Dead brand walking: Sears is going out with a bang

In the weird irony that is often part of retail (and life in general), Sears Holdings recently announced its first quarter of comparable sales growth in many years—and I believe only its second or third since I left the retailer in 2003! It turns out that the liquidations sales being held in the many Sears and Kmart locations that were closing during the quarter finally brought out customers in droves. Better late than never, I suppose.

Of course, the world’s slowest liquidation sale is not yet over, but it’s hard to take this dead cat bounce as a positive indication of anything substantive.

Last week also brought two other pieces of Sears news. In a classic “you broke it, maybe you want to own it” moment, the hedge fund led by Sears Chairman Eddie Lampert offered to buy the nearly dead retailer. In a statement that seems certain to guarantee Lampert’s fast track admission to the reality distortion field Hall of Fame was this gem: “Sears is an iconic fixture in American retail and we continue to believe in the company’s immense potential to evolve and operate profitably as a going concern with a new capitalization and organizational structure.” In related news, I set fire to a big pile of cash.

The other big story was that Sears cancelled the auction designed to improve upon Service.com’s $60 million “stalking horse” offer when the effort failed to generate a single additional bid. The lack of interest in this once sizable and profitable unit (which was valued at many hundreds of millions of dollars during my Sears tenure) is yet another sign of how far Sears has fallen during the past decade and how little residual value the market sees in many of its pieces.

It may turn out that Lampert and his investors will do reasonably well when all is said and done in the sad saga of Sears’ demise. I’m not smart enough to figure out exactly how all the financial engineering and picking at Sears carcass will ultimately benefit them. But two things are clear: First, during his nearly 15 years at the helm of the bad marriage that is Sears and Kmart, Lampert has never once articulated a compelling and remarkable strategy to guide the retailer. Instead, we’ve had an endless parade of nonsensical tactics, relentless cost cutting and seemingly self-interested asset stripping. In return the company has sustained well over a decade of precipitous market share declines and massive operating losses. In fact, despite operating in one of the best quarters in recent U.S. history, despite closing hundreds of “bad” locations and despite taking an axe to other operating costs, Sears still managed to lose nearly $1 billion on barely over $2.7 billion in revenue this quarter.

Second, the notion that anything can be done to save Sears in a way that remotely resembles its once iconic status is absurd, particularly as Lampert holds on to the idea that the brand can shrink its way to prosperity. Sears has never fundamentally had a cost problem. It has, for at least 20 years, had a huge customer relevance and remarkability problem. Closing more stores and shrinking and/or leasing out the ones that remain may temper losses, but it will never do anything to address the core issue which, simply stated, is having enough customers that want to buy the stuff they sell.

I am certain that over the coming months there will more stories of asset sales, store closings and largely random new program offerings designed to return Sears to its former glory. It’s all just noise, far more like the like gasps of a dying man than a glimmer of hope for any form of resurrection.

Dead brand walking.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

The critical question for struggling retailers: Too much store or not enough brand?

I suspect hardly anyone is surprised when an ailing retailer announces plans to shutter locations en masse. Across the last several years we’ve seen dozens of once mighty chains close hundreds of stores in hopes of staving off a trip to the retail graveyard.

Last week, having already closed some 120 stores in a bid to shrink to prosperity, Macy’s announced that it plans to eventually reduce the size of many of its under-performing stores. These “neighborhood stores” (four of which are currently being tested) will also undergo merchandising and service changes. In a Wall Street Journal article discussing the new strategy I was quoted as saying ““If you’ve got too much space, it means your brand isn’t resonating. It’s not a real estate problem, it’s a brand problem.” And while that quotation was a bit out of context and not meant specific to the viability of Macy’s new strategy, I do think it’s critical for retailers to be sure they are working on the right problem. From my experience, more times than not, a massive retrenchment of brick & mortar space is most often an indication of poor customer relevance, not bad real estate.

Of course, this does not mean retailers should not prune store locations and/or look to resize current (or planned future) locations. Clearly real estate decisions, be they specific location or size of footprint, need to reflect today’s consumer and competitive situation. And we know that the United States is, on average, significantly over-stored. We know that some retailers went a bit wild and crazy with store expansion plans in an era of cheap money. We know that the growth of e-commerce can often cause a radical rethink of physical asset deployment. Some store closings and some optimization of space is inevitable for most retailers.

