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Why Sears Holdings Corp Will Go Out of Business

Sears Holdings (NASDAQ: SHLD  )  has been slowly dying since the company merged with Kmart in 2005. Watching this iconic American brand wither away has been painful. The company, once the largest retailer and employer in the United States, has been losing money since 2011. To stay afloat, it has been shedding assets and closing stores.

Earlier this year, Sears spun off its Lands End brand and Brian Sozzi, chief executive of Belus Capital Advisors, explained the logic behind that move to Reuters."Sears is in a steady state of decline," he said. "They're essentially selling their body parts so they stay alive today."

Now Sears has plans to sell more assets and CEO Edward Lampert acknowledged at the company's annual shareholder meeting (earlier this month) that store closures were in its future. The company quietly closed about 100 stores last year.

"They have too many stores and they're losing a lot of money, burning cash," John Kernan, an analyst with Cowen, told CNN Money. Kernan expects the company to close 500 of its 1,980 U.S. stores in a few years. Ultimately, he expects Sears to go out of business.

Where the troubles began
Sears -- like many retailers -- has struggled to compete with Internet retailers including  (NASDAQ: AMZN  ) . It has also lost its identity, while competitors Wal-Mart (NYSE: WMT  ) and Target  (NYSE: TGT  )  have strengthened theirs. Sears feels like a big store that sells a bunch of stuff -- a brand without an identity. Kmart is in even worse shape -- some customers know it as a less-nice Wal-Mart.

"There are tumbleweeds blowing through the parking lots at Kmart. They're basically completely irrelevant," Kernan told CNN Money.

Many questioned Lampert's decision to merge Sears and Kmart in 2005 in an $11 billion deal. At the time, Lampert was a hedge fund manager. He has been CEO of the merged company since February 2013 and his 2005 move looks more and more like an albatross that will drag both brands to their doom.

Change or die
The Sears death spiral has already slowed the company's investment in its stores, which in retail quickly becomes a self-fulfilling prophecy. If you don't constantly evolve with new merchandise, new store design, and other innovations, then customers will shop in stores that do. Target and Wal-Mart both aggressively cycle in new merchandise and both chains have invested heavily in new concepts over the past few years.

Target has revamped many stores to sell more fresh groceries and Wal-Mart has rolled out smaller grocery-only stores in parts of the U.S. Those are only two examples of things those companies have done to stay relevant while delivering a shopping experience its customers expect.  

While its brick-and-mortar competitors evolve, Sears has done little beyond seasonally rotating merchandise. Further, as Amazon finds new ways to become an even tougher competitor for physical retailers, has failed to gain any traction.

Sears needs cash
Lampert knows his company needs cash, so he will be selling one of its few remaining assets. Sears announced Wednesday that it would explore "strategic alternatives for its 51% interest in Sears Canada, including a potential sale of Sears Holdings' interest or Sears Canada as a whole. In connection with those efforts, Sears Holdings intends to engage an investment banking firm."

The cash from that eventual sale buys the company more time, but it's hardly a turnaround strategy. Instead it looks like Lampert is slowly selling off the pieces of the company, while it quietly goes out of business.  

Piecemeal may also be the best approach for selling the company's Canadian holdings as analysts doubt a buyer exists who would want the whole package.

"The pieces are likely worth more than the whole, particularly as we consider that the Sears brand has been allowed to decay," Jim Danahy, chief executive of consultancy CustomerLAB and director of the Centre for Retail Leadership at York University's Schulich School of Business, told Reuters . "This is carrion. The vultures are circling and they're not interested, no one's interested, in the whole thing."

The end is near
American history is littered with once-vaunted brands that are now historical footnotes. It seems unlikely that Lampert can revive Sears, and to some, it appears as if he's not even trying. Selling assets to buy time only makes sense if you have a plan that fundamentally changes your business model.

Instead, Sears looks like it will slowly shed assets, close stores, and cut expenses. Then, the last employee can turn out the lights on an American icon that probably should have died years ago.

