For Once-Mighty Sears, Pictures of Decay; “Every store has something fundamentally wrong with it.”

OCTOBER 29, 2013, 8:41 AM

For Once-Mighty Sears, Pictures of Decay

By DAVID GELLES

Updated, 8:46 p.m. | When Brian Sozzi, the chief executive of Belus Capital Advisors, visited Sears locations in New York and New Jersey this month, he said, he found barren shelves, haphazard displays and badly stained carpets. Also missing: customers. “It’s just badness throughout,” Mr. Sozzi said in an interview. “Every store has something fundamentally wrong with it.”Photos of the stores that Mr. Sozzi posted on his blog attracted more than a quarter-million views and captured the sentiments of customers dissatisfied with the company. The website Business Insider titled a post: “18 Depressing Photos That Show Why Nobody Wants To Shop At Sears.”

Yet it is these core Sears stores that Edward S. Lampert, the hedge fund manager who is Sears’s majority owner and chief executive, believes represent the future of the retailer.

To help raise cash for that future, Sears announced on Tuesday that it was looking to split off its Lands’ End and Sears Auto Center brands, two of the company’s best-known assets. It also said that Sears Canada, which it controls, had sold five store leases for $384 million.

In a statement, Sears said the moves would let it become “a more focused company that is easier to understand and to manage,” and that it would concentrate on its best-performing Sears and Kmart stores.

But even after the disposals, what remains of Sears appears to have rapidly diminishing value.

On Tuesday, the company also released limited information about its financial performance that suggested that its core retail business was plummeting. Sears said that comparable store sales fell 3.7 percent in the 12 weeks ended Oct. 26 and that it expected adjusted earnings before interest, tax, depreciation and amortization, or Ebitda, of negative $250 million to $300 million.

Gary Balter, a retail analyst with Credit Suisse, said in a note that the early results represented “an amazing rapid deceleration into the abyss for the U.S. retail operations.”

Sears has been under pressure for years. Among brick-and-mortar retail competitors, it has lost out to Walmart, Target and Home Depot, while Amazon.com and other online outlets have forced all retailers to trim prices.

J. C. Penny, a Sears competitor that came under the influence of another hedge fund manager — William A. Ackman of Pershing Square Capital Management — is also struggling to survive. (Mr. Ackman recently sold his entire stake for a loss.) Other department stores like Macy’s and Nordstrom have moved upmarket.

Ten years ago, Mr. Lampert took control of Kmart while it was in bankruptcy. He then orchestrated Kmart’s $12 billion buyout of Sears in 2005. With both companies under his control, he formed Sears Holdings, an umbrella group that included several business units, each competing for limited resources.

Performance initially improved, but in recent years a lack of investment has hurt the core retail business. After cycling through several chief executives while reportedly micromanaging the company, Mr. Lampert himself became chief executive in January.

“He’s not a retail executive, he’s an asset manager,” said Mary Ross Gilbert, managing director at Imperial Capital. “What we’re seeing reflects what an asset manager would do, which is find ways to realize value.”

Mr. Lampert, a mercurial free market advocate and a professed Ayn Rand fan, declined requests for an interview.

Sears is likely to spin off Lands’ End, which was acquired for $1.9 billion in 2002, giving shareholders stock in a new public company. It employed this strategy successfully this year, spinning off Sears Home and Outlet Stores.

It will try to find a buyer for Sears Auto Centers, but it may have trouble given that the brand is weak, many centers are attached to bigger Sears stores and there may be liabilities involved with the sale of environmentally sensitive businesses.

With those assets gone, analysts say, it is only a matter of time before the company continues its liquidation. One likely disposal is the 51 percent of Sears Canada that the holding company still owns. Kenmore and Craftsman, two brands under the group’s control, are also mentioned as possible targets. Some of its real estate in the United States may also make for attractive targets.

“They are a zombie retailer,” said Mr. Sozzi, who has a sell recommendation on Sears stock. “And with today’s announcement, they are dismembering their body.”

The moves announced on Tuesday gave investors some hope, with shares of Sears surging 11.75 percent, to $62.09.

“There’s much more value in the company broken up than there is when it’s together,” Mr. Balter of Credit Suisse said in an interview.

So far this year, Sears shares are up 50 percent. Yet since reaching a peak in 2007, shares of Sears have fallen more than 67 percent.

The plight of Sears today represents a depressing decline for a once-proud American retailer. Founded 120 years ago as a mail-order catalog merchant, Sears became one of the country’s great department store chains. In 1973, it held the naming rights of the Sears Tower in Chicago, then the world’s tallest building. But the company has failed to keep pace with a rapidly shifting retail environment, especially in recent years.

After the expected disposals, what remains of Sears and Kmart is likely to be a collection of down-market stores that are badly in need of a makeover, as illustrated by Mr. Sozzi’s photos.

“They haven’t spent on the store base, and that’s the issue,” said Ms. Gilbert of Imperial Capital.

On Tuesday, Sears seemed to reaffirm this view, saying it would consider closing more stores while trying to minimize any associated costs. But analysts cautioned that even this could be a costly process because of costs associated with severance, pension obligations and real estate.

“It’s not free to close stores,” said Mr. Balter of Credit Suisse.

He was among those who viewed the dismal pictures posted by Mr. Sozzi. But Mr. Balter said he wasn’t surprised by what he saw.

“I go to the stores all the time,” he said. “Those pictures weren’t unique.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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