If a consolidation of a retailer’s real estate portfolio, along with a robust digital strategy, results in a more remarkable customer experience that, in turn, leads to growing customer value then the strategy may well be sound. But this is rarely the case. Usually the shrinking to prosperity strategy is driven by a lack of physical store sales productivity which has been caused by losing market share to competitors with a better value proposition. So–at least in theory–you can improve productivity metrics by reducing the denominator. But that presumes that sales (the numerator) are at least stable. And the track record on that is poor. Show me a list of retailers that have cut their square footage massively in recent years and you’ve pretty much got a list of bankrupt or nearly bankrupt brands.

A lot of times Amazon–or e-commerce in general–is cited as the reason that retailers need a lot less square footage. Unfortunately this argument doesn’t hold up all that well. In turns out there are plenty of “traditional” retailers that have winning value propositions that are doing little if anything to the size of their stores. In fact many are opening stores. This is because their value proposition is unique, highly relevant, remarkable and well-harmonized across channels. I very much doubt Apple, Sephora, Costco, Nike, TJX, Neiman Marcus, Nordstrom, among many others, will be announcing major contractions of their physical space anytime soon because their brands are more than big enough for their real estate.

Of course, the impact of e-commerce and shifting consumer preferences affect different categories quite differently, so there is no one size fits all prescription when it comes to any given retailers situation. Having said that, it always gives me pause when a brand that (allegedly) serves a large audience and derives most of its sales from brick & mortar locations discovers it must shut down a store in an otherwise well performing mall or in a trade area that has oodles of other “national” retailers that are not struggling in the least. Again, this suggests the problem is with the brand, not the location.

For Macy’s in particular, their neighborhood store strategy may well turn out to be value enhancing. Time will tell. But in some ways it is akin to admitting defeat in those trade areas unless other aspects of their overall digital strategy lead to meaningful market share growth.

When retailers get into trouble the easy thing to do is cut costs. Most struggling retailers have the expense optimization hammer and are always looking for the next nail. What’s harder, but ultimately far more important, is to become truly customer-obsessed and to invest behind being more remarkable than the competition. Until that happens, whether we are talking about Sears, JC Penney, Dillard’s, Kohl’s, Macy’s or any other brand that remains largely stuck in the boring middle, shrinking is not going to be the answer.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

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Sears: The world’s slowest liquidation sale picks up the pace

The Lampert Delusion might be a good name for a Robert Ludlum novel. Unfortunately it is more apropos of the apparent strategy Sears Holdings’ principal shareholder and CEO is employing to try to save the flailing retail chain.

Regular readers may remember that I have been calling Sears “the world’s slowest liquidation sale” since 2013 as it became clear that Lampert had no credible strategy to stop Sears and Kmart from sinking further into irrelevance–much less restoring them to meaningful profitability. Since then, nothing material has been done to get the brands back on track, and asset after asset has been unloaded to fund widening operating losses.

The good news — in one way of looking at it — is that Sears had significant fungible assets of decent value to raise cash and a more than cozy relationship with a few willing buyers. Unfortunately, in many cases, by the time Sears sells off something, it is doing so at fire-sale prices and in a manner that only further weakens its core business. Which is why my provocative post from 2014 is looking more prescient every day.

So while Lampert has been slinging strategic nonsense for over a decade, he has been able to keep Sears Holdings alive well past its expiration date. However, today’s action to close yet another bunch of stores is almost certain to accelerate Sears’ trip to the retail graveyard. Here’s why:

First, and most importantly, closing stores does precisely nothing to improve customer relevance. Neither Sears nor Kmart suffers from a “too many stores” problem. They suffer from being boring, irrelevant and poorly executed retail concepts. Tellingly, both have exited multiple markets and trade areas that lots of other similar retailers make work. There is a reason the Kohl’s or Macy’s or Home Depot down the street from the stores Sears is closing remain profitable, and it mostly comes down to customer relevance and remarkability.

