Sears: Is The End Finally In Sight For The World’s Slowest Liquidation Sale?

When I left Sears in 2003, I was quite pessimistic about the company’s long-term prospects. Some initiatives we had put in place during a two-year strategic re-positioning effort were gaining traction, but most key metrics were alarming. The apparel business was well below a sustainable productivity level. The appliance and home improvement segments–which accounted for roughly 50% of our enterprise value–were losing market share to better positioned competitors, mostly notably Home Depot and Lowes. And the one strategy that might have saved us was no longer a feasible option. My fear was that Sears’ slow death was inevitable.

The following year Eddie Lampert put two failing retailers together and promptly made a bad situation even worse. While Sears and Kmart both suffered from challenges driving revenue, Lampert focused on cutting costs. As leading brands realized that retail was moving to an era of greater customer experience and shopping integration, Lampert set up merchandise categories as warring factions. Next came the idea of starving the stores further to focus on making Sears more digitally savvy. Then he became enamored with an emphasis on making Sears “member-driven” by launching “Shop Your Way,” a frequency shopping scheme that only served to lower margins without restoring necessary sales growth.

After witnessing nearly a decade of flailing, in 2013 I publicly declared Sears “the world’s slowest liquidation sale” and suggested that they were a dead brand walking.

I have to admit that Sears has hung in there longer than I would have thought. The degree to which Lampert has been able to extract value from Sears assets has been surprising and remarkable. But he is rapidly running out of rabbits to pull out of his hat.

First, and most importantly, Sears has never laid out any realistic strategy to reverse a nearly perfect string of comp store declines for both the Sears and Kmart brands extending back to 2004. Sears cannot possibly cut enough costs to restore positive operating cash flow without growing top-line sales significantly.

Second, most store closings only make things worse. Contrary to popular belief, stores are needed to drive online sales, and vice versa. Sears’ fundamental problem is not too many stores, it is that is has become a brand that is no longer relevant enough for the assets and operating scale it has in place.

Third, with massive operating losses assured for the foreseeable future, Sears must raise a lot of cash to stay afloat. And it has already sold almost all the good stuff.

Yes, the presumably imminent sale of the Kenmore and DieHard brands may fetch in excess of a billion dollars. Yes, there is some real estate left to unload. Yes, the Home Services and Auto Centers retain some meaningful value. But don’t let the financial engineering strategies gloss over the fundamental point. There is no viable operating strategy to restore Sears to a profitable core of any material size. And unless the company can generate cash from operations before running out of assets to fund its staggering losses, it is not, in any practical sense, a going concern.

The company has been liquidating for many years now. It’s just that some of us are finally starting to notice.

 

This post originally appeared on Forbes where I recently became a contributor. You can check out more of my writing by going here.

Kors is the latest retail highflier to get its wings clipped

Add once soaring–and seemingly invincible–Michael Kors to the list of retail brands to disappoint the market.

Last week Kors, the “accessible luxury” fashion brand that has grown from a niche player to a multi-billion dollar global juggernaut in under a decade, reported earnings that actually slightly beat expectations. Yet a miss on sales and lowered guidance sent the stock cratering.

At first blush, the overall sales weakness should not have surprised anyone. Kors has pulled back significantly on its wholesale distribution while simultaneously reducing promotional activity. An increase in that sector would have taken a miracle. But what was shocking was a rather precipitous 6.4% drop in comparable stores sales and a nearly 23% decline in licensing revenue.

It’s tempting to see the problems at Kors as brand specific, self inflicted and temporary as the brand realigns its pricing and distribution strategy. But I believe they underscore several broader and more vexing industry issues.

For several quarters now we’ve witnessed a panoply of once mighty high-end brands falter. The luxury department store industry’s big stall is now well into its second year. Saks has reported several quarters of disappointing comps. Neiman Marcus, saddled with high debt and weakening sales, had its debt rating downgraded last week. Nordstrom’s industry leading full-line store performance has become tepid at best. And all of this comes amidst a surging stock market and improving consumer confidence.

To be sure, the strong dollar and weak oil market has a material dampening effect. But even if that were to reverse–which seems rather unlikely anytime soon–the industry is still plagued by increasingly unfavorable demographics, lack of innovation, over capacity and growing consumer willingness to “trade down” to less expensive substitutes. Until these companies find ways to drive traffic increases, attract meaningful numbers of new customers and drive revenues through transaction growth instead of merely raising prices, we can expect a continued string of disappointments from most, if not all, of these brands.

And it just might take a major shakeout to restore the industry to its glory days.

A version of this post originally appeared @Forbes where I recently become a contributor. You can check out my latest work here.

