Is Groupthink Taking Hold at Sears Holdings Corp?

Last week, Sears Holdings Corp (NASDAQ: SHLD  ) reported yet another dismal quarter. The company reported an adjusted loss per share of $0.96 as domestic comparable-store sales fell 6.4%. While Sears has had lots of ups and downs since hedge fund manager Eddie Lampert combined it with Kmart almost 10 years ago, there's been hardly anything to cheer about recently.

SHLD Chart

Sears Holdings Corp 10-Year Price Chart, data by YCharts.

Last January, Lampert -- who has owned a controlling interest in Sears Holdings and served as the company's chairman ever since the Sears-Kmart merger -- finally took over the CEO spot as well. As Lampert has solidified his leadership of the company, Sears has taken a turn for the worse.

Yet Lampert and other Sears Holdings executives continue to tout small "successes." For example, they have repeatedly highlighted how a rising percentage of sales are going to members of the Shop Your Way loyalty program. Sears executives take this as a sign of higher engagement -- even though sales are still falling as quickly as ever.

This suggests that Sears' leaders are becoming out of touch with reality. This could be a symptom of groupthink: a condition in which members of an insulated group that is under pressure prioritize consensus over objective or independent thinking.

Groupthink: The basics
Groupthink is a concept in psychology that has been used to explain many cases of faulty decision-making, from the Bay of Pigs Invasion to the bankruptcy of Swissair. The main idea is that members of a small decision-making group can become insulated from reality, especially when facing a significant external threat.

Groupthink causes members of the group to seek consensus rather than critically evaluating all of the available facts. Evidence that leaders' preferred courses of action are not working (or are not likely to work) gets suppressed, either through self-censorship or due to pressure from other members of the group. Flaws in the group's decisions go unrecognized until they are so obvious that it is too late.

The newest victims of groupthink?
Over the last five years, Sears has implemented a strategy to become what it calls a "Member-Centric Integrated Retailer." This fancy terminology means that Sears wants to turn customers into loyal members of its "Shop Your Way Rewards" program, while giving them the ability to buy products through a variety of channels: in stores, online, from third-party sellers, etc.

However, while Sears executives talk a good game, the company's results have been nothing short of dreadful.

In the company's recent earnings presentation Sears Holdings CEO Eddie Lampert and CFO Rob Schriesheim spent most of their time explaining how -- as bad as the results were -- the company was really making significant progress in its turnaround. (Unlike most public companies, Sears plays a pre-recorded call, which rules out Q&A with analysts, potentially shielding executives from tough questions.)

Sears executives don't seem to recognize how much trouble they are in.

Many of the positives mentioned by Sears management seemed to be more spin than substance. For example:

1. Lampert noted that member engagement had improved, as 72% of sales went to Shop Your Way members last quarter, compared to 58% in Q4 2012. Yet this "increased engagement" did not prevent a massive slide in comparable-store sales and total company sales.

2. Lampert also lauded the company's 10% online sales growth last quarter -- despite the fact that this is much slower than the rate of e-commerce growth nationally.

3. Schriesheim blamed gross margin deterioration on the cost of giving Shop Your Way members points for their purchases in addition to standard promotional markdowns. Yet Sears has not outlined how it will ever be able to wean customers off discounts -- other retailers like J.C. Penney have tried this and failed miserably.

4. Schriesheim also noted that Sears is an "asset-rich enterprise" and highlighted the company's success in generating additional liquidity last year. He didn't mention how Sears has been burning through all the cash it has generated from asset sales, spinoffs, and other financial engineering undertaken in recent years.

Foolish bottom line
In short, Sears executives do not seem to fully grasp the severity of the situation the company faces. Whereas Sears seemed to be stabilizing its performance in early 2013, when Lampert took over, adjusted EBITDA (a measure of earnings that Sears executives prefer) declined by nearly $1 billion last year.

