It’s been 125 years since former railroad employee and innovator Richard Warren Sears launched a mail-order catalog that would propel the Sears retail operation into the “World’s Largest Store.” Its later diversification into financial services included the Dean Witter Reynolds investment firm and Discover Card brands.
But when the 1990s dealt the conglomerate a bad hand, Sears changed — first divesting many nonretail businesses and finally agreeing to be acquired by Kmart. Seven years after the merger that created Sears Holdings Corp. (NASDAQ:SHLD), the retailer is still changing.
Sears’ sales have been shrinking every year since the Kmart merger in 2005. In the second quarter of 2011, Kmart sales were flat, and Sears’ sales fell 1.2%. At $35.3 billion, SHLD is now ranked 10th in annual retail sales — not necessarily catastrophic in a down economy, but far less than head-to-head competitors Wal-Mart (NYSE:WMT) at more than $307 billion and Target (NYSE:TGT) at nearly $66 billion.
Now Sears may be banking on a management shift to help reverse its slide. On Thursday, Sears Holdings announced the departure of its president of marketing, Dave Friedman, who’ll be replaced by Imran Jooma, e-commerce president.
Sears is also trying to capitalize on some of its most well known names. It has already has licensed the Die Hard battery brand to Meijer Corp.’s 194 stores, and it hopes to make similar deals for the Kenmore appliance and Craftsman tool brands. That’s risky, however, because the three brands’ popularity accounts for a lot of in-store traffic.
At $77, SHLD is trading 50% above its 52-week low of $51.14 in September. With a market cap of nearly $8.5 billion, the stock has a price-to-earnings growth (PEG) ratio of –0.66%, meaning it’s losing money. SHLD has total cash of $658 million and total debt of $3.74 billion. Its operating cash flow is –$147 million, and its levered free cash flow is –$338 million.
Here are four reasons to return Sears shares this season:
- The Economy Is Punishing Mid-Market Retailers. Sears is caught between the proverbial “rock and a hard place.” With stubbornly high unemployment and a still-sluggish economy, shoppers are down on mid-market retailers. Low- and high-end retailers had been posting strong sales this year, while mid-market retailers slumped. The reason: Budget-conscious consumers wanted more bang for their buck, while the “wealth effect” drove sales at high-end stores. But October numbers released by many stores on Thursday were disappointing for all three tiers, leading to gloomier expectations for the holiday season. Because SHLD is already struggling, losing more shoppers likely would have a greater impact on its overall health.
- Sears Continues to Lose Money. If the third quarter is anything like the first two, expect SHLD to lose money when it next reports earnings on Nov. 14. In August, it reported a loss of $146 million ($1.13 a share) — including $48 million in charges related to closing 29 stores. Second-quarter sales were an anemic $10.3 billion, even lower than Wall Street expected. Not even hefty discounts that further shaved already thin margins could stem the sales decline.
- Don’t Trust the Recent Stock Bounce. Yes, Sears’ shares rose last month, but that’s not the whole story. Because the retailer has been weaker than its peers for so long, a lot of investors are shorting the stock. Since its most recent high of $193 in April 2007, SHLD has been on the schneid, dropping more than 72% to about $52 in August. Despite rebounding into the $79 range since then, the headwinds continue.
- Gimmicks Are Unlikely to Prompt Turnaround. SHLD hopes to boost sales this holiday season with enhancements to online shopping, free delivery, layaway promotions and 5% discounts on qualifying Sears and Kmart purchases. But those higher costs and bigger discounts will weigh further on margins, rather than generate a rebound in sales.
Bottom Line: It’s unlikely that Sears can reverse its long-term sales decline at a time when the retail sector in general is expecting a slowdown. Management can’t right this ship just with licensing agreements and consumer gimmicks. It needs an extreme makeover. And that might require the innovation of a modern-day Richard Warren Sears to accomplish.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