Working on the wrong problem

When we see a brand struggling–or we find ourselves working within a flailing or failing organization–the first order of business should be clear. We need to understand the root causes. Once we’ve become keenly aware of what’s driving our problem–and accepted the reality of the situation–we are then ready to move into developing and launching a course of action.

So if the path is clear and obvious, why do so many retailers–and scores of other types of organizations, for that matter–get it so very wrong, so very often?

We regularly see retail brands hyper-focused on cost reductions when by far the bigger issue is lack of revenue growth (I’m looking at you Sears).

We see brands falling prey to the store closing delusion when often it turns out that closing stores en masse only makes matters worse.

We see brands blindly chasing the holy grail of all things omni-channel when, in most cases, they are merely spending millions of dollars to transfer sales from one pocket to the other–often at a lower margin.

We brands engaging in price wars they can never possibly win or without regard to the possibility that their customers aren’t even interested in the lowest price.

We see brands chasing average, the lowest common denominator, the one-size-fits-all solution because it seems safe. Yet it is precisely the most risky thing they could do.

Far too often we fail to pierce the veil of denial.

Far too often we fall victim to conventional wisdom, what we’ve always done or what we think Wall Street wants.

Far too often we ascribe wisdom to shrewd salespeople or charismatic and clever charlatans.

Far too often we fail to do the work, to ask for help, to dig deep to understand what’s really going on.

We can work really hard. We can focus our energies and those of our teams we great alacrity and intensity. We can pile on the data, build persuasive arguments and rock a really slick PowerPoint presentation. We can tell ourselves a story that convinces us we must be right.

But if we aren’t working on the right problem that’s all a colossal waste of time.

 

 

Holy stuckosity Batman!

“Stuckosity” isn’t a real word. It can’t even be found at Urban Dictionary. Well, at least not yet.

But certainly most of us are familiar with the quality of being stuck. Perhaps you’re feeling it right now.

We get stuck telling the same old stories about ourselves that are familiar, but serve no useful purpose.

We get stuck trying to solve problems with the same level of thinking that got us into trouble in the first place.

We get stuck defending the status quo, even when we know it’s not working.

We get stuck in self-righteousness, which almost never changes the other person’s mind or behavior, but frustrates us to no end.

We get stuck fighting reality, re-litigating the past, trying vainly to predict the future.

We get stuck striving for perfection, when perfect is both impossible and, ultimately, only a recipe for suffering.

We get stuck waiting for precisely the right time and to be fully ready, failing to see that those exact conditions will never ever come.

We get stuck in relationships because we fail to speak our truth and ask for what we want and need.

We get stuck unleashing our full potential because we wonder how other folks will judge us if we were to go out on a limb.

And on and on and on.

The key to getting unstuck is to first see it for what it is. And most of the time our stuckness is merely our habitual reaction to an irrational fear; to a fundamental misunderstanding of risk.

Once we become aware that staying in our fear–and being unwilling to let go of our story, our need for control and our desire to be right–is actually the most risky thing we can do, the door is cracked open to change.

Once we we accept that our behavior is simply habit, the debilitating result of a lifetime of bad conditioning, we can work to establish new, more healthy and useful ones.

Once we are committed to take action, we are finally free. Free to start before we are ready. Free to embrace failure as a natural outcome of growth. Free to be okay with our imperfection.

And that’s good thinking Robin.

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Retail’s great deleveraging

Over the past several quarters an awful lot of retail brands have reported disappointing earnings. Expect that to continue.

Some of this is because of tepid overall consumer demand in certain categories. Apparel comes to mind. But it goes far beyond simple macro-economics.

We are going through the great deleveraging of retail. And for many brands this will end badly.

When retailers operate a fleet of strong brick & mortar locations with growing revenues, small increases in sales typically convert powerfully to greater profits and return on invested capital. Yet when revenues are headed in the other direction the converse is true. The high fixed cost nature of physical stores can quickly make a given location financially untenable when sales sag. This is the primary reason we are seeing a virtual tsunami of store closings.

But store closings typically cause deleveraging as well.  Many marketing, supply chain, administrative and other costs are relatively fixed. Pull volume out of the system through massive store closings and other types of deleveraging occur.

A lot of folks seem to think that aggressive investments in digital channels and omni-channel integration are the silver bullet answer. But that’s often not true. There is also a relatively fixed cost nature of fulfilling and shipping a direct-to-consumer order. Shift sales from a physical store where the marginal cost of filling an order is comparatively low to e-commerce, where the marginal cost is higher and, once again, the financial leverage gets worse, not better.

Most retailers are investing heavily in omni-channel integration capabilities. Many of these investments are necessary, but not sufficient. If all we are doing is adding a lot of cost to the system without gaining market share and becoming meaningfully more customer relevant, we are once again deleveraging our underlying economics.

