Monday, December 20, 2010

Is Sears/Kmart headed for Bankruptcy?

How can this place stay in business?

I use to invest in Sears stock, and I was a little chagrined to see that I still have four shares loitering in my Compuershare account - not enough to warrant the $15 fee to sell them, at $68 a share, it would seem.  (Update:  Oh, the days before free trades!  And yes, I did sell the stock!).

But that got me thinking.  Should I unload these or hang on to them, or buy more?  After all, the share price was nearly $125 earlier this year - and then it dropped precipitously.  Is it a sleeper stock destined to recover when management turns the company around?  Or is this the General Motors of retailing?  I am inclined to think the latter, and here's why.

Sears has a long and storied history, and chances are, you've shopped there at one time or another.  And if you are old enough, you remember the catalog.  At one time, you could buy nearly anything at Sears, from clothes to boats, to cars, to car batteries, to tools, to lawn tractors, and even houses!  But that was a long time ago.

To me, Sears always had sort of a dorky reputation and sold sort of second-rate goods, at least in the 1970's, when I grew up.   As kids, we wanted Levis or Wrangler jeans, but Mom would take us to the mall and buy us a set of ill-fitting Sears "Tuffskins" which would insure mockery the next day in school.

Sears' model of branding their own products quickly became an anachronism in the era of brand identification.  For consumers in the 1980s until today, brand awareness has become key in marketing, and Sears' line of brands are viewed as, well, pretty lame.  Kenmore doesn't cut it in the age of designer appliances.

To be sure, there were some cases where the branding worked.  Sears Craftsman tools, for example, earned a reputation for quality, only because Sears would replace any tool you bought, for free, if you broke it.  This sort of reputation for toughness and durability worked well for the Craftsman name.

Similarly, the Sears "Die Hard" battery was, at one time, the ultimate battery to have, lasting a staggering 60 months - this in an era of 36 month gas-station batteries costing twice the price.

Sears auto centers, however, started generating news, and not of the good sort - stories about customers being pressured to have maintenance done that was not necessarily needed.  And of course, Ron White's famous rant about lug-nut school didn't help either.

Sears auto centers developed an odious reputation for shoddy work and for selling unnecessary services.   One of their primary strengths turned into one of their greatest weaknesses.

Sears branded tires never took off in a market that quickly became brand loyal.  Sears did carry the Michelin line, eventually.  But its guardsman and other "house" brands were viewed as second rate or economy brands, much as with house branded foods in grocery stores.  People started looking at other brand names as indicia of quality, and Sears' line of store brands were viewed as generic equivalents - not quite as good, but slightly cheaper in price - perhaps.

For many of us, the ability to get a Sears credit card when very young was appealing - we could buy clothes or put new tires on the car and pay "on time" - never mind the staggering interest rates.   But the "lifetime guarantee" on many items, such as shocks and mufflers, almost made it worthwhile (I did collect on that, once - but of course labor was extra!).

As for the rest of the store, well, I can't say much about ladies' apparel, other than it, too, has become more brand-conscious and trendy over the years.  Young women in particular, are fussy as to brands and labels and styles, and Sears was never known for being trendy, on the contrary, it was the height of establishment and staid styling.

Fast-forward a few decades and several marketing factors have occurred that spell trouble for the chain.  First is the demise of the mall.  Malls once ruled the nation, during the 1970's and 1980's, until people got tired of their stuffy atmosphere, high prices, and teenagers and gangs hanging out.  In the 1990's, off-mall sites became more popular, and stores like Wal-Mart, which have their own shopping plaza, took off, while many malls went under, saw decreased sales, or converted themselves into strip-type malls.

Sears has moved fairly aggressively to an off-mall model, and most K-mart stores were not mall anchors.  However, Sears still has a lot of unattractive real estate it cannot unload (it would cost more to abandon the stores than to run them) and thus is keeping many locations alive only until leases expire.

K-mart merged with Sears in 2004, with bankrupt K-mart oddly enough buying ailing Sears.  A hedge fund manager bought most of the shares and continues to "run" the combined company.  However, most stores have received zero dollars in terms of makeovers, remodeling, or refreshing, and as a result, store sales are plummeting.  Profits have gone up slightly over the last year, but only because of an aggressive cost-cutting strategy.  While cost-cutting is good, you can't cut costs to long-term profitability with shrinking market share.  You can only save so much money, and then you've run out of costs to cut.

Most Americans are abandoning Sears and K-Mart.  The stores are old, poorly stocked, and poorly served.  For example, the K-mart in Ithaca New York is rather disgusting, and on any given day you can count the number of shoppers (and cars in the lot) on one or two hands.  Meanwhile, next door, Wal-Mart has torn its store in half, expanding it by over 50% in size to make it into a "SuperCenter".

