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SHLD: Same Fate as JCPenney, It’s Just Taking a Different Route

The nation's two most prolific department store chains aren't in terribly different boats ... unfortunately for investors of both

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Sears Holdings firmly implies that it’s just trying to cull the stores that are a drag on profits, but at least a couple of the stores Lampert has let go of recently are among the organization’s most profitable units located in some of the country’s highest-traffic malls. Why would he let go of such assets? Because the offers — to Lampert, anyway — are just too good to refuse.

There’s just one problem with the approach … it’s not viable for the long haul. Indeed, given enough time, it’s almost a guaranteed loser.

Even if most of the stores Sears is cutting loose of are dead weight, the 80/20 rule largely applies in the world of retail — 20% of Sears’ department stores provide 80% of … well, we can’t say “profits” because the company is habitually losing money; it lost $985 million last year, and is on pace to lose nearly twice that this year. Let’s just say 20% of the company’s units make up 80% of the company’s value. Booting even just a handful of the very best stores (because the payoff is strong) still knocks out a huge chunk of the company’s ability to produce revenue, and more important than that, the ability to produce profits.

It’s a nice short-term fix, but the whole point of retailing is to build a machine that produces recurring — and growing — revenue for years to come. Booting even just a few of your best profit centers makes things worse, not better.

Bottom Line

As long as Lampert is willing to sell Sears stores to raise cash, the company won’t need to make any kind of secondary offer the way JCPenney just did. SHLD had $681 million in cash on the books as of the end of last quarter, and seems to collect tens of millions (though the amount can vary widely) each time a store is sold. But, until Sears can actually address the reason it’s bleeding money, carving out pieces of itself only buys time.

And, therein lies the problem … Sears Holdings doesn’t seem to have any understanding of why it’s losing money, and therefore doesn’t have a viable plan to turn business around.

Eventually Lampert is going to run out of attractive stores/locales to sell. It might take a while, but it’s going to happen sooner or later. That’s when the company is going to face a serious JCPlike cash crunch, which for retailers usually marks their final days.

Hopefully Lampert will give up on the whole thing and abdicate his position before he chops off too many of the organization’s most vital organs, as someone else who “gets” retailing could still save the company

Lampert appears to be entrenched, though; the outlook for SHLD doesn’t look encouraging.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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