To make matters worse, Lampert -- who has presided over several CEO changes in the last decade, but never chose a retail industry veteran -- has now installed himself in the CEO spot. (Lampert's background is in hedge fund management, not retail.)

While Sears executives talk about transforming the company's business model, they confront two intractable problems. First, they want to turn Sears and Kmart into member-oriented stores, yet neither chain has an image that would entice many people to become loyal fans. Second, while they talk about eventually reducing promotional markdowns, there's no clear strategy for doing so without taking a big hit to sales.

Sears Holdings needs some fresh thinking if it is to avoid squandering whatever shareholder value remains. Instead, since Lampert took full control of the company last year, groupthink has set in, leading to complacency in the face of weakening performance.

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Read/Post Comments (16) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2014, at 1:07 PM, MSFInvestments wrote:

    The author is forgetting something. Sears Holdings is a holding company. Here is only one of 28 others.

    www.seritage.com

    Lahiem

  • Report this Comment On March 07, 2014, at 6:05 PM, perfectcompany wrote:

    Yes, Seritage. One analyst has compared Sears real estate to a gold mine in Antarctica: it might be worth something, but how do you access it? Further, who wants this real estate? Staples is closing and down-sizing stores. Radio Shack is closing stores. Retail is being impacted by online marketers who have the advantage of price, selection, better product information, and an easier buying experience (try the Sears check-out lines.) It's hard to imagine Wal-Mart saying to itself, "Geez, where can we get some smallish, expensive stores with escalators?"

    Another of the 28 companies in Sears Holdings is K-Mart, which also saw same-store sales shrink last year.

    It's a tough situation that -- maybe -- could be solved by outstanding leadership bringing executives together to create an awesome buying experience around Sears house brands, but that's not happening. Sears executives are pitted against each other in a Darwinian management that ensures only the most unoriginal and conforming remain.

  • Report this Comment On March 07, 2014, at 6:11 PM, Idiot2fool wrote:

    Go to a kmart and you will see vinyl tiles of different shapes, sizes and colors, lights that needed to be changed, open areas with nothing eye catching to see and a drab look of sadness.

    They look like remnants of 1970's buil free clinics. There is no appeal.

  • Report this Comment On March 07, 2014, at 9:17 PM, Davesparkman wrote:

    Sears has few items that i need, and the ones I do want, I can buy at better prices elsewhere.

    some of their warranty is a little better than some stores, like walmart. But their tools have made in china stamped all over them, and I can buy china tools from harbor freight for about 20 cents on the dollar for sears. Sears needs to cut their management salaries to the bone till they find some way to improve sales. I would suggest cutting prices to the bone on internet sales.

    and model themselves after amazon. Sears has the name. The new moto should be SELL SELL SELL.

  • Report this Comment On March 07, 2014, at 9:54 PM, TexanSooner wrote:

    Back in the early '80's Sears was the biggest retailer in the land - and caught the same disease - wasn't long before they were left in the dust by several other retailers - including Wal-Mart and Target. Internal politics and influence peddlers have driven anyone with more than an ounce of brains out of the company.

  • Report this Comment On March 08, 2014, at 9:16 AM, TMFGemHunter wrote:

    @MSFInvestments: In hindsight, Lampert should have come up with a 5 year plan to totally wind down Sears and Kmart retail operations even before the recession. Sears has already sold off billions of dollars in real estate in recent years, and the proceeds have just gone to offset big retail losses. I don't think it's likely that the real estate gains will ever outweigh the retail losses.

    Adam

  • Report this Comment On March 08, 2014, at 9:22 AM, foolishinohio wrote:

    I wonder if Lampert is really, really smart or too smart for his own good. It appears that something is going on behind the scenes to develop or improve the workings of some other of the holdings in Sears Holdings (insurance?) while letting Sears stores and K Mart die a slow death as a distraction. Watch for insider buying. OR just watch it all disintegrate.

  • Report this Comment On March 08, 2014, at 9:53 AM, Gorm wrote:

    Sears and K Mart have been losers for years!

