Unfortunately, the reports are true. Sears Holdings (NASDAQ: SHLD) has become the worst retail stock in the universe. The iconic American brand’s share value fell to $15.03 after reports that its same store sales fell by 9.2% in 2015.
For those of you unfamiliar with it, Sears consists of two famous American retailers: the discounter Kmart and the legendary department store operator Sears. Both brands have been struggling for years, but the company is now facing what amounts to a collapse.
Same store sales fell by 6.9% at Sears and 7.2% at Kmart during the fourth quarter of 2015, The Christian Science Monitor reported. That prompted the company to announce plans to accelerate store closings and to sell $300 million worth of assets, mostly real estate, to keep afloat.
Sears is currently planning to close around 50 stores, but it could shutter even more. Keeping up with store closings at Sears can be difficult because the company refuses to list the total number of stores it closes. Instead, it announces closings individually in an attempt to keep investors from seeing the extent of its problems.
Sears’ Nightmare Numbers
Nobody who looks at Sears’ financial numbers will be fooled by that trick. The latest earnings report from October 31, 2015, is a horror story that contains some figures that are hard to believe.
The last batch of Sears numbers are a nightmare that contain such frightening statistics as:
- A diluted earnings per share ratio of -6.766.
- A net income of -$708 million (€624.48 million) on revenues of $25.94 billion (€22.03 billion).
- A profit margin of -7.9%.
- A free cash flow of -$1.288 billion (-€1.14 billion).
- -$1.499 billion (€1.32 billion) cash from operations.
Judging by these numbers, it looks as if Sears is losing money every time it opens the doors. Now for the truly frightening part: Sears is about to get worse. Media reports indicate it had a terrible fourth quarter of 2015, meaning that when the company announces its numbers on February 25, 2016, they are going to be even worse.
It is easy to see why Sears’ share price fell from $33.75 (€29.77) on February 10, 2015, to $15.03 (€13.26) on February 10, 2016. That means Sears lost more than half of its share value in just a year.
To add insult to injury, Sears lost more than two thirds of its market capitalization during the same period. On February 10, 2015, Sears had a market capitalization of $3.611 billion (€3.19 billion); by February 10, 2016, Sears’ market cap had plummeted to $1.604 billion (€1.41 billion). These numbers alone would make Sears awful, but revenue actually makes it far worse.
In the third quarter of 2014, Sears reported a TTM revenue of $33.69 billion (€29.72 billion). By October 31, 2015, that number had fallen to $25.94 billion (€22.88 billion). That means Sears’ revenue fell by $7.75 billion (€6.84 billion) in just one year. Sears has become the worst retail stock in America and perhaps the world because it lost around $1.9375 billion (€1.71 billion) in revenue, nearly $2 billion, a quarter over the course of a year.
Releasing these numbers on October 31, 2015, was an appropriate move. The numbers are truly a horror story.
What Went Wrong at Sears
Most observers blame the problems at Sears on the company’s CEO, Eddie Lampert. Lampert is a veteran hedge fund operator who has little or no experience or interest in retail. To make matters worse, his involvement in the day-to-day operations of the company seems to be minimal.
For example, Lampert lives in Connecticut, while Sears’s headquarters is in Chicago—making for a commute of 837 miles (1,345.41 km). To make matters worse, Lampert is actually something of a recluse who seems to be afraid of actually going to Sears. Unlike Walmart’s C. Douglas McMillon, Lampert has never been known to walk the stores at Sears or Kmart or talk to customers or employees.
Instead, Lampert’s major means of communication with his employees seems to be the long, rambling, and confusing blog entries he posts in the Sears Holdings Alumni Newsletter. A glance at these incoherent writings will tell any observer why Sears’ employees regard Lampert as a bad joke.
Nor does Lampert seem to have any grasp of basic retail operations. Triple Pundit reported that he required his associates to carry iPads on the sales floor when most of the staff said the gadgets were unnecessary.
Instead, Lampert’s strategy for Sears appears to be selling off assets. For example, he’s transferred much of the company’s property to a real estate investment trust called Seritage Growth Properties (NYSE: SRG). Divisions of the company, such as Sears Canada, the Land’s End clothing line and Sears Hometown & Outlet (NASDAQ: SHOS), a chain of mostly franchised appliance stores, have been spun off into independent publicly-traded companies. It is not clear how this asset stripping helps Sears, but Lampert apparently thinks he can make some money from it.
Failure to Keep Up with the Competition
Beyond Lampert, Sears seems to have failed to keep up with developments in American retail. Its management was repeatedly caught off guard by aggressive competitors with innovative new business models.
This first happened with Walmart’s deep discounting in the 1980s and 1990s, then with home improvement stores like Lowe’s and Home Depot and the club store Costco in the last decade and finally with Amazon.com in recent years.
Sears failed to develop a coherent strategy for dealing with these challenges, possibly because it combines two very different chains. Sears is an old-fashioned department store catering to middle-class customers with largely mall-based operations, while Kmart is a giant discount outlet similar to Walmart that sells to a working-class clientele.
Is Sears’ Business Model Out of Date?
There’s also a strong possibility that Sears’ business model is out of date. Sears department stores traditionally combined several different kinds of retail operations, including an auto center, men’s and women’s clothes, appliances, hardware, electronics and shoes.
Americans became used to shopping for these items at different specialist stores. More recently, Amazon provides a much larger selection at very low prices and the added convenience of not having to go to a store to shop.
Income inequality and the well-documented decline of America’s middle class also played a role in Sears’ woes. Average Americans have less disposable income, so they are shopping less and doing more bargain hunting. That environment favors discounters like Walmart and Amazon, not department stores like Sears.
How Bad Management Is Killing Sears
Finally, Sears and Kmart suffer from bad management on almost all levels as anybody that visits one of their stores can attest to.
Kmart stores in particular are cluttered and understaffed and offer higher prices than competitors like Walmart and the various Kroger grocery stores. Sears stores seem to be stocked with a confusing variety of merchandise nobody seems to be buying. Another detriment is the presence of questionable amenities such as a shoe department that nobody seems to visit.
Perhaps business school classes of the future will study Sears as an example of retail failure. The company is already a textbook example of a terrible stock as well as a failed retailer. Sears is definitely the worst retail stock in existence today.