Most retailing trends of the last decade can be summed up quite simply.
Shopping is no longer entertainment.
Shopping used to be entertainment, back before the Web was spun. Men and women would enter a store with a rough idea of want or need. The store, through displays, design and other merchandising tricks, would meet the need. The entertained shopper left with something in a bag.
This is no longer the case. Shopping has become utilitarian, we know what we want before we get in the car, and we don’t deviate. Even if we’re buying a car.
The job of the sales funnel has moved online, but many retailers have yet to adapt to this new reality, making them attractive, regular shorts.
Sears: The Model
Investor Eddie Lampert put Sears and Kmart together in 2005 as Sears Holdings Corporation (NASDAQ:SHLD) and still thinks he can make money investing in “wow.”
But Sears Holdings Corporation (NASDAQ:SHLD) has never made any money in wow, nor in retailing. Sears Holdings Corporation (NASDAQ:SHLD) is a real estate company, drawing down a century’s worth of assets, a piece at a time. Its current model dates from 2005, and while the stock price rose 50% over the next two years, it is now down 72% from those highs.
That’s why Lampert said he would take over as CEO. The easy money may lie in spinning off discrete operations, as was done with what’s now Orchard Supply Hardware Stores Corp (NASDAQ:OSH). OSH looked like a winner when it came public last year, but is now worth a tiny fraction of that price, and Lampert has been quietly getting out of it.
Lampert’s game works for Lampert. It doesn’t work for you. There is nothing more limited than a limited partner, and if you’re buying SHLD you’re Lampert’s limited partner. He’s going to milk operations and extract cash for as long as he can get away with it, and very likely will come off whole. The only way you will is with selective shorting on the way down.
J.C. Penney: The Sequel
That’s because, once upon a time, J.C. Penney Company, Inc. (NYSE:JCP) was a really big, successful retailer, and like Sears Holdings Corporation (NASDAQ:SHLD) held a lot of real estate. Like Sears Holdings, J.C. Penney peaked in the 2007 real estate boom, and is down 82% from the 2007 peak.
Like Sears, J.C. Penney Company, Inc. (NYSE:JCP) has tried to prop itself up with hype. Sears Holdings Corporation (NASDAQ:SHLD) did it by making Lampert CEO. J.C. Penney did it by hiring Ron Johnson from Apple Inc. (NASDAQ:AAPL), where he had spearheaded the Apple stores.
Johnson, and Penney, made a big mistake in evaluating that success. Both thought people were going to the store for entertainment, and staying because of some “wow” factor. In fact, people go to Apple stores, still, to buy or get customer support that’s unavailable online, and most of the people inside the store are waiting in line. They’ve either bought or are involved in an elaborate buying ritual. They’re not “shopping.”
Johnson tried to make J.C. Penney Company, Inc. (NYSE:JCP) both more high-tech, with iPads in the stores, and more hip. The two ideas worked at cross purposes. If you can buy with a computer, you can do that at home. As to the hip, again, people go to stores to buy, not shop. Had he found a way to integrate the online and in-store buying experience, having people fit and pick up merchandise in the store, he might have had something.
In fact, he had nothing. He had hype, which got a lot of people into the stock, and now, again, it’s a short. It was, in some ways, a classic pump-and-dump, with September as the time to get out, when the stock was near $30/share. It’s now selling for half that price, but watch the hype cycle start again if Johnson gets canned. If you’re long, that’s your time to get out. Otherwise, J.C. Penney Company, Inc. (NYSE:JCP) is a great short.
What To Buy
The only trend that makes sense is greater integration of the online and offline experience. Anything else is dead money.
The best buys in retailing are stocks like Costco Wholesale Corporation (NASDAQ:COST), which are strictly utilitarian in nature, as are Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT), and The Kroger Co. (NYSE:KR). In fact, if you had bought 100 KR and sold 100 JCP short on the day Johnson was hired, you would be up 44% on the Kroger and 34% on your negative Penney’s bet.
If shopping remains entertainment, the venue has moved. It’s no longer something you do at the mall, but something you do online, with perhaps some participation from a physical store. If opportunities remain in retailing, that’s where they lie and in general you’re best served keeping your money in your pocket until they show up.
The article The End of Shopping as Entertainment originally appeared on Fool.com is written by Dana Blankenhorn.
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