth. Instead, he chose to starve his brick-and-mortar operations and did nothing to address rising disruption.
The key lesson is this: A profitable business that spins off loads of cash or is engaged in an aggressive buyback program can look very appealing to a value investor, but it is vital to recognize whether such actions are sustainable or just robbing the future to pay for the present.
Sears is an object lesson in how a profitable company with huge brand equity and market power can be disrupted and driven to ruin. Good management is always key. No business can run itself, no matter how good it is.
Disclosure: No positions.
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