The Rougher Side of Sears

Perhaps no single brand had a holiday season quite as rocky as Sears. When the retailer announced a string of bad news on Jan. 9, shares of Sears Holding Corp. (which includes both Sears and Kmart) went through the floor. Holiday sales at Sears stores were down 9.2% in the nine weeks prior to Jan. 6, a brutal figure when you consider that overall retail sales were up slightly over the holidays (which I’ll discuss more in my next column).

As we know, it’s not as if this is a blip on the radar screen: Sears Holding Corp. reported an adjusted loss of somewhere between $811 million and $914 million in 2013, and Sears (and, to a lesser extent, Kmart — which was, by the way, down 5.7% itself over the holidays) has been seeing declining sales ever since the Sears-Kmart merger in 2005.

Considering the fact that Sears and Kmart have been struggling for some time now, I think it’s noteworthy that these numbers are so bad that they did more than raise eyebrows — they made headlines. To me, the overall trajectory of the brand is so negative that it might be time to start asking hard questions, such as whether or not vendors will continue to work with Sears if the disappointments continue.

How did it come to this? While there are a lot of moving parts that contribute to the success or failure of any retail brand, one piece that jumps out at me with Sears and Kmart is that the company has been run less like a true retail operation and more like a real estate owner and developer for years now. What I mean by that is, because they own many of their locations, the value in the brand is largely in the real estate itself. Because of that, they can continue to sell off assets and not only maintain some cash flow, but actually make some money doing it. They have been doing some downsizing, leasing out some space to different retailers and selling some properties — focusing on the value of the real estate instead of the consumer value of the brand. I think it’s worth wondering if this real estate investor mindset and the market challenges don’t disincentivize them from being a good retailer. It’s clear that both the Sears and Kmart brands have suffered mightily. Another question (perhaps the question, with regard to the future of Sears) is this: how long can they continue selling off and repositioning assets? Won’t they, at some point, run out of real estate?

From a retail perspective, things look pretty gloomy. In contrast, for all of J.C. Penney’s much-discussed inconsistency in the last year, it has been obvious that the retail brand is working hard to reinvent and reinvigorate itself. I don’t see nearly as much evidence that Sears and Kmart are investing that kind of energy or resources in similar efforts. The consumer experience at both of those brands remains uninspiring. Kmart has made efforts to bring in new brands and promote mobile shopping, but it remains a distant third in its category. Sears has done even less when it comes to differentiating themselves from the competition, with predictably negative results.

In an environment where the brick-and-mortar experience has got to be good to compete with online sales and to remain competitive in a rapidly evolving marketplace, the frankly glum Sears consumer experience might be the last straw. Sears’ only real remaining strength — tools and appliances — can just as easily be purchased from a Home Depot, Lowes or, in the case of appliances, a consumer electronics store.

If the Sears struggles continue and the brand continues to sell off or reposition assets, what does it mean for retail real estate? I believe the broader real estate market will continue to absorb the added square footage coming on to the market without any real price fluctuations. These are, generally speaking, high-quality and fairly desirable sites, and, since commercial real estate prices held even in the midst of the recession, I doubt even a Sear/Kmart catastrophe would make much of a dent. I do think it’s clear that, to avoid that catastrophe, Sears needs to do some serious thinking about how viable their retail model is going forward — if they have any chance of surviving in the long run, they need to start to focus on operating as a viable retailer again.

That’s my take on this tough situation — what’s your prognosis? And, if you were the doctor and Sears was the patient, what would your prescription be? Is there any chance of a full recovery or is the outlook as grim as it looks? Leave a comment below to continue the conversation, or email me at jeff@jeffgreenpartners.com.


Click here for past columns by Jeff Green.

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