Even Sears' Pensioners Think It Should Throw In the Towel

Things just keep getting worse for Sears Holding Corp.  (NASDAQ: SHLD  ) .

In the last two months, its spinoff of Lands' End turned into a dud, it announced plans to close more stores and rent out space to other retailers in existing stores, and now a former Sears executive has called for the company to liquidate.

Steven P. Dennis, a former vice president at Sears who left the company in 2003, said what's likely been on many market observers' minds recently, giving five reasons in a recent blog post that the company should shut its doors. 

Source: Author.

1. "No value proposition. No reason for being."
Dennis says that CEO Eddie Lampert "has still failed to articulate a vision of why and how Sears will fight and win in the intensively competitive mid-market sector."

With its sprawling brand portfolio and lack of investment, Sears seems to be in the midst of an identity crisis. Newer retailers like lululemon athletica tend to have well-defined missions and unique value propositions, and successful big-box chains often broadcast one clear signal. Home Depot is for your home-improvement needs. Wal-Mart is for everyday low prices. Sears communicates nothing of the sort to investors, and once brand image deteriorates, sales quickly go south with it.

2. "The competitive gap continues to widen."
Dennis notes that Sears has lost market share and relevance in every major category, while competitors continue to improve. The department store chain is "fundamentally disadvantaged by [its] real estate," he says. 

Retail sales have flocked online or to more modern brick-and-mortar companies, but Sears is also losing market share against other department stores, as its share has fallen every year for seven years as newer chains like Kohl's take share.  

3. "Digging a deeper hole."
Dennis argues that Sears' physical stores have to be "compelling" in order for it to win back customers, but that the company has chronically underinvested its real estate.

Indeed, according to a study by the International Strategy & Investment Group, Sears spends between $1.50 and $2 per square foot on maintaining and upgrading its retail space, while chains like Wal-Mart spend anywhere between $6 and $8. That gap makes a big difference in the store's image and the customer's perception, and plenty of analysts have taken notice, calling the stores "dingy," among other choice adjectives. Dennis notes that even if Sears wanted to upgrade its stores to the level of its peers, it couldn't possibly fund that kind of investment. 

4. "A leader who is either a liar or delusional."
Dennis points out that sales have declined for 28 straight quarters at Sears, but CEO Eddie Lampert has touted loyalty programs and closing unnecessary locations as strategies for rejuvenating the brand. 

All CEOs have to put a positive face on their companies, but Lampert's decisions have been questionable, if not downright self-destructive. The former hedge fund manager has mined the company of much of its value, treating it as a financial asset rather than a retail business that requires its own investment in order to turn a profit.  As Dennis argues above, after years of neglect, that negative brand image becomes nearly impossible to overcome.

5. "Valuable assets get less valuable every day."
Dennis says that Sears' strongest assets may be brands like Craftsman tools, Kenmore appliances, and DieHard batteries, but as Sears retail locations have faded, so has the relevance of these brands. Dennis also says that the value of Sears' real estate portfolio is exaggerated, as demand for those spaces is also waning. 

Oddly enough, Sears' closures is one of the forces bringing down the value of mall real estate, as the department is an anchor at many malls across the country, and those malls suffer when Sears vacates. As Sears declines, so does traffic in those malls and that surrounding retail space with it. 

Closing time
It's rare in corporate America for an executive to attack his former employer like this, and Dennis even admits it's in his own best interest for Sears to survive because he receives a pension from the company . Still, his argument is hard to refute, especially when you take a look at Sears' recent financial results. In its last three years, the company has seen operating losses of over $3 billion with even wider net losses. Last year, Sears' free cash flow was close to negative $1.5 billion, showing that those losses are very real to the company. Sears is set to report earnings next week, but analysts expect another dismal quarter, with an 8% decline in sales and a loss per share of $1.80.

Dennis closed his argument by saying:

Sears has zero chance of transforming itself into a viable retail entity. Any further investment in this sinking ship is throwing good money after bad. Stripping out the idiosyncratic technical reasons for gyrations in the Sears stock, the underlying true company economic value declines each and every day. There is no plausible scenario where this trajectory will change.

Shares are likely to continue to fluctuate for some time as the company has over $1 billion in the bank and plenty of assets leftto sell if it so chooses, but long-term, Dennis' conclusion seems accurate. Operationally, Sears is a lost cause. 

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  • Report this Comment On May 14, 2014, at 5:14 PM, Dangremaus wrote:

    For all the bears out there who jumped on the news today, let me remind you that Berkowitz stepped in to help Lampert monetize the assets. This year Lampert's closing over 70 stores, spun off Lands' End, and now has Sears Canada up for sale.

    Tisch just added 475,000 shares a month ago and Berkowitz is slowly accumulating. No one seems to notice that Lampert sold a large deal of his AutoNation stock off. (Perhaps to reinvest and concentrate on Sears Holdings.)

    Shareholders (like myself) know Lampert is liquidating assets. But the liquidation has to be done properly, as there are lots of pensioners depending on the company. If the company were to go into bankruptcy suddenly, who would be blamed for not having a plan to take care of the company's pension? And who would be blamed for leaving 2500 stores shuttered if the company were to declare bankruptcy and suddenly put 100,000+ employees out of work and into the job market? Lampert.

    So anyone advising the company to throw in the towel really needs to look at the bigger picture.

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