Over the past three years, the stock market has consistently hit new highs. In this environment, stocks belonging to both good and bad underlying businesses tend to appreciate. However, if you look hard enough, you will find stocks that have grossly underperformed the market. This is often a telling sign that investors don't see current strength or long-term potential for those businesses. Sears Holdings (SHLDQ), which is facing much competition from every angle, is an example of this. In fact this short list of competitors: Amazon.com (AMZN 0.52%), Wal-Mart Stores (WMT -0.20%), Home Depot (HD -0.12%) and kohl's (KSS 0.17%) is enough to raise concerns. This has led to stock deprecation of 28% over a three-year time frame.
Sears hasn't made any significant changes to its stores, but it has made several significant moves to improve its business. Will these moves be enough to offer investors a dash of hope, or would that hope be merely a mirage?
Competition from all angles
Sears, the once-dominant department store, failed to change with the times while other companies began offering something unique. For instance, Amazon.com(AMZN 0.52%)offers the ultimate in convenience with its online retail store. More people are shopping online every day, and even if Sears and its other department store peers increase their online traffic, they're still going to be well behind Amazon.com.
According to website analytics company Alexa.com, Amazon has a global traffic ranking of 10 (with 1 being the highest) and a domestic traffic ranking of 5. On top of that, Amazon's page views per visitor have increased 54.80% to 10.76 over the past three months. Its time-on-site has shot up 63% to 9:03 over the same time frame. These are astronomical numbers, and they're very important to Sears. Amazon consistently steals customers from all retailers, and Sears is no exception. What makes Sears different is that it can least afford to lose those customers.
Consider that other than Amazon, some of Sears' largest competitors include Wal-Mart(WMT -0.20%), Home Depot(HD -0.12%), and Kohl's(KSS 0.17%). Now take a look at the top-line comparison for these five companies over the past year:
WMT Revenue (TTM) data by YCharts
Only Sears has suffered a concerning revenue decline. Wal-Mart's revenue increase over the past year isn't overly impressive, but it's not expected to be. Wal-Mart is a large and mature company that finds ways to grow methodically while returning capital to shareholders in the form of dividends and buybacks. For instance, it currently yields 2.4%. Therefore, its rewards go beyond stock appreciation. Mist important for this comparison, consumers looking for bargain-basement prices will opt for Wal-Mart over Sears.
Kohl's revenue has slipped a bit over the past year, primarily due to the suffering middle class, which it tends to target. However, it's still outperforming Sears on the top line, relatively speaking.
Home Depot has been stealing business from Sears for years. Home Depot presents a do-it-yourself image, which leads to consumer savings. This drives consumers into the store. Therefore, while Sears remains No. 1 in annual installation calls (14 million per year), consumers are attempting to do as much as they can on their own these days. This image also leads to foot traffic and increased product sales for Home Depot. The rebounding housing market doesn't hurt, either. Furthermore, Home Depot yields a 2% dividend.
Sears is attempting to offset the increased competition with divestitures and initiatives, but will it be enough?
Divesting and investing
Over the past two years, Sears has spun off Sears Hometown and Outlet Stores, Orchard Supply Hardware Stores, and now Lands' End. It acquired the latter for $1.9 billion in 2002. Bringing the brand in-store proved to be a strategic error. It's possible that Sears will continue its divestment rampage with Kenmore and Craftsman, but that remains to be seen. One thing is certain: Sears is beginning to look much different than it has in the past.
In regard to initiatives, the best one Sears has is its Shop Your Way rewards program, which is a free program that offers rewards, personalized deals, and member coupons. There is no minimum required to redeem points.
Sears recently announced a Shop Your Way Holiday Bonus, where consumers can earn up to 10% back in points through the reward program through Jan. 31. Additionally, Shop Your Way Max members have an opportunity to receive free two-day shipping on all orders. This also goes for anyone spending $59 or more. Shop Your Way members can also use the Shop'In app if they're near a Sears or Kmart if they want to place an order and then swing by and pick up their products with ease.
The Shop Your Way program might have potential as a positive catalyst, but will it be enough? Not likely. With the revenue chart above in mind, take a look at the company's bottom-line performance over the past year:
SHLD Net Income (TTM) data by YCharts.
Recent divestments will likely help the bottom line, but they're not going to help the top line. It looks like the goals for Sears are to become smaller and profitable. Though not impossible, these will be difficult tasks, especially considering the company's fiscal situation. Sears generated negative operating cash flow of $694 million over the past year and it's leveraged -- $599 million in cash and short-term equivalents versus $4.70 billion in long-term debt.
The bottom line
Americans love a comeback story, and it would be great to see Sears prove almost everyone wrong. However, due to stiff competition, being years behind industry trends, and fiscal weakness, this doesn't seem to be a likely scenario.
