The Best Move to Save This Retail Dinosaur

For an industry facing trouble from disruptive technology, there are few answers. Traditional retail, one such industry, is under attack by the Internet. With the rise of the e-tailer, we have seen the most successful bricks-and-mortar survivors emerge as either wholesalers or niche players. It seems that the world has little room left for anything in between. This is the reason we're seeing some of the oldest, most respected brand names desperately reinventing themselves. The question is: Who will succeed, and who will go extinct?

Giant mall foyers
Once the pride of many a mall and shopping plaza, Sears Holdings (Nasdaq: SHLD  ) is a vague imprint of what it used to be. It's not all the company's fault -- it's the victim of a changing world. Sears, its subsidiary Kmart, and competitor J.C. Penney (NYSE: JCP  ) have all felt the sharp pain of innovation.

Investors followed the trend that consumers set and have fled both companies -- declaring them dead only a few years into the "AA" (After Amazon) age. Only a brave and optimistic few have stayed around to flex their creative and financial muscles in hopes of reviving these flatlining organizations that now serve as enormous entryways into the mall.

When in doubt, condense
It's a mantra not often heeded in the corporate world, but it should be. Age-old companies facing new challenges are too often reluctant to slim down and rebuild. Eddie Lampert, who draws both strong praise and fierce criticism, has been at the helm of Sears for quite some time now and has been slowly slimming the ailing company down for as much time. In his boldest move yet, Lampert is spinning off the Sears Hometown and Sears Outlet lines, as well as some of Sears' hardware stores. Announced in May, Sears will also be selling off part of its Canadian operations.

Cumulative sales from the Hometown and Outlet stores year over year were relatively flat for 2011 -- ticking down from $2.35 billion to $2.34 billion. The company has some strong lines, one of them along with its well-respected hardware brand, Craftsman, but the company's old-fashioned policy of selling sweatshirts emblazoned with wolves in the snow just wasn't cutting it in today's fast-fashion world.

The move to spin off will further slim down Sears into a more manageable beast while raising up to half a billion dollars, with which Lampert will invest in (hopefully) more profitable areas for the company.

Investors have responded positively to the move -- as of Monday, the stock was trading up more than 3%. Sears' stock is trading nearly twice its 52-week low, but it's far from its high of near $90 per share.

Anything to stop the bleeding
Sears and J.C. Penney are both trying to tie the tourniquet above the wound inflicted by companies such as Amazon.com (Nasdaq: AMZN  ) . While inventory issues, too much real estate, and "showrooming" have kept the former companies down and out, Amazon has avoided every problem bricks-and-mortar stores have faced by being a nimble, though giant, retailer.

Many are critical of Lampert's efforts with Sears, saying he is draining the company for whatever it's worth to get back his investment. I find that unlikely, as Lampert could have done that quickly and made an exit before the retail environment eroded further. Instead, I believe he is trying his best to get this company back on stable ground on which he can build a new, refreshed Sears. It's no different from Bill Ackman and Ron Johnson with J.C. Penney -- though the two companies are taking vastly different approaches.

Hedge fund activist Ackman and former Apple retail chief Ron Johnson aren't using the cutting method -- instead, they're reinventing JCP in hopes of making it yet again a retail destination. Fellow Fools have outlined their efforts in previous articles.

I can't say with certainty which path will yield better results. J.C. Penney reported weak earnings for its most recent quarter and appears to have a long, tough road ahead as it executes Johnson's turnaround vision. Though with stories like J.C. Penney and Sears, it takes time for value to be realized. Quarter-to-quarter monitoring will only confuse and depress, and ultimately waste one's time.

Foolish bottom line
Sears' future is still in the air, but I believe this spinoff is the smartest move yet for the company. Let Lampert slim down the operations so he can focus on reinventing the brand and deriving profit from the company's real estate holdings. It may not be enough to save the company in the long run, but it's certainly the best thing to be doing now. The new company will trade soon under the ticker "SHOS."

Amazon and its peers are the future of mass retail. It's simply undeniable. That doesn't mean other players can't find profits in the space, but if you want a macro-focused bet on the industry, the e-retailer is the best place to start. In this free report, our analysts explain the benefits of Amazon and another successful retail company that could be of major benefit to your portfolio. Read it here.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter, @MikeyLewy. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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