If women prefer shopping at used clothing stores instead of at Sears Holdings' (NASDAQ:SHLD) flagship Sears stores, maybe they'll also buy goods at Kmart that come from bankrupt businesses. The retailer announced last week it would begin selling "brag-worthy" products it scooped up from liquidated companies and "other opportunistic situations." The way things are going, investors might wonder how long it will be before merchandise from Sears ends up there.
While consumers are always looking for a deal, and deep discounters such as T.J. Maxx and Marshall's have been the stars of the retail market, seemingly making Kmart's entry into the ultimate deep discount end of the market a shrewd move, closeout leaders Big Lots and Tuesday Morning are proving it's not so easy to simply set up shop and profit.
Getting into an industry with razor-thin margins, particularly since Sears is suffering from dramatically lower sales and expanding losses, is not what it needs now.
According to Kmart's press release, its initial foray into the closeout business will be with products from Brinkmann, the owner of Malibu Lighting that went bankrupt last October. The Chicago Tribune reports that Sears paid $3.3 million for Brinkmann's goods, which included over 4,000 charcoal smokers and grills, almost 10,500 beer-can chicken roasters, and over 83,000 grill brushes and scrapers. Kmart says they'll be offered as Blue Light Specials at closeout pricing.
This is just another loopy idea from Sears, similar to its desire to be your pawn broker in a cash-for-gold scheme, or since the fast-fashion segment of the market was hot, Sears thought of doing that, too. Entering the liquidation business seems like it's one of the last remaining ideas left sticking to the whiteboard that was thrown at it during a brainstorming session.
The closeout business is intensely competitive, and new entrants, such as Ollie's Bargain Outlet, which went public last summer, are targeting the same niche. It's also competing against the dollar stores that are clamoring for consumers' attention and wallets with an ever-expanding range of products.
It's proved to be a challenge for established leaders such as Big Lots, which suffered through several years of lower comparable-store sales before getting them to turn positive again. While it's since posted seven consecutive quarters of positive comps, one of the biggest hurdles to get over is going up against the likes of Amazon.com, with its range of products and price points, and online discount coupon sites such as RetailMeNot, which provide consumers with real-time information of great deals.
One of the advantages of the closeout business is supposedly the treasure hunt aspect of shopping there, but these rivals negate the need to hunt at all.
Sears is also still hemorrhaging customers at both its namesake stores and at Kmart. Earlier this month it said comps were down 7% at Kmart and were off over 11% at Sears in 2015. Comparables are an important retail metric, as they strip out any growth that might occur from simply opening new stores, and Sears is actually closing down stores left and right to reduce its footprint and plans on accelerating the number of closures this year.
Sears also needs to make sure it has enough cash on hand to buy inventory and pay for the rest of its operations. Last quarter it had just $294 million in the bank, down from $326 million the previous year, and though it got an influx of cash from shedding its real estate, it's also trying to pay down debt.
The $3 million it spent to acquire this initial load of merchandise is insignificant, but if it wants to make this a real venture -- and not just one of its hit-and-run ideas -- it's going to need to commit to spending more money, and with falling sales and a worsening financial picture funds will be constrained. Tuesday Morning is running into troubling building out its infrastructure to support its growth as completion of a distribution center has fallen behind schedule.
What it comes down to is that Sears is simply casting about and hoping something -- anything -- works to reverse its steep decline. Being a closeout retailer isn't about to give it any more growth than did its other hare-brained schemes and only serves as another distraction on fixing what is still wrong with this retailer, which namely has been corporate neglect of its stores. Fix that, and Sears Holdings might finally find it can be a retailer that doesn't have to worry about one day liquidating its own inventory.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Big Lots. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.