And WalMart is the problem, frankly.  They have the capital to tear apart profitable stores and re-make them into even more profitable stores.  Sears doesn't even have enough money to close a money-losing store.

And the combination of K-Mart and Sears has yielded no combined savings.  In Ithaca, in addition to a crumbling K-Mart is a very lackadaisical Sears store on the other side of town, which is also poorly attended.  I went there once, five years ago, and bought a weed whacker on sale for $50.  I saw no reason to go back - most of the appliances were far overpriced, compared to WalMart, BJ's and the like.  Rather than combine the stores into one brand, Sears and K-Mart continue to operate side-by-side, often competing with one another.  As a retail strategy, it makes no sense.

To be sure, Sears has some niche markets.  For some reason, many Hispanics love to shop there, at least in the DC area.  But for most people, they either gravitate toward WalMart for better pricing, or to Target for better style.  And instead of the "one stop shopping" model, where Mother might buy a dress, Dad a Craftsman tool, the kiddies some new toys - all while the family car was having its brakes relined (while mother made payments on her Discover card, updated her Allstate Insurance and signed up for Prodigy service for their new PC Jr.) today people go to different stores for different things - and many of those stores and services are online.

Sears is aggressively trying to develop an online presence through twitter and social networking sites.  But I am not sure Sears can ditch its "nerd" factor, at least to my generation (Sears was always, it seems, the sponsor of "the Wonderful World of Disney" in my mind.  Tuffskin Jeans and Guardsman tires, and a "S-Cargo" for the annual trip to DisneyWorld).

Its attempt to convert existing K-mart and Sears locations to Internet ordered pick-up sites (like a virtual version of Service Merchandise) has met with mixed reviews.  When FedEx and UPS and the USPS can deliver in 2-3 days, most people rather just wait for the brown truck to deliver to their door - for many items, we really don't crave immediate gratification, it seems, with Internet purchases.

So what is the future for Sears and K-Mart?  Without massive investment in store overhauls (which need to be relocated, so that means building new stores from the ground up) they cannot compete with Wal-Mart, Target, or the Warehouse stores (BJ's Costco, Sam's).  And increasingly, these sorts of stores are where people are buying appliances and other purchases (for home appliances, like stoves or refrigerators, I would be more inclined to think Lowes or Home Depot than Sears, for a flat-screen TV, BJ's or Wal-Mart).  And for clothing, I would be more inclined to look to Marshall's, Target, or Wal-Mart before I spent money at Sears.  And kids, I think would rather go "Aeropostal" at the mall than buy Tuffskins or Garanimals.

But maybe that is just me.  But frankly, from what I can see, as the stores get crumblier and crappier, they will continue to lose sales. Inventory will start to be cut, and the reason for going there will become even less and less (the last time I went to the Sears in Brunswick to get a Craftsman tool, they hardly had any in stock!).  Meanwhile, Wal-Mart will remodel its SuperCenter yet again.  And again.

As for on-line retailing, that may be a good way to make money - for an online retailer.  But there are other online retailers out there who are not saddled with a huge overhead of crappy worn-out brick-and-mortar stores in second-string malls and burnt-out strip malls.

Then there is the nature of the management.  The Chairman of the Board, whose hedge fund owns a controlling interest, has said in the past that he views the company as a hedge fund, with cash to be used to buy other holdings.  Now, apparently, he has changed that strategy, as there are no holdings left to hedge with.  And since the day-to-day nitty-gritty (and difficult) retail management of the stores has been neglected, there is not much left to do with the company.  Running a business takes real talent, and hedge fund managers are not like Warren Buffet, who isn't afraid to roll up his sleeves and remake a company from the ground up.  There is more to running a retail chain than cutting numbers on computer screens.  You have to have a vision and a plan, and both are markedly lacking at Sears and K-Mart.

The idea that a majority of the stock is held by one hedge fund is also troubling.  If you are a minority shareholder in any enterprise, where one block of controlling shares is held by one entity, you are always going to get the screw job, in my opinion.  It's like holding shares in a family-owned business, where you are not one of the family.  They will take care of themselves, pay themselves benefits, and manipulate the stock to serve their ends, but you will get the short end of the stock.

So, I just now hit "SELL" on Computershare for my orphaned four shares of Sears Holdings Stock.  I could use the loss, anyway, as it is nearly the end of the year.  I just don't see this company taking a piece out of Wal-Mart's hide - or Target's - which is what they would have to do to prosper.  I can see no place for them to go, but down.