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Read/Post Comments (10) | Recommend This Article (29)

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 May 19, 2014, at 9:55 AM, antonoguba wrote:

    in this article it seems no trace of a real plan,

    as it was said just selling body parts

  • Report this Comment On May 19, 2014, at 9:59 AM, seaguy wrote:

    it's become a self fulfilling prophecy each quarter sales stay stagnant or go down so Lampert reacts by closing more stores which just further alienates customers who are already turned off by stores that are old, dingy and in need of remodeling. As more Kmart and Sears locations close the ones left often are further to travel than it is even worth when their competitors stores are still open locally and they are clean, modern and inviting.

  • Report this Comment On May 19, 2014, at 11:41 AM, Afterberth wrote:

    They will go bankrupt and Amazon will pick up the pieces for nothing and incorporate it into their distribution network. They will keep a few stores open as Amazon Mega retail centers.

  • Report this Comment On May 19, 2014, at 1:21 PM, blogd2death wrote:

    you sears commenters are really funny. you always talk about selling off the pieces to raise cash but you have no idea that the value is constantly being distributed to shareholders.

    in the last year sears shareholders have received $19 per share in distributions of stock and dividends from sales of "pieces"

    there is much much more to go whether or not this "iconic American brand" succeeds or not

  • Report this Comment On May 19, 2014, at 8:29 PM, plange01 wrote:

    after five years without a president a failing america is in the same shape as sears!!!

  • Report this Comment On May 20, 2014, at 12:47 AM, 20davidsmith wrote:

    First time on this site. I notice everyday I go to yahoo news there is always a story from here about Sears in a coffin? Why is that? Everybody love a train wreck?

  • Report this Comment On May 20, 2014, at 2:29 AM, youstink wrote:

    the k-mart store where I worked, management rotated all employees out the door. so they could tell upper management that they couldn't meet expectations, and they needed them to hire again. their prices are higher than Wal-Mart's also.

  • Report this Comment On May 20, 2014, at 9:35 AM, scchask wrote:

    I don't know. The Shopyourway points program seems to be huge, the Sears store in the Pittsburgh mall is packed on weekends - it is clean,

    well stocked, lot of employees and technologically more advanced than other stores.

    Order online, print your receipt, scan the UPC on the email in their machine, 5 minute guarantee of delivery and it usually takes 1 minute to get your stuff. The Kmart is not as advanced but this is way more modern than they were 10 years ago.

    Not sure if this matters on the macro level, but I don't see death signs inside these stores.

  • Report this Comment On June 18, 2014, at 11:12 PM, shadowemployee wrote:

    It is interesting to hear Lampert's comments and plans for the future. After the annual shareholders meetings he repeatedly talked about how stores would close and the new look to Sears would be an integrated store that sold partially their own merchandise and more of the third party merchandise that can be found online. Although their technological advances are intriguing, it won't matter if no one knows that their stores are even open.

    What Sears should do with their Shop Your Way program is create their own email service that will get people to visit their website and buy their products. If online sales is as important as Lampert believes, then it could make a killing on a new type of business. They could potentially combine the business models of Amazon and Facebook by creating a social network for shopping.

    However, the one thing that the stores will need to carry in order to compete with companies such as Target and Wal-Mart is by adding a grocery store. With this dual strategy of online sales and local business, it could revamp the company and take them to the top once again. But Lampert does not seem to be in touch with any sort of reality when it comes to the retail business.

  • Report this Comment On December 14, 2014, at 2:56 PM, macdoeshe wrote:

    I can't speak for anyone else but a really bad experience with the automotive division has left me with a sigh of relief that the store that I dealt with is among the list of closure. Back in 2011, I recall telling the manager his store would shut down. Call it female intuition. To make a long story short, the repairs was done incorrectly and rather to say that the shop had played a guessing game to find the real problem. After two all day visits and three separate diagnosis that were wrong, the car was worse. Sears' District Manager agreed that the shop was at fault but was only willing to part with a Sears $100 gift card for my loss. If I paid over $300 for a repair that was not satisfactory, than I should have received all my money back in the form of payment that I paid the bill, CASH, not a gift card that I'm sure was going to be a write off as some type of promotional and not a payment to a dissatisfied customer. The case was to go to court but the unexpected death of my sister and finding her body in her apartment, shut me down emotional for quite some time and it didn't seem important anymore. In my opinion, victory is mine!!! I'm glad the stores are closing and I hope the rest of the chain will follow.

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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