Just one month ago, Transform Holdco, the new post-bankruptcy owner of Sears and Kmart, announced another round of store closures for the two struggling chains. Five Kmarts and 21 Sears stores are scheduled to shut their doors between late October and mid-November. This decision followed the company's move to close a handful of stores quietly over the past few months.
As it turns out, that was just the tip of the iceberg. By the end of August, Transform Holdco had initiated the store-closing process for about 100 more locations, according to USA TODAY. That action suggests that the Sears and Kmart chains could be close to collapsing entirely. That would put billions of dollars of sales up for grabs by competitors, ranging from J.C. Penney (OTC:JCPN.Q) to Target (NYSE:TGT).
The pace of store closures accelerates again
At the beginning of 2018, Sears Holdings operated about 1,000 stores between the Sears and Kmart nameplates. The remnant that survived bankruptcy was less than half that size. The store closures announced just since the beginning of August will leave the two chains with fewer than 300 full-line stores combined.
The official store-closing announcement in early August mainly targeted Sears stores. A company statement indicated that the move was part of a broader shift to a strategy centered on small-format stores with a limited merchandise assortment. Transform Holdco has agreed to buy Sears Hometown and Outlet Stores -- or at least the Hometown portion of the company -- which will instantly widen its geographic reach. Sears Hometown stores primarily sell appliances, tools, and lawn and garden supplies -- merchandise categories in which Sears still competes relatively well.
By contrast, more than 80 of the roughly 100 locations marked for closure later in the month were Kmarts. This move has nothing to do with a shift to small-format stores. It simply marks a retreat from the soft goods, grocery, and pharmacy categories that account for the bulk of Kmart's sales.
The beginning of the end
This massive wave of store closures is a clear signal that bankruptcy didn't solve the underlying problems at Sears and Kmart. If more proof is needed, Transform Holdco is slashing its headquarters staff to the bone, keeping on just enough staff to carry out the essential tasks needed to stay in business.
It's not surprising that Sears and Kmart are in a downward spiral, considering that comparatively stronger chains like J.C. Penney are also on the rocks. Certain retailers -- like Target -- are gaining market share rapidly, thanks to a combination of low prices, compelling products, well-designed stores, and convenient pickup and delivery options. Others, like Sears, Kmart, and J.C. Penney, are struggling to adapt to changing consumer behavior.
In recent years, management often claimed that closing unprofitable Sears and Kmart stores would make the chains stronger in the long run. That's no longer a plausible argument. What's left of the Sears and Kmart chains is too small to be viable in today's competitive environment. Adding a bunch of small-format Sears stores won't change that, either.
J.C. Penney's last chance to gain some market share
Several years ago, under former CEO Marvin Ellison, J.C. Penney adopted a growth strategy focused on taking market share from Sears as it shrank. Most notably, J.C. Penney began selling major appliances, hoping to capture a portion of Sears' multibillion-dollar appliance business.
But selling appliances turned out to be unprofitable, as did many of the company's other growth initiatives. Meanwhile, J.C. Penney allowed its core apparel business to deteriorate, losing market share to off-price retailers, discounters like Target and Walmart, and fast-fashion chains. J.C. Penney's new management team eventually undid Ellison's entire growth strategy, leaving the company with lower sales and lower profits than it had enjoyed a few years earlier.
Today, J.C. Penney has pivoted back to a focus on fixing its core apparel and home businesses and improving the in-store shopping environment to drive a return to growth. If this strategy is successful, the retailer could benefit from the ongoing downward spiral at Sears and Kmart. Kmart in particular still sells plenty of apparel and home goods and targets customers similar to J.C. Penney's.
However, to reverse its own sliding sales, J.C. Penney will need to ensure that rivals like Target don't continue eating its lunch. Considering the discounter's strong sales momentum, that will be a very tough task.