Therefore, it should not surprise us that retailers experiencing relatively flat sales overall through a combination of minor declines in physical store sales, but strong increases online are seeing profits erode. Deleveraging is to blame.

Ultimately, the greatest long-term leverage comes from being more remarkable and more intensely customer relevant in ways that grow share of wallet and engender true loyalty, not by squeezing out operating costs and closing stores.

Show me a retailer that is all about cost-cutting and “rationalizing” its real estate and most often you’ve shown me a brand that is out of ideas. Far too often that merely confirms that the downward spiral has begun. Dead brand walking.

Does e-commerce suck?

Well it certainly isn’t bad for consumers. In fact, it’s been a bonanza.

The advent and enormous growth of e-commerce has dramatically expanded the availability of products, making nearly anything in the world readily accessible, 24/7. Product and pricing information that was previously scarce and unreliable is now easily obtainable. Prices are down, in many cases, dramatically. Digital tools and technologies have ushered in a new era of innovation making shopping far more convenient, easy and personalized.

For retail brands and investors the picture is much less clear and increasingly bleak. The fact is e-commerce is mostly unprofitable–and that’s not about to change anytime soon.

Amazon, which is both far bigger than any other retailer’s web business and growing faster than the overall channel, has amassed huge cumulative losses. The high cost of direct-to-consumer fulfillment and so-called omni-channel integration has made virtually every established retailer’s e-commerce business a major cash drain. And more and more, it’s becoming clear that most of the “disruptive” venture capital funded pure-plays are ticking time bombs. Quite a few major write-downs have already occurred (e.g. Trunk Club, Nasty Gal and just about every flash-sales business) and more are surely on the way (I’m looking at you Jet.com and Dollar Shave Club).

Investors have been throwing money at business models with no chance of ever making money for years. Analysts and pundits regularly excoriate traditional brands that are slow to “invest” tens of millions of dollars in all things digital and omni-channel while spewing nonsense about physical stores going away. Much of this is incredibly misguided.

It’s time for everyone to be more clearheaded and, dare I say, responsible.

Industry analysts and the retail press need to stop with the breathless pronouncements about the demise of physical stores. They need to back off the notion that retailers can cost cut their way to prosperity. They also need to quit labeling disruptive businesses as “successful” merely based upon revenues and rapid growth and take the time to really understand the economics of e-commerce and omni-channel (hint: it’s mostly about supply chain and customer acquisition costs).

More established retailers need to stop chasing all things omni-channel and prioritize investments based upon consumer relevance, long-term competitive advantage and ROI. They also need to realize that if they feel the urge to close a lot of stores or drastically cut expenses they are probably working on the wrong problem.

Venture capital investors need to start caring more about building a business based upon fundamentals, not just pricing everyone else out of the market and/or hoping that some idiot big corporation will come along and write a huge check. Also, have we forgotten that selling at a loss and making it up on volume has never been a viable strategy?

Of course, by far the single biggest thing that would restore an element of sanity to the overall market would be if Amazon were to decide to not treat most of their e-commerce business as a loss leader. Sadly, that doesn’t seem likely to happen anytime soon.

So if you are a consumer, enjoy the ride and the subsidies.

If you are retailer, yeah, that definitely sucks.

 

A monkey with a gun

Monkeys can be pretty entertaining. Some are awfully cute. It’s easy to get fascinated by their behavior which–especially with chimpanzees–is often quite similar to human’s. We can get seduced by some of their charming qualities.

At the same time, monkeys are inherently aggressive and can be prone to attack when put on the defensive. It’s also common for them to fling their feces all over the place for no apparent reason. And perhaps, like me, at some point you’ve been at the zoo with your young children and found yourself having to stumble through an explanation of why “that monkey is touching himself.” Let’s just say when it comes to sexual matters, monkeys can be rather impulsive.

Once we accept that a monkey is a monkey just doing monkey things, why would we be the least bit shocked when they act like a monkey? In fact, time spent hoping or expecting them to start behaving like a human, a zebra, a bird, or anything other than a monkey, is simply time wasted. Our best intentions, our righteous indignation, our efforts to change them only results in our being frustrated and, perhaps, a pissed off ape.

If we really understand how monkeys are we know what is safe to let them do and what would be reckless and dangerous. So it would seem rather obvious you’d never give one a gun because something like this could very well happen.

If you have the misfortune to find yourself confronted with an AK 47 wielding chimp you have a few choices. You can run like hell. You can try to stop him. Or you can just hope it all works out.

Of course, the very best thing we can do is never let a monkey get anywhere close to a gun in the first place. Another good thing to do is to never lose sight of a good metaphor.

 

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