Don’t expect the Sears failure to be a contagion threatening to infect the rest of retail.
A year ago, a Sears bankruptcy would have fit better into the U.S. retail narrative, given the steady decline of shopping malls and foundering chains. Today, however, with shoppers feeling more free to spend and nicer malls on the upswing, bankruptcy is a clear sign of individual weakness, not an industry trend.
Sears, once a force in U.S. retail so dominant that it could be called the Amazon of the 20th century, has been suffocated by debt and a steady erosion of revenue. While department-store competitors invested in e-commerce and tried new brands and formats, Sears withered as majority shareholder and Chairman Eddie Lampert repeatedly cut costs and shuttered stores.
“The retailers that are succeeding are investing in being good retailers,” said Ivan Feinseth, chief investment officer of Tigress Financial Partners. “All Sears did was close stores and sell assets, and it was a study in financial engineering that didn’t work.”
In other words, don’t expect the Sears failure to be a contagion threatening to infect the rest of retail.
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Sears Holdings — whose shares lost about 90 percent of their value this year — filed for Chapter 11 protection from creditors early Monday. Sears and its Kmart stores plan to stay in business for now, with help from $600 million in new loans.
Like Sears, Toys R Us was crippled by debt, which caused it to liquidate operations despite last year’s $11.5 billion of revenue. Both companies had seen cash flow increasingly constrained by interest payments. Sears has the added pressure of pension liabilities.
Meanwhile, the rise of Amazon has forced retailers into an expensive race to provide the online and delivery capabilities that consumers demand. Shoppers also are expecting customer service that goes beyond ringing up a cash register.
Walmart and Target have led the charge, expanding delivery and options like curbside pickup. Both have much lower debt levels and are tolerating the narrowing margins as a necessary cost of business.
Other retailers have experienced varying degrees of success. But with the U.S. economy strong and unemployment low, most chains’ prospects are brighter today than they were a year ago. Investors have seized on the companies that are poised to survive the industry’s protracted shake-up.
Smaller apparel chains like American Eagle Outfitters and Urban Outfitters have rebounded in recent quarters as shoppers have started spending again. Meanwhile, bigger stores like Best Buy have steadily siphoned off some of the appliance sales that traditionally went to Sears.
Sears, ironically perhaps, recently held a showcase for a renovated store in the Chicago suburb of Oak Brook, Illinois. It’s unclear whether that Oak Brook blueprint will be enough to bring in shoppers who might have defected long ago or who feel no loyalty to the brand.
“Too much rot has set in at Sears to make it a viable business,” Neil Saunders, managing director of GlobalData Retail, said in an email. “The brand is now tarnished just as the economics of its model are firmly stacked against its future success.”
While the company will remain open through the holiday period, its bankruptcy might deter some shoppers from buying big-ticket items there because of concern that Sears won’t be around much longer to back guarantees or take returns, Saunders said.
David Tawil, co-founder and president of Maglan Capital, said Sears is more of a “unique, one-off situation,” rather than a reflection of retail’s broader plight. He cited Sears’s unusual relationship with Lampert, who for years fended off the retailer’s demise by paying off debt and selling assets.
Sears has closed hundreds of stores in recent years in a bid to cut expenses. Other businesses that were sold or spun off include Craftsman tools and apparel company Lands’ End.
“Closing stores and selling good assets only leaves you with no stores left to close and no good assets,” said Feinseth of Tigress. “It’s the ultimate pulling the plants and watering the weeds.”