Second, closing these stores does little to improve profitability. Sears lost $324 million in the first quarter on a 11.9% comparable store sales decline. You cannot possibly show me any math that suggests shuttering these stores will make a dent in those deeply disturbing statistics. Moreover, almost none of the volume lost from these closings will be made up online or in neighboring stores.

Third, as a practical matter, neither Sears nor Kmart is a national retailer anymore, and as they shed volume they deleverage or make inefficient their operating systems. As marketing moves further to digitization and personalization, national scale economics are less important, but they still matter.

The supply chain is highly dependent on scale. Continue to drop volume, and logistics costs as a percentage of revenue go up — or service must be cut, further weakening Sears’ competitive position. Sears has a lot of product that is home delivered. Take volume out of a delivery area, and costs go up or service must go down. As revenues continue to contract, vendors not only become worried about getting paid but also aren’t likely to focus product development and marketing resources on an ever-shrinking chain. It gets harder and harder for Sears to offer anything proprietary or unique in its merchandise assortments.

Fourth, a key point of differentiation for decades has been Sears’ proprietary brands, particularly Kenmore, Craftsman and Diehard. As these products get distribution elsewhere, Sears may generate some incremental cash, but it continues to give customers fewer reasons to shop in its stores or on its captive e-commerce sites.

The simple reality is this: Nothing of any consequence has been done or is being done that will materially reverse the downward trajectory of the company. Closing stores and selling off key elements of the business may slightly improve cash flow, but they further weaken Sears’ and Kmart’s value propositions. Operating losses remain huge with no end in sight. And Sears Holdings is quickly running out of things to raise significant cash.

In an ode to Hemingway, the way Sears will go bankrupt is gradually and then suddenly. Dead brand walking.

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A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

On June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago.  For more on my speaking and workshops go here.

It’s just about time for full-on panic at J.C. Penney

It’s been a long sad slog for J.C. Penney. In 2011, after more than a decade of (at best) mediocre performance, the company brought in Ron Johnson from Apple as its new CEO. In what some saw as a bold attempt at transformation — and others saw as a misguided Hail Mary pass — retail’s latest savior changed just about everything all at once, and to put it mildly, the results were disastrous. Sales plummeted by about a third, the stock tanked, and Johnson was eventually shown the door.

Former CEO Mike Ullman returned to stabilize the rapidly deteriorating situation — which he did. Then in August 2015, Home Depot’s Marvin Ellison was brought in as the new CEO. In the more than five years since the Ron Johnson debacle, Penney’s has tried many things to claw back lost market share, improve profitability and become more relevant for a new generation. Very little of it has gained any traction. The stock, which traded around $40 when Johnson joined — and in the $20s when he left — sunk to just above $2 after a hugely disappointing quarterly earning report and the announcement that Ellison was leaving to join Lowe’s.

This is bad. Very bad. And I will be the first to admit that I am a bit surprised.

While it is clear that Penney’s is in some ways the poster child for “the collapse of the middle” that I frequently speak about, there were reasons to believe that Penney’s was well positioned to regain meaningful market share.

First, under Johnson, the company essentially fired one-third of its customers through a series of bone-headed moves. While it is difficult to win back customers in an intensely competitive market, I thought a decent subset would return once the obvious blunders were fixed. For the most part, it hasn’t happened.

Second, Sears, its most similar on-the-mall competitor, has closed hundreds of stores in the past few years — surely Penney’s would pick up a fair share. But if it has, it’s not so obvious.

Third, in addition to continuing to expand its successful Sephora in-store shops, Penney’s has added new products and services (including home appliances and mattresses) to attract new customers, drive incremental traffic and improve store productivity. So where’s the beef?

Fourth, after being a laggard in e-commerce and omni-channel, Penney’s has taken steps to elevate these capabilities. Yet the growth hasn’t followed.

Lastly, the categories in which it competes have performed pretty solidly the past few quarters. Penney’s failure to grow revenue at least 3-4% means it is losing share.

So Penney’s now finds itself in a situation where it has been engaged in years of cost cutting and store closings. There is very little gas left in that particular tank. The problem is no longer fundamentally about cost position or store footprint; it is about customer relevance and revenue. Penney’s finds itself in a situation where competitors have ceded hundreds of millions of dollars of sales through store closings, yet apparently little has migrated to its benefit. Penney’s finds itself in the middle of the best year in recent retail industry history, yet is struggles to keep pace. And now its CEO elects to leave.

