Investors can learn a lot more about losses then they can from gains, which is why I like to perform post-mortems on companies that fail.
More than anything else, this helps me build a mental picture of what factors are most likely to cause problems at a company and what red flags to look for when assessing potential investments.
Sears (SHLD, Financial) is the newest company to make it onto this list. Many different catalysts can be blamed for the company's downfall, but there is no one primary reason why it has failed.
Stuck in the past
The most common reason being cited as to why the company collapsed is that it struggled to keep up with the changing world, letting Amazon (AMZN, Financial) and other online retailers grab market share while relying on its time-tested business model of operating large stores in malls.
This was just one part of the puzzle. Yes, the company should have shut more stores and invested more in its online offering, but at the same time, other parts of the business such as its valuable homeware brands, auto centers and real estate remain attractive businesses in their own right.
Analysts are also blaming hedge fund manager Eddie Lampert for the company's collapse. Lampert, who was once lauded as the next Warren Buffett (Trades, Portfolio), has presided over the company's demise and is its largest creditor. Over the past few years, he has sold off assets and tried to shut as many stores as possible to help the group survive as long as possible. He has been accused of stripping the company bare for his gain and being the wrong man for the job. He is a hedge fund manager, not retail man, critics say, which is a fair assertation.
However, is it fair to say that an experienced retail manager would have been able to extract a different outcome? Looking at the state of the rest of the retail industry, I'm not so sure.
Something else at play?
The arguments that Amazon.com and lack of experienced management are to blame for these company's collapse have merit, but there is one overarching factor that encompasses both of these that seems to have had a more significant impact on the failure of the firm: size.
Sears was, at one point, the most prominent retailer in the U.S., employing close to 350,000 people. Trying to restructure such an enormous beast would have been a tough task for even the most experienced managers. The nature of the retail industry, with lease and supply agreements, means any efforts to restructure will always be limited by the restrictions enforced by other stakeholders. Size isn't always a desirable factor. It defines a company's ability to change and adapt. And Sears isn't the only company facing size-induced problems today either. General Electric and IBM are also struggling to remain relevant. Size has limited their ability to address fundamental changes to the underlying businesses.
A different outcome?
We can try to speculate whether Sears's story might have had a happy ending if certain factors had worked in the company's favor. For example, if the group had zero debt, it might have been able to invest more and certainly wouldn't have wasted hundreds of millions of dollars, which could have been spent on innovation, paying off creditors.
Overall, this seems to be a situation where the outcome is a result of many different factors. Mismanagement, too much debt, a lack of investment, over-expansion and overconfidence have all contributed to the company's problems.
The good news is, Sears's collapse is a boon to the rest of the retail industry. One less competitor in the market will mean a more significant share of the pie for competitors. It might be a bitter pill to swallow for some, but the collapse is an overall positive for the oversupplied U.S. retail industry. It probably won't be the last either.
Disclosure: The author owns no share mentioned.
Read more here:Ă‚
Sears Is Now Under $1; What I Said About It Two Years Ago in My Book “Invest Like a Guru”Â
