As you've no doubt heard already -- because when century-old American retail institutions crumble, it's big news even if it's not unexpected -- Sears Holdings (OTC:SHLDQ) has finally declared Chapter 11 bankruptcy. But does that mean the whole chain will vanish immediately? No. With debtor-in-possession financing, the next step in its dissolution will involve closing 142 of its remaining 700 or so stores and hoping to make it through the holiday season, perhaps even luring in enough shoppers to allow it to limp along further than 2019.
Still, it's a sad almost-end for a company that was both the Amazon.com (NASDAQ:AMZN) and the Walmart (NYSE:WMT) of its day, a business that sold everything from watches to entire houses. In this Market Foolery podcast, host Mac Greer and analysts Emily Flippen and Matt Argersinger discuss its long history, its broad expansion into a conglomerate with segments as diverse as financial services and auto repair, the Eddie Lampert era, the decisions that brought Sears low, whether there's any remaining hope of a recovery, and what lessons other retailers -- both e-commerce and bricks-and-mortar -- should take away from this tale.
A full transcript follows the video.
This video was recorded on Oct. 15, 2018.
Mac Greer: It's Monday, Oct. 15. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Emily Flippen and Matt Argersinger. Welcome! How are we feeling?
Matt Argersinger: Well, it's a Monday!
Greer: It's a Monday? Come on, we need more enthusiasm here! Come on, bring it! We are going to be talking some Sears. Are you ready to talk Sears?
Argersinger: I'm ready to talk Sears.
Greer: It's a sad chapter, and it's not an altogether surprising chapter. On Monday, Sears, filing for Chapter 11 bankruptcy protection. What that means for now is that Sears will close 142 stores. The company has around 700 stores. Matt, this is a last-ditch effort to save the company. We knew this was going to come. Probably not surprising. It really could be the end of an era.
Argersinger: I think it is the end. I know they're going to go through this Chapter 11 process, debtor in possession, try to get through the holidays. That can help a lot with covering a lot of outstanding costs and liabilities. But for all intents and purposes, I think this is pretty much as close to midnight as you can get for a brand and a company that, we talked about this morning, over 125 years in existence. I looked this up. The average Fortune 500 company these days lasts less than 15 years in existence.
Greer: Started in the 1880s.
Greer: Selling watches via mail order.
Argersinger: Yes, the mail-order business. It really was, if you think about it, the Amazon of the early 20th century. It was reaching people across the country, enabling people not just in cities, but in rural areas in the country, to get a catalog, order things, have things shipped.
Greer: Get a house.
Argersinger: Get a house. Eventually buy a car and service a car. There's so many things. Sears impacted everyone's lives. So to see it come to this end... and we've seen this end approaching for a while now, but I believe we're pretty close to the end right now.
Greer: I did a little research here. I want to do the brief history. Then, Emily, I want to get your thoughts. Sears, as we mentioned, founded in the 1880s. Expands its catalog in the 1890s. In 1906, goes public. The 1908 catalog -- I love this. 1908, Sears says, "We solicit honest criticism more than orders." Very Amazon-esque there. They opened their first department store in 1925. By the middle of the 20th century, Sears' domestic annual revenue is around 1% of the U.S. GDP. Amazing, Emily!
Emily Flippen: It's clear that Sears definitely made its impact on the American economy, the American consumer, and managed to weather a lot of storms throughout its history, especially when you look through the 20th century. What's really interesting is, it started out with this catalog model, where people in rural areas were having access to products that they wouldn't have otherwise had access to. And they slowly changed that to become a retail model, which allowed them to reach more consumers, supply products at the price points that are most convenient and most profitable for them, something that was challenging with the catalog model.
Then they expand. They get into lots of different industries. One of the ones that we spend a lot of time talking about is financial services. They tried to get into the financial-services industry. They really wanted to become a one-stop shop for the American consumer. Now it's interesting that, coming into the 21st century, we've seen this very slow but inevitable decline.
Greer: Let's talk about that. There was a 1980 quote by their head of their planning group, this guy Philip Purcell. He says, "There is no reason why someone shouldn't go into a Sears store and buy a shirt and a coat, and then maybe some stock."
Argersinger: I'm so glad you found that. First of all, it's so 1980s, right? It's the conglomerate era. It's all these businesses buying other totally non-related businesses because they think having this umbrella of all these different businesses enhances your revenue, increases your diversification. It's just so funny. Some of the stuff is logical. Sears sold insurance. Well, that makes sense in a lot of cases. If you bought a car or an appliance at a Sears, getting insurance to go along with that makes sense. But then, going in and maybe buying a stock? They bought Dean Witter, a brokerage company at the time. They bought a real estate brokerage firm. They combined all these things. What it did, and I thought the article that you pointed out from The Atlantic, the one by Derek Thompson, pointed out that they did all these things and it actually worked. All of these businesses they actually bought worked. But it masked a fundamental decline in their core retail business. We'll talk a little bit going forward about some of the lessons out of this. That was one of the reasons, I think, that was the beginning of the end for the Sears' retail business.
Greer: Let's talk a bit more about that, Matt. If people haven't followed the recent history of Sears, we're talking about older history, but recent history. You've got to begin with the name Eddie Lampert. Fill us in there.
Argersinger: That's right. Eddie Lampert's this very highly regarded hedge fund manager. He comes in, he turns around Kmart. Well, "turns around." He acquires Kmart and gets credited for turning around that business. Then he does something just extraordinary at the time. He takes Kmart and merges it with Sears, under the idea that I'm going to take two struggling retailers, put them together, and together they're going to be stronger, together they're going to be able to compete with the Walmarts of the world, the Targets of the world, the Home Depots of the world, all these big, emerging mass-merchant retailers.
