Congratulations to Sears Holdings Corp (NASDAQ:SHLD) shareholders. SHLD stock was up as much as 22% on Thursday amid news that its Kenmore brands of appliances would now be sold by e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN), opening a new door to some much-needed revenue.
Of course, the question remains: Does the use of this venue inherently make Sears shares 22% more valuable than they were yesterday?
It’s a victory to be sure, and if nothing else serves as a way of telling the world that some Kenmore appliances are now so-called “smart appliances” that work with Amazon’s Alexa. The partnership is also one with liabilities, though, and Sears has proven more than a few times that if it can fumble the ball, it likely will.
Amazon and Sears Team Up
The deal is simple enough. Rather than visiting a Sears store to purchase a smart Kenmore appliance, you can go to Amazon.com. After the purchase is made, Sears Home Services or Innovel Solutions will fulfill the order, delivering, installing and repairing the appliance as needed.
It’s not exactly a first. Kenmore-branded appliances were already available at Amazon.com, though this is the first Sears itself will be offering.
The motivation for the relationship is relatively obvious. As Sears SEO Eddie Lampert explained to SHLD stock holders in the announcement press release:
“The launch of Kenmore products on Amazon.com will significantly expand the distribution and availability of the Kenmore brand in the U.S.”
Terms of the deal were not disclosed. But, presumably Sears would be paying the relatively typical Amazon listing and transaction fees. That’s on the order of 15% for the amount of the sales price that’s $300 or less, and then 8% for the amount in excess of $300. Most of Kenmore’s window-mount air conditioners will sell for less than $300, while full-sized refrigerators will sell for more.
Any chance to sell your wares to an audience that wouldn’t otherwise even think about buying from you is a win. This deal isn’t the panacea traders seem to feel it is, however, given the meteoric rise of SHLD stock today. A couple of realities stand in the way of it becoming a smashing success.
One of them is the fact that, for all its popularity, Amazon still isn’t a top-of-mind place to shop for appliances.
Sears was once a go-to destination for appliance shoppers, though rivals like Best Buy Co Inc (NYSE:BBY) and Home Depot Inc (NYSE:HD) have been chipping away at its business. Their growth has been largely driven by in-store help and post-purchase support, boosted by simple name recognition. While most consumers may be willing to spend a few bucks on a piece of clothing or an electronics device sight-unseen, those same consumers may want to see a costly appliance with their own eyes rather than buy it on faith, online.
The other potential pitfall of the relationship is the fact that, after paying Amazon its cut, there’s not a whole lot of profit left.
On average, gross margins — the price the consumer pays minus the cost of those goods to the seller for appliance and electronics retailers — is just above 30%. That’s hardly the net profit earned on sales of appliances, though. Once employees are paid and all the other operational bills are paid, there’s not a lot of profit left. Even if Amazon extended a very sweet offer to Sears, this partnership may be more valuable as a PR tool than an actual money-maker.
Bottom Line for SHLD Stock
That’s not to suggest it’s all bad. The fact of the matter is, inasmuch as many of Kenmore’s appliances are now smart appliances that seamlessly integrate with Amazon’s Alexa digital assistant and Amazon is launching its own version of Best Buy’s Geek Squad, consumers will likely add refrigerators and air conditioners to the list of smart-home hardware they need help from Amazon to set up. It’s a very fluid, organic add-on sale.
It’s just not enough to matter.
The fact is, Sears continues to bleed money, unable to make any measurably fiscal progress. The only reason it’s losing less money now than it has in the past is because it’s been shrinking the whole operation via store closures. Actual growth (sales of margins) remains elusive. Last quarter’s same-store sales were lower to the tune of 11.9%.
In that light, even though appliances is one of the company’s better remaining businesses, selling them through Amazon.com isn’t actually going to help save the company. You may want to take your profits on SHLD stock while you can after Thursday’s early pop.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.