By Andrew Nyquist
Sears slow grind continues. After many quarters (and years) of underperformance, the big box retailer announced that it will be closing more Sears and Kmart stores. The retailer cited a difficult economic environment and slow sales on big-ticket items as drivers behind the closures. The announcement pushed the stock down 27.2% to $33.38 (Sears Holdings Corporation: SHLD), and is now down over 80% from 2007 highs. It’s yet another bitter pill for Sears investors to swallow.
So what does this mean for Sears’ future? And the landscape of Big Box retail? Well, the closures are just a small percentage of Sears’ total stores, so the focus shouldn’t be on the announcement alone, but on the continued struggles of Sears and Kmart retail stores. As it is, Target (TGT), Wal-Mart (WMT), and Costco (COST) have taken control of each level of targeted big box consumers, leaving the niche big box home improvement to Home Depot (HD) and Lowe’s (LOW). Fading brands like Sears, Kmart, and Shopko have become a thing of the past, due to a lack of differentiation, and weakening brand equity. Furthermore, Wal-Mart and Sam’s Club, as well as Home Depot, have pushed into rural America and consumers have migrated to their selection and low price.
And what about the real estate that Sears long thought was so valuable? Well, the real estate crisis took care of that, and now the retailer has been forced to rely on sales or sub-leasing to generate additional cash to keep the core business alive. To be honest, it’s difficult to watch. But that’s the nature of the retail business; it’s a dog-eat-dog world on real estate development, as well as product pricing and retail sales. Other big box retailers have too much brand equity and too much to offer in terms of jobs/growth for cities and developers to turn down, so they get the prime digs. And, as for the Sears and Kmart store closures, I think the true winner is Wal-Mart. The mammoth retailer will not only benefit from consumer overlap and migration, but possibly from the real estate (if Sears would ever let it go to Wal-Mart).
Yet at the same time that we write about Sears demise, I think it is helpful to note that there is still some value in the name. We just don’t know exactly how to define that value. And more importantly, at what price value investors will decide to enter the name. I certainly don’t find the name attractive longer term, but stranger things have happened. With a 3.5 billion dollar market cap (and shrinking), the stock is well under book value and sliding into “shark” territory… by “shark,” I mean investment shark. And although the retailer probably needs a complete overhaul, facelift, and new business strategy, it does have a familiar name, along with the aforementioned real estate.
For a closer look at the stock, read my technical take on Sears Holdings.
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No positions in any of the securities mentioned at time of publication.
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