Sears (SHLDQ) has had a death scene worthy of William Shatner after being told by a director to "go over the top." The retailer has been on the verge for years, and in the weeks since it filed for bankruptcy in October, it has been convulsing on the table as halfhearted efforts are made to revive it.
The once-proud chain has suffered from years of neglect. While rivals like Macy's and J.C. Penney have (to differing degrees of success) made major changes in their battles for relevancy in the omnichannel era, at Sears, management's turnaround efforts have consisted mostly of closing stores.
This was a story where the ending was already known -- a sort of sad retail This Is Us where we know Jack's going to die, and we're pretty sure how. Everyone who ever enjoyed shopped at the iconic retailer and laments its fate has been hoping for a miracle, but it's only becoming clearer based on how the holiday shopping season has gone so far that one's not coming.
How bad is it?
Sears entered the holiday season in Chapter 11 bankruptcy. Former CEO Eddie Lampert, who holds much of the company's debt, had a plan that involved it closing more than 140 stores to emerge from bankruptcy as a smaller company. His ability to implement it, however, was far from clear, as it will require approval from the company's other debtholders, and Lampert needs additional partners to make it happen.
Nobody expected the struggling retailer to pull a blockbuster quarter out of its hat, but there was hope that its aggressive discounts would attract a surge of customers. Sears hasn't released any holiday sales numbers yet, but according to an article by Josh Saul in The Chicago Tribune, the early results are not good.
When the company declared bankruptcy Oct. 15, it filed a budget with revenue forecasts of $241 million for the week of Christmas and $1.93 billion for the two months ending Jan. 12. But an updated budget filed Friday shows only $215 million the week of Christmas and $1.69 billion for the entire two months, almost $246 million less than originally projected.
The company also now forecasts that it will have negative cash flow during the holiday period. It also expects negative net cash flow of $434 million for the 13 weeks that end Feb. 16.
That's an utter disaster. If a retailer can't make money over the period that covers Thanksgiving through the end of the year, it has no hope for the future. The Sears turnaround has failed, and consumers aren't even interested in picking over its remaining merchandise.
Lampert, it has to be noted, last week made a $4.6 billion offer (with a lot of contingencies) through his hedge fund, ESL Investments, to buy the company, and keep about 500 Sears stores open. That deal, which needs financing, would also give him the Kenmore and DieHard brands, its inventory, and some of the chain's remaining real estate.
That may be the company's last hope for survival -- though there are allegedly other bidders looking at it -- but it's hard to imagine why even Lampert wants to save Sears. It's a chain with a rapidly declining customer base, no compelling differentiator in the marketplace, and small odds that anyone could do much to change those conditions anymore.
This was inevitable
Sears is in this position because nothing Lampert did worked, and what he tried to do wasn't nearly enough. The company lacked a strategy to make it relevant to modern consumers. On the e-commerce front, Lampert pushed the "Shop Your Way" platform, but it never achieved any traction with customers. He also failed to bring the company into the modern omnichannel way of operating.
Basically, Sears continues to run its stores like it's 1987. That's not a model that can work anymore, and no amount of store closures will get around that fact.
Sears' position is nothing like that of Toys R Us: It isn't a mostly healthy company driven into bankruptcy under the weight of debts piled upon it via an ill-advised leveraged buyout. Instead, Sears entered its decline chockablock with assets, and it has sold nearly all of them in order to fund its operations. What it didn't do was make significant changes to its fundamental model.
At this point, management could pull the metaphorical copper wire from the walls and sell it in order to fund a few more days of operations, or accept Lampert's offer, in which case, Sears will continue its death march as a private company. It would be better for the company to liquidate -- sell its home services group to Ace Hardware and investment firm Centerbridge Partners, which are considering a bid, according to Reuters -- and get as much as it can elsewhere for the remaining assets.
As a going concern, however, Sears has shown it has no future. Any efforts by Lampert to pretend otherwise at this point would just be delaying the inevitable.