For the past few years, Sears Holdings (SHLD +0.00%) has been burning billions of dollars of cash annually, while its sales have plunged. During 2017, its problems have become even more pronounced. Sears' cash cushion has fallen to dangerously low levels, and the company has made plans to close 17% of its stores this year.
As a result, vendors have become very leery about doing business with Sears, leading to inventory problems. A series of exposes over the past year have shown stores with lots of empty shelves, highlighting Sears' distress.
Low sales and long lines are a bizarre combination, but that seems to be the new normal at Sears. Image source: author.
On a Saturday in June, I set out to get a firsthand look at how things are going at Sears and Kmart. I visited two Sears stores and one Kmart store in Northern Virginia. What I found was that the level of inventory -- and the quality of presentation -- depended a lot on how important a particular category is to Sears.
Best merchandise categories are presented well
Fifteen years ago, Sears purchased Lands' End (LE 4.13%) for nearly $1.9 billion, in an effort to boost its internet presence and upgrade the quality of its apparel offerings. As part of its turnaround plan, Sears spun off Lands' End as an independent company a few years ago. However, there are still Lands' End shops in most Sears stores.
This Lands' End shop looks like a nice place to shop. Image source: author.
Lands' End remains a key part of Sears' apparel strategy. It also caters to higher-income customers than Sears' other apparel offerings do. Thus, it makes sense that Sears would want to keep its Lands' End sections looking good.
Sure enough, the Lands' End shop at Sears in Falls Church, Va., was a good shopping environment. The carpet was relatively new, there was good lighting, and there was adequate inventory. Some of the piles of clothing were shorter than they probably should have been, but there was no blatant inventory shortage here.
The appliance section at Sears in Falls Church, Va. Image source: author.
The situation was similar in the store's appliance department. The setup was hardly elegant, but the selling area was packed with floor models, the lighting was good, and the section was clean.
Appliances are one of the few product categories where Sears is still a major player. Thus it's not surprising that the company is doing its best to keep its appliance sections in good shape.
My key takeaway was that Sears is still providing a reasonably good shopping environment for its core offerings. Even this clothing section from the Kmart in Annandale, Va., looks reasonable (for what it is).
Kmart's apparel section is functional, if not attractive. Image source: author.
There are plenty of warts
Once I looked past Sears' most important categories and product lines, the attention to detail dropped off -- as did the level of inventory.
For example, at Sears in Alexandria, Va., the Lands' End shop itself looked perfectly reasonable. Yet the accessories display perched at the edge of the section was nearly empty. This may be a symptom of inventory shortages.
Sears won't be selling many accessories from this display. Image source: author.
Slim pickings at the Kmart vitamin display. Image source: author.
An even more blatant example of an inventory shortage was on display in the Kmart vitamin and supplements aisle. There was lots of empty shelf space. Even for the items that were in stock, Kmart had only one or two bottles of each.
Sears Holdings' Kmart chain is a tiny player in the grocery market today. Thus suppliers have no reason to cut it any slack -- and it shows. Furthermore, Sears Holdings can't afford to tie up lots of capital in inventory for a strategically unimportant merchandise category like this.
Exercise equipment was another category that is evidently not a key focus for Sears. The exercise equipment section at the Sears I visited in Falls Church was covered with dingy, stained carpet. The section also somehow managed to look both cluttered and light on inventory at the same time.
This exercise equipment section at a Sears. Image source: author.
Sears and Kmart also seemed to be trying to cover up their inventory problems by keeping the middle of their stores well-stocked. By contrast, the sections around the exterior walls were likely to have obvious gaps with missing inventory.
There's way too much empty shelf space here. Image source: author.
For example, this bedding section was located along the wall of a Sears store. Hardly any of the shelves were full, while two racks were empty.
The electronics section at Kmart in Annandale looked even worse. Presumably, the back wall of the store was supposed to display a variety of TV models. Instead, it was nearly bare.
Good luck buying a TV at this Kmart. Image source: author.
Sears should stick to its knitting
Sears Holdings' situation is so dire that the company seems to have little chance of avoiding bankruptcy. Despite CEO Eddie Lampert's cost-cutting efforts, Sears Holdings continues to bleed cash at a rapid rate.
To have any hope, Sears' best course of action may be to radically reduce the square footage of its remaining stores and sell just a few key product categories, such as appliances, tools, mattresses, and perhaps Lands' End clothing.
Sears has already opened a pilot store that sells just appliances, along with a second store that sells appliances and mattresses. We can hope this means management has finally realized that Sears is competitive in only a few key product categories.