    If the bankruptcy courts had NOT given Lampert all that K Mart high value property for NOTHING while screwing bond holders and shareholders, Sears would have been history long ago!!

  • Report this Comment On March 08, 2014, at 3:22 PM, notsans999 wrote:

    Hmmm. Perhaps if the executive team didn't each skim off the top by earning ~$2 M per year, then Sears might actually have a profit. see Google Finance for details.

  • Report this Comment On March 08, 2014, at 5:12 PM, CapHoya wrote:

    Taking hold? It's the whole reason they've been in a death spiral for years. Fantasy solutions such as their ridiculous "loyalty" program and their pathetic attempt at rolling out a "new culture," because culture comes from a training video, are just two examples of paralyzed leadership in a failing enterprise. Anyone who questions status quo is quickly shown the door.

    Eddie Lampert - "that's what failure look like to me."

  • Report this Comment On March 09, 2014, at 8:45 PM, MSFInvestments wrote:

    Take a look at the open interest in the January 2015 $60 and $70 strike.

  • Report this Comment On March 09, 2014, at 11:26 PM, EnzyteBob wrote:

    Spare yourself the psychobabble or even spending any time thinking about this one.

    Eddie is fixated on real estate, on numbers and on liquidation value. If he wanted to run this as a going concern, he would be putting money into the stores.

    Why isn't he putting money in the stores? Why don't you put money into remodeling a house in a crappy neighborhood when you intend to move? Why spend money putting in a swimming pool when you are about to move?

    Same goes here. The aim is to liquidate. It always has been and it always will be. Period. End of discussion.

  • Report this Comment On March 09, 2014, at 11:41 PM, EnzyteBob wrote:

    @ foolishinohio

    "I wonder if Lampert is really, really smart or too smart for his own good. It appears that something is going on behind the scenes ..."

    ======

    Lampert is in this at the equivalent of $11 a share. Lampert has already pulled cash, dividends and management fees out of this company so that the effective cost of those $11 a share is maybe $5 a share?

    Then there are all those stock buybacks. Eddie's not selling, so he has effectively been using company funds to increase his ownership percentage. After considering the effect of stock buybacks, maybe his cost is $3 a share if not zero.

    IOW, Lampert is in for $3 a share (or maybe even zero) and it's worth $40. He's making money no matter what happens because he is at the top of the pyramid. He is slowly dismembering this company. There is no way "he" can't make money.

    If Eddie gets $20 per share or even $40 pershare he makes money.

    The situation is different for someone buying today. If you buy it at $40, I can't believe there's a lot of upside to this stock and a LOT of downside risk.

  • Report this Comment On March 13, 2014, at 2:58 PM, wentorf56 wrote:

    Why trust a Hedge Fund Manger in the first place?

    They are only interested in one thing - to make money.

    They will sell everything peace meal, til there is nothing left.

    Sell all of Sears real estate and then what?

    No money left to prop up what's left.

  • Report this Comment On March 15, 2014, at 7:41 AM, thegreatad123 wrote:

    Sears stores are stuck in malls! If you want to go to sears, you'll have to find a mall! Sears have become "by chance stores"? If by chance, I'm at or near the mall, I'll go to Sears. "Stand-Alone Brick-n-Mortar" stores, in different locations, with the freedom to evolve, and change, would be the way to go. They've also used "Kmart" in the wrong way! Here's what should have happened? Like Walmart, build separate "stand alone stores" well designed, anchor stores, one Kmart, one Sears. Kmart being the department store with groceries; Sears being higher end catalog store, and allow other supporting stores to spring up around the two star attractions.

  • Report this Comment On March 15, 2014, at 12:32 PM, jrj90620 wrote:

    Was shopping for a circular saw.Sears warranties it's saws for 1 year.Porter Cable for 3 years and Milwaukee for 5 years.Got a great deal on a Hitachi,with 5 year warranty.

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