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.
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.
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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