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Should Sears and Kmart Become Online-Only Stores?

By Rich Duprey - Apr 17, 2017 at 6:51PM

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A number of retailers are doing it, and it could save the industry icon from the fate of declaring bankruptcy.

Maybe it's time for Sears Holdings (SHLDQ) to consider the unthinkable. No, not seek bankruptcy protection, though that's likely in the cards if it doesn't do something soon, but rather follow some other retailers in becoming an online-only retailer.

With Payless filing for bankruptcy protection and closing stores, the number of retail bankruptcy filings so far in 2017 has already surpassed the total number of retailers that went under last year. In the news recently is a report that mall-based Bebe is trying to forestall a bankruptcy filing by becoming a hip e-commerce-only women's retailer, and that might be a way for Sears and Kmart to avoid what's increasingly looking like an eventuality for them. 

Entrance to Sears store in Danbury, Conn.

Image source: Sears Holdings. 

Death looms large

The number of companies on a Moody's Investor Services list of distressed retailers is the highest it's been since the Great Recession, though with Payless succumbing, the number is now reduced by one to 18. Other stores on the list include Claire's, J. Crew, True Religion, and Sears Holdings.

The impact from e-commerce leaders like (NASDAQ: AMZN) on one side and discount retailers such as T.J. Maxx on the other has caused rumors to circulate that even more financially sound retailers like Macy's (NYSE: M) may get bought out, while office supplies retailer Staples is reportedly considering having private equity firms take it out of the public spotlight.

If they're seeing the future as too much to handle on their own, how can a financially distressed company like Sears Holdings hope to make it? It probably can't, and that's why the online-only option is intriguing.

Stripped down to its essentials

For one, although it's still rare for a retailer to scale back to being exclusively an online brand, these days it's becoming more fashionable. Just this past January, The Limited closed all 250 of its stores and moved its clothing sales online, while Kenneth Cole announced in November it was closing all but two stores as it moved its business online as well. Before that, bankrupt Filene's Basement -- a discount retailer that closed down in 2011 but was apparently ahead of its time considering the success T.J. Maxx, Ross Stores, and other similarly situated discounters are having -- was revived in 2015 by Macy's as an online-only discounter.

Sears and Kmart aren't quite the same kind of retailers as these others, as they have a far more diverse product lineup consisting of not only apparel, but also appliances, consumer electronics, lawn and garden equipment, tools and hardware, automotive parts, household goods, toys, housewares, and sporting goods. Sears also has a number of services, including home repair and installation, and auto work.

If both Sears and Kmart went the online-only route, the transition wouldn't be easy, but it wouldn't be an insurmountable hurdle to get over, either.

Sears lawn and garden center

Inside a Kmart. Image source: Sears Holdings. 

Different, but the same

Apparel has been one of Sears Holdings' weakest segments, with sales falling 12% last year and serving as the leading cause of margin contraction at both Sears and Kmart. Incurring store expenses to support this failing line of business makes it a natural choice to move online, but it could also just as easily sell dishwashers, refrigerators, lawn mowers, and tools through its website -- and at lower cost. It would be a modern-day version of the Sears catalog, where once upon a time, you could even order a house.

While Sears' auto service centers couldn't be moved, neither would they have to be, and the rebranding Sears is contemplating under the DieHard banner is a smart decision that could make the stand-alone stores an even more cost-effective option.

Sears is already selling its stores to its Seritage Growth Properties (NYSE: SRG) real estate investment trust, which is converting the vacant spaces into smaller units for specialty retailers to occupy. Sears could continue shedding its real estate and transition its merchandise online.

Although Sears stock jumped after Chairman and CEO Eddie Lampert bought up even more company shares, there's been nothing to suggest a long-term move toward financial health. It may take time before Sears Holdings declares bankruptcy, but if it follows the lead of some of its equally troubled peers and moves both its Sears and Kmart brand online before doing so, the once-venerated retailer might still be able to survive for many more years to come.

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