What went wrong?
Sears Holdings Corp (NASDAQ:SHLD) poor performance is not news. It most likely all started after the merger with Kmart in 2005. Since then, Sears has not produced any top-line growth. Naturally, the recent economic crisis did not help either, as Sears targets a consumer segment that is highly sensitive to cost increases and macroeconomic trends. As sales continued decreasing faster than the cuts in costs, capital expenditure reductions and inventory reductions that management imposed, Sears started losing money.
Cost cutting and capital expenditure reductions have strong downsides, however. A negative five-year capex rate has made Sears Holdings Corp (NASDAQ:SHLD) have one of the lowest capex per square foot figures in the industry. This results in fewer store improvements, and decreases Sears’ competitiveness in a fierce industry. In a desperate attempt to come back to profitability, Sears started closing stores. Closing stores is not enough, however. As the company continues closing it stores, competitors like The Home Depot, Inc. (NYSE:HD) will take advantage and steal market share in hardware and appliances. Likewise, Wal-Mart Stores, Inc. (NYSE:WMT) will do the same in electronics and home goods.
The role of Eddie Lampert
Eddie Lamper became the CEO of Sears Holdings Corp (NASDAQ:SHLD) in January of this year. His job? Bring the company back to profitability and boast sales. Looking at the latest earnings figures and the fact that stock is down more than 6% since Lampert took power, it doesn’t seem like he is doing his job well so far. The company’s latest earnings before interest, taxes, depreciation and amortization number came in negative, minus $8 million for the first quarter of 2013, compared to a positive $160 million in the prior year’s quarter. Domestic comparable sales declined 3.6% and the company’s gross margin rate decreased 220 basis points.
Lampert’s management style has also been severely criticized by the media. Bloomberg Businessweek, for example, mentions that he divided the company into more than 30 business units. Each business has its own president and profit-loss statement. These units compete against each other for Lampert’s attention and money. In this way, Lampert runs Sears like a hedge fund portfolio, which in theory isn’t so bad. In practice, however, divisions may have turned against each other.
What comes next?
A recovery won’t be happening any time soon. Despite its long history, It seems that Sears has few competitive advantages left, which is critical in a market full of competitors and extremely price-sensitive consumers. That being said, Sears still owns more than 750 properties, 10 distribution centers and has headquarters in Illinois, Michigan and Canada. These assets can be leveraged in many ways, including lease-backs, bringing safety to the balance sheet. Bishop Research and Analytics used five models to value Sears Holdings Corp (NASDAQ:SHLD)‘ real estate. When averaged, these models give an estimate value of $31.186 billion. If this number (which is more than 6 times the company’s current market capitalization) is accurate, then it’s hard to think of bankruptcy in the short run. However, considering that Lampert has an ownership stake that is already greater than 20%, I wouldn’t be surprised to see a private Sears in the future.
Competitors
Sears’ main competitor in electronics and home goods is Wal-Mart, which remains the market leader in food and general merchandise and is well known for its aggressive pricing strategy. Needles to say, Wal-Mart has its own problems: sales have been growing at 2%, an amazing rate for a company with a $256.47 billion market capitalization. The downside is that to keep the growth rate, Wal-Mart is investing its gross margin to make prices even lower. This is not sustainable in the long run. It’s also worth noting that in the past 12 months, the company’s stock has underperformed if compared with major indexes. The 5% annual return shows that even a giant like Wal-Mart is exposed to the increasing popularity of e-commerce, which isn’t one of Wal-Mart’s core competitive advantages.
In hardware and appliances, The Home Depot, Inc. (NYSE:HD) is one of Sears’ main competitors. Unlike Wal-Mart, Home Depot’s annual stock performance has been impressive: the stock price has more than doubled! This is not surprising if you take into account the positive effect of the housing recovery since Home Depot is a popular retail outlet for home and construction products and services. If you have a bullish view on the long term U.S. housing market prospects, Home-Depot may be attractive as an investment.
Summary
Although Sears Holdings Corp (NASDAQ:SHLD) is not showing signals of early recovery, it’s real estate has enough value to prevent bankruptcy. A private Sears is a more feasible outcome. Because Sears has the lowest capex figures in the industry and has had to make cost reductions and close stores, however, it could end up losing even more market share against The Home Depot, Inc. (NYSE:HD) and Wal-Mart.
The article This Huge Department Store Chain Is About to Say Goodbye originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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