Why Sears Holdings Corp Will Go Out of Business

The company is selling another asset as part of what appears to be a losing battle to stay afloat.

May 19, 2014 at 9:26AM

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 Amazon.com (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, Sears.com 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.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Daniel Kline 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers