The Everlasting Problem for Sears Holdings

Sears Holdings released quarter-to-date performance results that were less than impressive. The biggest problem for the company moving forward is not one that can be easily resolved.

Jan 22, 2014 at 2:32PM

Sears Holdings (NASDAQ:SHLD) has a problem with demographics. Like some other brick and mortar retailers, it is losing customers to online retailers like Amazon (NASDAQ:AMZN). The biggest issue for Sears Holdings moving forward is that its loss of customers is not a problem that can be easily solved without substantial changes.

Part one of the problem
During the holiday shopping season, I walked through the Sears store on my way into the mall (since it self-admittedly always has parking) and overheard a conversation between a cashier and a customer that summed up the reasons why Sears is struggling. After ringing up a snowblower belt, the cashier asked for the customer's email, to which the response was: "I don't got one of those."

Sears' customer base is aging, and the more affordable marketing methods that work to attract a younger consumer base cannot be utilized to reach a generation of consumers without regular Internet access. The access to Internet, unfortunately for Sears Holdings, is not the only obstacle that they face, as the larger problem seems to go beyond the more tangible reasons like lower prices and convenience that give insight as to why consumers shop online. What Sears is lacking is broader support from a younger and more active population.

Part two of the problem
The first part of solving a problem is admitting that there is a problem to start with. Marketing research is continually being evaluated and applied to make Amazon even more appealing to its customers. Examples like innovative ways to get purchases delivered more quickly, such as drone deliveries and 'anticipatory' shipping, demonstrate that the company is responsive to the desires of the consumer base. Amazon is continually adapting to better its business, and customers notice these efforts.

Sears Holdings is not making the changes to address consumer concerns, and in turn the company is further wearing away at its already diminishing customer base. Instead of recognizing the need to significantly expand outreach to younger consumers through both directed marketing and expanded online sales, it proudly admits its own perseverance in traveling down a losing path. Sears Holdings recently provided a quarter-to-date performance review in which it reported a 9.2% decline in total domestic store sales at domestic Sears stores. This big result was noted only after touting successes in its Shop Your Way membership program.

The company's Shop Your Way members accounted for 69% of sales in a period at the end of 2013 as compared with 58% of sales from the same period of the year before. When the two results are considered simultaneously, the simplest interpretation is that if total sales are declining but sales from Shop Your Way members are increasing, then sales from non-members must be dramatically decreasing. In other words, non-members are not shopping at Sears, meaning that their consumer reach is shrinking. Demographically for Sears, the consumers who are not showing up are the younger ones.

Is there a fix?
Resolving the underlying issue will not be easy, and will be nearly impossible if Sears Holdings is not willing to fully acknowledge the problem. Current solutions proposed by the company for its financial woes include spinning off the Lands' End and Sears Auto Center businesses, along with closing unprofitable stores.

The other big move that many companies make in light of consistently bad results is to make big changes to those in charge of running the organization. Unfortunately, a change in the head of the organization does not necessarily equate to a change in philosophy. Even more discouraging for struggling brick and mortar retailers is that fact that changes in philosophy do not guarantee success either, as seen in the J.C. Penney experiment of making former Apple retail executive Ron Johnson CEO. His short bid as CEO was met with an initial excitement, followed by a quick release after extremely poor fiscal year results. Sears Holdings has a tough task of balancing a needed change in marketing and operations without driving away the dwindling number of consumers who still shop there.

The takeaway
Sears Holdings is in trouble with a shrinking customer base that is leading to decreased sales. Even if it decides to redirect from the current path, it will take time to realize the impact of operational and marketing changes. Though investors may choose to be patient with Sears Holdings, time alone will not be able to fix the company's bigger problems.

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Fool contributor Shamus Funk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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