Sears Holdings (NASDAQOTH:SHLDQ) is about to close even more stores. After shutting down more than 150 Sears and Kmart stores last quarter, the troubled retail icon recently decided to close another 72 locations by September (65 excluding auto centers), according to Business Insider.
Store closures have been a constant at Sears Holdings in recent years. However, what had previously been a steady downsizing has turned into a rout during 2017. This is just one more sign that Sears may have finally slipped into a death spiral. That would be great news for rivals such as J.C. Penney (NYSE:JCP) that are waiting to pounce.
A long retreat
At the beginning of 2012, Sears Holdings operated 1,305 Kmart stores and 867 full-line Sears stores in the United States. Including locations in Canada and smaller "specialty stores," Sears still had more than 4,000 stores at that time.
Since then, Sears has spun off most of its ancillary businesses to focus on its full-line Sears and Kmart stores. It has also steadily pared back its store fleets for both chains. By January, there were just 735 Kmart stores and 670 full-line Sears stores still operating.
2017 is set to be the biggest year yet for store closures at Sears Holdings. Early in the year, the company announced that it would close 150 unprofitable stores to reduce its losses, consisting of 108 Kmarts and 42 full-line Sears stores.
However, Sears Holdings' sales declines have accelerated this year. As a result, in the past few months, the company made plans to close about 30 more stores by July. It has now scheduled a third round of cuts for September, eliminating another 16 full-line Sears locations and 49 Kmart stores. This will leave the company with fewer than 1,200 stores, down nearly 20% from the beginning of the year.
Are these Sears Holdings' cost cuts?
Sears began 2017 with plans to reduce its operating expenses by $1 billion in an attempt to stem its losses. But with the severity of its sales declines, even $1 billion in cost cuts would not improve its profitability significantly.
Accordingly, in late April, Sears Holdings boosted its cost-savings target for 2017 to $1.25 billion. However, if store closures are driving a big part of Sears' incremental cost cuts, that doesn't bode well for the company's profit-improvement goals. Most of the operating-expense reductions will probably be offset by the impact of further sales declines related to having fewer stores.
Sears Holdings' revenue plunged 20% year over year last quarter. With more store closures coming in the next few months, the pace of its sales declines will probably accelerate. And barring a miraculous turnaround, the scale of its losses means it will run out of assets to sell within two or three years. At that point, the Sears and Kmart chains are likely to shut down for good.
Good news for rivals
Despite years of huge sales declines, Sears still generated more than $22 billion of revenue last year. And it remains a force in the major-appliance market, with sales of $3.8 billion in 2016, putting it in third place behind Lowe's and The Home Depot.
J.C. Penney, Sears' biggest rival at the budget end of the department-store market, has been positioning itself to profit from the latter's likely demise. Most notably, it re-entered the major-appliance market last year after more than a 30-year hiatus. J.C. Penney is also testing new home-services offerings, moving into another traditional area of strength for Sears.
J.C. Penney should be able to pick up a substantial portion of the sales Sears forfeits as it closes stores. Last year, it became the No. 23 major-appliance retailer in the U.S. despite still being in the early innings of its appliance rollout. J.C. Penney has tons of room for growth in this business over the next few years as it improves its offerings and as Sears declines.
It appears that the writing is on the wall for Sears, as none of its turnaround initiatives have gotten the company any closer to stemming its losses. Pretty much the only good news to come out of this situation is that Sears' crash-landing could enable J.C. Penney to make a full recovery from its own near-death experience.