As a potential investor, ask yourself whether you trust Sears Holdings (NASDAQ:SHLD) CEO Eddie Lampert. The man has singlehandedly kept the Sears business alive (albeit, barely), but ironically has also singlehandedly been behind the destruction of Sears stock.
Currently trading for about $7, Sears stock is about 27% off its recent lows of $5.50. However, Sears stock is a only headed one direction in the long-term, and that’s lower.
The Sinking Sears Ship
Sears has done some things right. Spinning off its Lands’ End, Inc. (NASDAQ:LE) unit was a good decision at the time, although it now sits near all-time lows. It’s partnership with Amazon.com, Inc. (NASDAQ:AMZN) to exclusively sell its Kenmore brand could be beneficial. But Sears made that move with Amazon out of desperation: They didn’t want that deal, they needed that deal. That’s how you know Amazon had its way with Sears, not the other way around.
The rest of the company’s moves were just too terrible. Unless Sears were to embark on a serious transformation, I can’t imagine it will survive. It may be a slow bleed out, but a certain death almost seems guaranteed.
What were some of those mistakes? Take your pick. A few years ago, SHLD opted to spin its top-performing locations into a REIT. The move left it owning its worst-performing locations. While the capital injection was nice, its benefits were limited. Same with selling its Craftsman brand to Stanley Black & Decker, Inc. (NYSE:SWK) for $900 million. The inflow of capital will be good. The loss of business not so much.
Ultimately, Sears needed to get as much money as it could in its asset sales. That meant selling its top assets, leaving it with its worst ones. All that does is prolong its life, but it doesn’t cure Sears’ disease.
The Current Retail World
Why does Sears’ blunders over the years matter? Maybe if it were 2010 and the retail industry hadn’t shifted so much, none of this would matter. But with Amazon, eBay Inc (NASDAQ:EBAY) and others making big strides in e-commerce, traditional retailers are under more pressure than ever.
At least 300 of them have already filed for bankruptcy this year, up 31% over the same period a year ago. Thousands of stores that aren’t going bankrupt are closing locations left and right.
It’s tough sledding out there and even the best are struggling. What matters now is a differentiated experience for the shopper. Be it value and bargains or unique experiences. Sears doesn’t provide that. Top brands can survive this environment too. Names like Nike Inc (NYSE:NKE) may struggling, but they’ll be okay over the long-term. Unfortunately for SHLD though, it’s been selling off or spinning off its top brands.
Sears Canada is struggling and no matter how much Lampert is “fighting like hell,” Sears stock is in a bad spot. Any brand, business or land that had value, the company has seemingly parted ways with.
The Bottom Line for Sears Stock
Last quarter, Sears stock reported a 22% drop in revenue. Comparable-store sales fell more than 11%. Somehow Sears stock rallied. It hasn’t had positive net income since 2011. Sales have declined every year since 2007. Why would anyone want to invest in this company?
Even though a company like Macy’s Inc (NYSE:M) is struggling, at least it’s trying to make the right moves. It’s debt-to-asset ratio is declining. Not SHLD though, which saw its percentage climb from ~25% to almost 50% from 2016 to 2017. It’s been creeping higher over the past few quarters, too.
Maybe the company can find a way to overhaul its operations. Slim down. Close down its worst stores. Try to keep its best locations running. Work on free cash flow and high-margin services where it can create value for customers and shareholders alike.
Until then though, operating Sears and K-Mart will just continue the slow-going death of a one-time retailing conglomerate.
Sears stock clearly is in a secular decline. Traders might be able to ride bounces from $5 to $8 or from $7 to $10, but I don’t think it’s worth the risk. There are other retailers out there worth buying and not all of them are doing poorly. For those that want to invest in retail, stick with the ones that are winning (hint: these 8 can survive). Or invest in strong themes or brands that have staying power in this new world of retail.