I remember at the time, starting at The Fool in 2008, there was a lot of credit given to Lampert. "He's going to do this; he's going to pull this off. He's a genius. He's going to be able to financial-engineer his way to create a lot of value to shareholders. He's going to focus on the real estate. He's going to focus on some of the brands, like the Craftsman brand and the Kenmore brand, Lands' End." And we see what's happened over the last 10 years or so. It certainly has not worked out.
Greer: Emily, one of the things we were talking about before the show today is how Lampert really saw Sears, in some ways, as more of a collection of assets, but not so much a steward of this great American brand.
Flippen: Of course, hindsight is 20/20, and I'm relatively young, so I never got to live in the era of Sears' dominance. But I think Lampert, from my perspective, never really came into this company with the intention of saving it. You could look at the way he ran the company, the interest that his hedge fund had in it. What he did was, he consolidated a bunch of assets, and then proceeded to sell off the most valuable assets, leaving Sears this broken retailer while his hedge fund got tons of origination fees and interest payments for giving the debt to "save" this American icon. So I'm not sure if Eddie Lampert really went into the CEO role with the intention of being a steward of the Sears legacy so much as he went into it thinking, "How am I as a CEO going to make money off of this investment?" I think that's what it was for him, a long-term investment.
Greer: So if I'm looking for a good washer-dryer, Eddie Lampert's probably not the guy to talk to?
Flippen: Probably not.
Greer: Let's pull the thread forward here. I want to go back to Eddie Lampert, Matt. He says that by declaring Chapter 11 here -- I should back up and say that he has resigned as CEO of Sears, but he's still the chairman and he's still the company's largest investor. He says bankruptcy will allow Sears to strengthen its balance sheet and return to profitability. Wishful thinking?
Argersinger: I think very wishful thinking. I'm not surprised at this. Toys R Us, to use a recent example, declared Chapter 11 bankruptcy at least twice, if not three times, before they eventually liquidated. I think this is inevitable for Sears as well. They're going to close some stores. They're going to try to get some debtor-in-financing in place, so they can get through the holiday season, get a little bit of a boost to their revenue, and maybe try to pay off some liabilities. But this is a company that, just from a retail point of view, has no chance of bouncing back. The brand, I think, has lost a lot of the connection that it once had to consumers. By the way, they still have something like $1.5 billion in pension liability outstanding. How in the world are they going to be able to cover that at some point?
In my mind, even though they're going to go through this process that a lot of companies do, I don't see a light at the end of the tunnel.
Flippen: Yeah, I completely agree. I think, continuing to pull that thread forward, where Lampert really went wrong was not focusing on the core demographic, not focusing on the consumer at all. Sears succeeded a lot for as long as it did because it was obsessed with the consumer. It was constantly changing its business and innovating and moving to where they saw the markets. Sometimes that was misguided. Their financial services, for example, performed well, but like Matt said, it didn't make sense to go in and buy a shirt and a stock. Maybe it made sense to buy a battery and some insurance, but not a shirt and a stock. Really trying to understand the core demographic, I don't think that's something that Lampert spent any time doing. I think what he did was focus a lot on tech buzzwords, saying, "We're going to make this a technology-driven company," and didn't actually provide any value in that sense. So yeah, losing the focus on the core business and the core customer is really where Sears went wrong, in my opinion.
Greer: Matt, earlier, you mentioned Derek Thompson. He's a writer for The Atlantic. He spoke at one of our member events, has a book called Hit Makers. He had an interesting piece a few years ago, really interesting piece about how Sears was the Amazon of its time until it made some preventable mistakes. In fact, that's essentially the title of the piece. Here are four lessons that he says Amazon can learn from Sears. I want to spot you up with these and get your thoughts.
He said, lesson No. 1, retail is in a state of perpetual metamorphosis. Lesson No. 2, even large technological advantages for retailers are fleeting. Lesson No. 3, there is no strategic replacement for being obsessed with people and their behavior. Lesson No. 4, adding more business is not the same as building a better business.
Argersinger: Those are all four fantastic. When I think about them all together, it speaks to being flexible. It speaks to, you have to constantly adapt to your customer, to the environment, to your competition. Look at Walmart. If we think about Walmart, Walmart came in in the '60s, '70s, but really '80s, '90s, started to get into Sears' turf. It wasn't because they necessarily had more products. It was really a technology story. Walmart had figured out supply chain, the distribution. They just got ahead of Sears in so many ways and were so much more efficient that they could offer these low, low prices, so Sears and other retailers couldn't compete.
That was just an example of, Sears was focusing on expanding and diversifying into all these other areas. But wait, their competitors were doing a lot of interesting things to get their customers lower prices, and they weren't doing that. So when you think of Amazon, you think of other businesses, the ability to be flexible, to adapt to your customer, to adapt to trends, to adapt to technology, if you're not, you're set up to lose.
Flippen: Let's be clear here, I think innovation takes capital. You do, as a company, have to put your money where your mouth is. You can't say, "I'm going to be a data-driven company," and then not follow through with the investments necessary to make that a reality. For the time being, I think Amazon has done that really well. They've made a lot of strategic acquisitions and used that free cash flow to further grow and innovate and change their company to match the future of tomorrow. Of course, we can't know if that's going to continue. But I think that precedent, putting your money where your mouth is, and putting the capital behind the necessary innovation, is key for making that succeed.
Greer: Emily Flippen, Matt Argersinger, thanks for joining me!
Argersinger: Thanks, Mac!
Greer: If you have a thought on Sears, if you have a Sears story you want to share, if you have a question or comment for us, our email is email@example.com. Thanks as always for joining us! As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening. We'll see you tomorrow.