Sears Lives to Fight Another Day But Will Need a Miracle

January 16, 2019, 10:45 PM UTC

Sears Holdings (SHLD)is not being relegated to the dustbin of retail history, at least not yet, thanks to a $5.3 billion offer in bankruptcy court by company chairman Eddie Lampert.

Reuters and the Wall Street Journal early on Wednesday reported that the hedge fund manager, and Sears’ former CEO and top shareholder, had won an auction with a deal that will keep 400 stores open and give Lampert ownership of the chain as well as of key assets like Sears’ still well regarded Kenmore and DieHard brands.

That’s good news for the 50,000 or so store workers who get to keep their jobs. At the same time, it is hard to see how Sears, which also owns Kmart, can make a go of it as a much reduced retailer, particularly under Lampert’s ownership which has never lived up his promises years ago to build the retailer of the future.

Since 2005, when Lampert merged Sears with Kmart, which he had bought out of bankruptcy, the combined company has not reported a single year of sales growth. Instead, since then, sales at what as recently as the 1980s were the two biggest U.S. retailers, fell by two-thirds to hit $17 billion. Lampert in recent years had tried to stave off bankruptcy by selling off many of Sears’ best assets, including attractive stores and top brands.

While he has argued that he was trying to turn Sears into an “asset-light” company focused mostly on e-commerce and on a membership model, the moves have left Sears ill-equipped to compete in the current retail environment. At the company’s peak, it had 2,300 stores (which included smaller format stores and Sears Canada). But even the core Sears department stores and Kmart, which in the 1970’s had 20 times the revenue of Walmart, have been denuded.

Lampert has long held that Sears had to reorient itself toward e-commerce and correctly predicted that streamlined store fleets were the future of retail. For a while, he was able to attract top talent to Sears and Kmart’s digital businesses and operate some of the best e-commerce sites in retail. But such a dramatically smaller footprint deprived Sears of the physical locations that support e-commerce. Lampert didn’t grasp that stores and e-commerce work hand in hand. The most successful big store retailers of the last year, such as Target, Walmart, Home Depot and Kohl’s, are also chains that managed to both maintain store fleet size and have booming e-commerce.

Target last week reported a stellar holiday season, with comparable sales up 5.7% and traffic gains at stores, and said that almost all of its e-commerce growth came from stores helping to fill orders. Kohl’s typically ship 40% to 50% of online items from store inventory.

Despite good tech, Sears e-commerce shriveled in the last five years. It’s all fine and good to have a site with good functionality. But it’s for naught if no one wants to buy your goods, or feels anything for your brand. And on those two front, Sears and Kmart have failed dismally. What’s more, revitalizing Sears will take money that the company may not have or get. When Kohl’s spends nearly a billion a year on stores and e-commerce, and Macy’s can make acquisitions, how could Sears ever keep up? A much smaller Sears will have far less sway with vendors to get exclusive product, key today to competing with other department stores and Amazon. And landlords, tired of Sears’ drama and non-stop store closings, are not likely to step up much anymore. Winning back customers will require heavy marketing spending.

Some surmise Lampert will focus on appliances and tools, areas where Sears still has credibility. Indeed, according to UBS Evidence Lab data quoted by Bloomberg News, Sears gets about $3.5 billion a year in sales from big appliances, putting it on par with Best Buy, though well behind Lowe’s and Home Depot. The company has opened a few small format stores for appliances that have been well received. But such appliances are big ticket items and won’t generate frequent visits to the big Sears department stores. And that’s a problem when Sears doesn’t have an appealing apparel business to speak.

Lampert now must revitalize a severely depleted retailer at a time when even dynamic rivals like Macy’s and Nordstrom are struggling to grow. He had 14 years to show his way was the right one, to no avail.

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