Sears (SHLD) is holding a giant garage sale right in front of everyone's face.
The beleaguered retailer announced Thursday that it will close a total of 78 stores by the summer, mostly weighted to Kmart. Why Kmart? Pretty simple actually: the stores are positioned in towns that have lost meaningful numbers of human beings, making them no longer relevant. For the people that do remain in these towns, their first choice for food and clothing are dollar stores such as Dollar General (DG) and Dollar Tree (DLTR) or a Wal-Mart (WMT).
There is no amount of merchandising overhaul or store investments that could be made to reverse these external factors -- they are fundamental, and reflective of Kmart being a store concept from a different time in America's history.
As for Sears, its store network is also in horrible locations. And where the company does go head to head with the best assortments and planning from Macy's (M) and J.C. Penney (JCP) it's simply unable to compete. The store shopping environment is subpar, the selection is drab and the prices are not competitive in almost all key categories.
Here is how I would read the announcement last night:
1. Stores are being looked at as piggybanks for Sears -- they can be quickly closed and inventory liquated, bringing in cash and cutting costs.
2. You ideally don't want to see a major retailer announcing 78 store closures before the critical back-to-school and holiday shopping seasons -- it will lead to even more market share loss that keeps the company in a financial death spiral.
3. The company's first quarter is likely trending absolutely awful from a top- and bottom-line perspective. As a result, core cash burn will continue.
4. Sears is taking measures that would normally be cheered, short term, by the market. When Gap (GPS) announced a large swath of store closures a year or so ago investors became short-term optimistic on profit margins. But seeing as Sears continues to close stores and raise cash and yet the stock is still in freefall, it's quite telling as to the long-term outlook for the business.
5. The innards of the company have been gutted to such as extent that it can no longer run 78 stores. As I have written many times before, Sears has no soul amid tons and tons of layoffs and executive turnover. The company simply does not have the talent to try and turn around a group of stores, which doesn't provide confidence it can drive the stores it leaves open to profitability.
6. Store closures mean the company loses assets from which to extract cash from in 2017 and beyond. In turn, shuttered properties turn into zombie properties -- the locations are horrible, and will sit on the company's books for years in some manner.
I remain steadfast in my opinion that Sears will file a form of major reorganization sometime in 2017. While the company has raised a good deal of cash this year, I don't see how it will be able to match its cash raising efforts in 2017 after what will be a brutal holiday season. As a result, I believe Sears will simply be unable to operate its business ahead of holiday 2017, and be forced to reorganize in an attempt to prolong an inevitable death.
View From the Ground
As some of you may know, I declared myself a "Sears photo journalist" several years ago. It has been amazing to watch the decline of this company as told through the lens of a smartphone. However, I am now running into a problem: the majority of the Sears and Kmart locations in my city have closed! While I do visit the few that remain open to assess what is going on, I am relying a great deal on social media to reaffirm what I am seeing these days.
I think the Instagram posts below from the around the country are pretty telling. Indeed, the photos reaffirm everything I continue to see during my store visits.
Weak Store Traffic
One of the main reasons for Sears' downfall is that because of years of merchandising stumbles, it can no longer attract consistent traffic to its stores. In fact, traffic levels are embarrassingly weak, which is not good because the company pays high rents given it's an anchor tenant.
Like the picture below, I often walk through Sears to get into the mall.
Appliance Share Lost
Sears was once the go-to place for appliances. But that is no longer case thanks to increased offerings from Home Depot (HD), Lowe's (LOW) and Best Buy (BBY) (which have also improved their customer service). Sears now has a ton invested in pricey appliances that are not being sold -- it's an asset losing value by the minute.
Sears Has No Identity
Sears is not Bath & Body Works, nor is it Dollar Tree. I continue to see the company trying to sell odd things in its stores, which is a sign it doesn't have the proper managers in place to understand the consumer base. Note that Macy's, J.C. Penney and others continue to focus on inventory localization to boost profit.
Selling $1 hand lotions is not going to help Sears reach profitability.
Deeply Discounted Clothing
Along the lines of the company having an indentify crisis, Kmart continues to think it's a fast-fashion retailer. Season after season Kmart is stocked with oodles of fashion pieces that go unsold because it's not what the customer base (old people) want. Hence, the items get marked down or are sold at super-low prices to begin with hopes of them selling.
