Eddie Lampert, fairly or unfairly, will go down in history as the man who killed Sears Holdings Corp (NASDAQ:SHLD). I think it’s an unfair charge, but it’s what SHLD stock holders will remember.
Ever since Lampert combined the venerable department store chain with his Kmart in 2004, Lampert has been fighting a rearguard action to save the onetime retail giant.
It’s an action that most analysts now see as futile. The combined company’s market cap today is barely over a billion, and SHLD stock opened for trade Friday at $8.43 per share after trading in 2007 for over $190. Every year there are fewer assets, the debt-asset ratio is constantly rising. It’s like watching someone slowly drown.
Lampert has drawn criticism for extracting value from the company during its fall, selling off brands and real estate, making himself its principal creditor, making certain he will remain a billionaire even after the company disappears.
But could he have done differently, or better?
Buffett Says No
Legendary Berkshire Hathaway Inc. (NYSE:BRK.A) CEO Warren Buffett has said the job was hopeless from the start. Retailers don’t come back, he said in 2005. Once a store has fallen behind its competitors (and Sears had fallen behind decades before Lampert moved on it), it doesn’t come back.
The reason is that retailing is about reputation, and goodwill is its chief asset. Customers go where they think they’re getting the best deal. Mainstream department store retailing has been out of fashion for decades. Stores like Macy’s Inc. (NYSE:M) and J C Penney Company Inc (NYSE:JCP), with their high-cost mall locations, were being replaced by discounters like Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT) 40 years ago.
Whether Lampert could have saved Kmart is a different question. Kmart claimed a cost structure and margins like Target. Maybe combining it with Sears was a mistake. But even in 2004, Kmart was the third player in the discount market; consolidation was obviously on the horizon, and it lacked scale to evolve into anything more than a Big Lots, Inc. (NYSE:BIG).
A Question of Margin
The key question remains margin. A small retailer may charge twice as much for a product as they pay for it. A department store chain usually needs margins of 35% to survive. Walmart gets by on 25%. Costco Wholesale Corporation (NASDAQ:COST), which announced another record quarter in the past week, gets by on 13%.
Lifestyles have changed. People no longer go to stores to shop. They go there to buy, lists in hand. No one has time for serendipity, or if they do, they let their fingers do the walking and wait for it to pop up on a screen. All of which brings us to Amazon.com, Inc. (NASDAQ:AMZN).
It’s Amazon that killed Sears, not Walmart. Amazon has been slowly raising its gross margins for years, they’re now well above those of Target, they’re approaching those of Sears itself, but the company has convinced consumers it offers value worth paying a markup for.
This is what Sears once did. The Ponce City Market, the hottest entertainment destination in Atlanta, was built in the late 1920s as a Sears mail-order warehouse. The Sears stores were built, like Amazon’s new bookstores, to bring this perceived value closer to people. The Sears “Wish Book,” the Christmas version of its catalog, was the Amazon website of the 1930s.
The Wrong End of the Business
The mistake analysts, and Lampert, made with Sears was in looking at it as a store, as an end to itself, rather than as its legendary chairman Julius Rosenwald saw it, the means to the end.
That is, the perception of value, convenience and selection on the part of the customer. How you get to that changes over time. Sears, however, did not change. Let that, not Eddie Lampert, be its epitaph.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
