Sears Long Sad Fall

Sears Canada found itself in a situation similar to a foreclosed home in Ft Myers, Florida. Even at an auction, no one bid on it. The company was facing a dire situation on the eve of the 2014 holiday season, when out of the blue, it found a buyer.

That’s the good news. The bad news is the buyer is ESL Holdings, the investing arm of Sears Holding Company CEO Eddie Lampert. Forty million shares changed hands and now 51 percent of Sears Canada is owned not by Sears U.S. (and its other shareholders), but directly by Mr. Lampert. And that means only one thing:  more of the same sad slide we’ve seen over the past few years.

For starters: Sears Canada’s CEO Douglas Campbell bid the company adieu, and said he plans to leave and return to the U.S. by the end of the year.  He said he was doing so “for personal reasons” a long-famous retail euphemism for “He got fired,” or potentially in this case, “He’s had enough.”

Somehow we suspect the upshot of this announcement will be Mr. Lampert finding himself as the titular CEO of yet another company.  He’s already the CEO of Sears US. He also has very little real retail experience.

The Sears store at Chinook Centre in Calgary, Alberta, Canada. (Photo credit: Wikipedia)

The long sad fall of Sears is nothing short of tragic. Its history is rich. One could easily argue that Amazon.com AMZN +1.31% is in many ways the Sears Catalog of the digital era. It was an institution, and a book that allowed a shopper to buy everything from liniment to pot-bellied stoves, to “build it yourself” house kits. Today Sears still owns some iconic brands: Kenmore, DieHard and Craftsman have long been considered best-in-class in their respective product lines.

Those products remain strong. Consumer Reports rates Sears Kenmore Elite’s extra-large washer and drier best in class. (In full disclosure, I bought a set.  They are definitely the best washer and drier I have ever owned, beating out other purchases by a country mile.)

By many accounts, Sears is no slouch in the technology department. It probably is one of the most mature and best examples of what’s now called “omnichannel retailing.”  Buy on line, pick up in store?  They’ve got that. And it works very, very well. Customer purchase history easily available across selling and information channels?  Yup.  They’ve got that too.  Big data analytics? For a while, Sears actually tried to spin that off into another division.  It’s that good.  Home delivery options? Who else will give you a two-hour delivery window for big ticket items?  It’s a very short list.

So what went wrong?  What went so horribly, horribly wrong? The core problem is, ironically, why Mr. Lampert decided the company would be a great addition to his portfolio: enormous stores with long inexpensive leases.  How many retailers today would sign a ninety-nine year lease?  Not very many, but Sears has a boatload of them.  Most of the remaining terms are about sixty years, since the leases were signed thirty or forty years ago, but that’s as close to ownership without a mortgage you’re ever going to see. What could be bad?

Well…the problem is that the products that used to fill those stores up have shrunk in size dramatically. Computers get smaller.  TV’s and stereos are no longer sold as console furniture…you hang the TV’s on the wall (even in the store), and the stereos are tiny little i-devices attached to efficient, tiny speakers.

Other products are now sold at a lower price at Walmart or lower-end furniture and dollar stores.  Sears has tried to make its apparel interesting for at least two decades, with no success. After all, the US and Canada both have plenty of alternatives: from fast fashion companies like Forever 21 , H&M and Zara . Target TGT +0.8% will be back to take share from Sears too.

So Mr. Lampert finds himself with enormous stores and not a lot of clue what to fill those big boxes up with. You can’t fault him for that, exactly. Most retailers start with a concept, and then figure out how big a “box” they need to execute on that concept profitably. Sears has the boxes already.  But the US doesn’t need another Walmart or Target.  Heck, even those companies are starting to build smaller stores. So we’re witnessing what some have called the world’s longest liquidation sale.

A fair question to ask is “Given the competitive environment, could anyone have been able to save Sears?” Maybe not. In fact, it could be argued ESL’s loans are the only thing keeping the company afloat. Take RadioShack, for example.  In many ways, the companies are similar: satisfying a need that no longer exists. But RadioShack is burdened with nasty bank covenants.  Those covenants prevented “The Shack” from closing batches of stores, and may yet prove to be the company’s undoing.

Sears has no such problem. ESL lends the money without a lot of strings attached. The collateral is the real estate.  Everything always comes back to the real estate and those 99 year leases.  Still, Mr. Lampert has proven unable to keep a real retail CEO on board, and to many eyes, he is running Sears as a hobby, and running it into the ground.

And so we wait, and look, and endure the long sad fall of a once winning retailer. It’s a shame, really.  But the free market is nothing if not indifferent to legacies. Will Mr. Lampert recoup his investment in Sears?  Maybe. Will the world go on? Definitely. Is it a poignant and sad end to a once proud company? Absolutely.