It simply won’t get any easier from here.

While the seemingly imminent demise of Sears will provide incremental market share opportunities, we should not lose sight of the fact that the moderate department store sector continues to decline with no end in sight. Sales of online apparel are expected to double within the next few years, which will continue to pressure the economics of brick-and-mortar retailers that don’t execute a well-harmonized multi-channel strategy. Younger shoppers will become increasingly important to the overall fortunes of just about any retailer, and Penney’s has done little to contemporize its brand. And while Penney’s may have a few stores to close, mass store shutterings are almost certain to accelerate its decline. The best barometer of success going forward is robust trade area growth, derived from stable to slightly positive comp store sales and strong double-digit e-commerce growth.

Given the bifurcation of retail and the death of boring, J.C. Penney is a long way from being a remarkable and compelling retailer. Yet the positive retail cycle we are in and the likely shuttering of hundreds of directly competitive stores over the next six to 18 months will give the more-than-100-year-old brand an unprecedented opportunity to grab share. If it cannot improve its performance dramatically over the next few quarters, the issue won’t be whether a transformation is ever possible; it will be whether the once-stored retailer will even be around at any reasonable scale much longer.

And if that doesn’t incite panic, I don’t know what will.

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A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

On June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago.  For more on my speaking and workshops go here.

Sears: Dead brand walking

Recently Sears Holdings made several interesting announcements. First, it declared it was closing 63 more stores, in a continued false notion that it can shrink itself to prosperity. This is in addition to the 358 Sears and Kmarts already shuttered in 2017. Then it issued a press release detailing steps it’s taking to improve its financial structure, wherein it included operating results for the quarter. Despite over a decade of strategic restructuring, huge investments in its membership program and digital capabilities, closing hundreds of its worst locations–not to mention massive store closings on the part of many of its direct competitors–the company expected to report comparable store sales declines of 15.3% for the quarter and a loss of at least $525 million. Yikes!

Following all this, in what is likely to win the award for the most obvious prediction by a Wall Street investment analyst in modern history, Bill Dreher of Susquehanna opined that “Sears may never be profitable again.”

So while Sears apparently has a few folks willing to believe something good might still happen, the company continues to execute what I have long called “the world’s slowest liquidation sale.” In fact, Sears continues to act as if we’re all either gullible or stupid. Or perhaps both.

Despite growing signs of its imminent demise–or at least a complete collapse into a holding company with a small and decidedly mixed bag of residual assets–Sears Holdings CEO Eddie Lampert continues to put lipstick on the pig. A couple of weeks ago he took the Wall Street Journal to task for a rather harsh story by posting a retort on the company’s blog, in which he once again neglects to discuss anything that would meaningfully improve customer relevance, but goes to great lengths to highlight moves that are clearing perpetuating, if not accelerating, declining performance. And in what may be the surest sign that the company’s beleaguered CEO has no capacity for irony, the day after the company shared its horrible quarterly performance Sears announced it was opening two (count ’em two!) small format appliance & mattress stores.

The news at Sears went from bad to sad a long time ago. As I have recounted before, back in 2003 when I was part of the senior team working on trying to fix the department store business, it was abundantly clear that Sears’ concentration of assets (particularly for its home business) in regional malls was a significant and growing liability. It was also apparent that Sears had much more of a revenue problem that a cost problem. As we sit here fourteen years later, average store sales productivity has declined in virtually every quarter since I moved on from the outhouse to the penthouse (Neiman Marcus Group) and beyond. The major appliance and home improvement businesses, which once were incredibly profitable, are largely decimated. Years of cost cutting have made Sears’ stores an embarrassment. Market share continues to plummet.

In the spirit of full disclosure, our team did not come up with a compelling plan to turn around Sears, so for me it has always been an open question whether anybody could have saved them. I was certainly neither smart enough, nor powerful enough, to make it happen. But I have always hoped Lampert and team would figure it out.

In any event, at this point any notion that Sears can be saved in any way remotely resembling a major national retail brand is the pinnacle of wishful thinking. Yet some people still seem to hold out hope. It’s time to let that go.

Dead brand walking.

 

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here

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