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As you've probably already heard, because when century-old retail establishments have collapsed, it's a big news, even if it's not surprising – Sears Holdings (NASDAQ: SHLD) finally declared chapter 11 bankruptcy. But does this mean that the whole chain will disappear immediately? With the debtor-in-possession financing, the next stage of its dissolution will involve the closure of 142 of the approximately 700 remaining stores and the hope of surviving during the holiday season, perhaps attracting enough purchases to allow it to limp longer. than 2019.
It's still sad for a company that was both the Amazon.com (NASDAQ: AMZN) and the Walmart (NYSE: WMT) of his time, a company that sold everything from watches to entire homes. In this Market deception the podcast, host Mac Greer and analysts Emily Flippen and Matt Argersinger evoke its long history, its vast expansion into a conglomerate made up of sectors as diverse as financial services and auto repair, the era of Eddie Lampert, the decisions hope for a recovery and lessons that other retailers – e-commerce and DIY – should draw from this story.
A full transcript follows the video.
This video was recorded on October 15, 2018.
Mac Greer: It is Monday, October 15th. welcome to Market deception! I am Mac Greer. Emily Flippen and Matt Argersinger, analysts at Motley Fool, join me in the studio. Welcome! How do we feel?
Matt Argersinger: Well, it's a Monday!
Rig: It's a Monday? Come on, you need more excitement here! Come on, bring it! We will talk about Sears. Are you ready to talk about Sears?
Argersinger: I'm ready to talk to Sears.
Rig: It's a sad chapter, and it's not a completely surprising chapter. Monday, Sears, filing for bankruptcy under Chapter 11. This means that Sears will close 142 stores. The company has about 700 stores. Matt, it is an ultimate effort to save the company. We knew it was going to happen. Probably not surprising. This could really be the end of an era.
Argersinger: I think that's the end. I know that they will go through this process of Chapter 11, the debtor in possession, trying to spend the holidays. This can help a lot to cover a lot of costs and outstanding liabilities. But for all intents and purposes, I think we're almost as close to midnight as you can get for a brand and a company we talked about this morning, which has been around for 125 years. I watched that. The average Fortune 500 business these days lasts less than 15 years of existence.
Rig: Started in the 1880s.
Argersinger: Unbelievable!
Rig: Sale of watches by correspondence.
Argersinger: Yes, the mail order business. It was really, if you think about it, the Amazon of the early 20th century. It affected the people of the whole country, allowing the inhabitants not only of the cities, but also of the rural areas of the country, to obtain a catalog, to order articles, to send articles.
Rig: Get a house.
Argersinger: Get a house. Eventually, buy a car and repair a car. There are so many things. Sears has had an impact on everyone's lives. So, to see this happen to this end … and we have seen this end approaching for a while, but I think we are almost at the end for the end.
Rig: I did a little research here. I want to make the brief story. Then Emily, I want to know your opinion. Sears, as we mentioned, founded in the 1880s. Develops its catalog in the 1890s. In 1906, becomes public. The 1908 catalog – I like that. In 1908, Sears said, "We seek more honest reviews than orders." Very Amazon-esque there. They opened their first department store in 1925. In the mid-twentieth century, Sears annual revenues accounted for about 1% of US GDP. Amazing, Emily!
Emily Flippen: It is clear that Sears has definitely had an impact on the American economy, the American consumer, and has managed to withstand many storms throughout its history, especially in the twentieth century. What's really interesting is that this catalog model started with the fact that rural people had access to products they would not otherwise have access to. And they slowly changed to become a retail model, which allowed them to reach more consumers and provide products at the most advantageous and profitable prices for them, which was difficult with the catalog model. .
Then they develop. They enter many different industries. We talk a lot about financial services. They tried to enter the financial services sector. They really wanted to become a one-stop shop for the American consumer. It is interesting to note that in the 21st century we are witnessing a very slow but inevitable decline.
Rig: Let's talk about that. There was a 1980 quote from their leader of their planning group, this guy, Philip Purcell. He says, "There's no reason for someone not to go into a Sears store and buy a shirt and coat, and then maybe stock."
Argersinger: I'm glad you found that. First of all, we are in the 1980s, is not it? It is the era of the conglomerate. These are all those companies that buy other totally unrelated businesses because they think that having this grouping of all these companies improves your business, increases your diversification. It's so funny. Some things are logical. Sears sold insurance. This makes sense in many cases. If you bought a car or appliance at Sears, it makes sense to purchase insurance. But then, go and maybe buy a stock? They bought Dean Witter, a brokerage company at the time. They bought a real estate brokerage company. They combined all these things. What did that do, and I thought the article you reported L & # 39; Atlantic, that of Derek Thompson, pointed out that they did all these things and that it worked. All the companies they actually bought worked. But this masked a fundamental decline in their core retail business. We will talk a little bit about the lessons to be learned from this. That was one of the reasons, I think, the beginning of the end of the Sears retail business.
Rig: Let's talk about that, Matt. If people have not followed the recent history of Sears, we are talking about old but recent history. You must start with Eddie Lampert. Fill us there.
Argersinger: This is true. Eddie Lampert is this highly regarded hedge fund manager. He enters, he turns around Kmart. Well, "turn around." He acquires Kmart and gets the necessary credit to correct the situation. Then he did something extraordinary at the time. It takes Kmart and merges with Sears, in the idea that I will take two distressed retailers, put them together, and together they will be stronger, together they will compete with Walmarts. of the world, the Targetof the world, the Home Depots of the world, all these big emerging retailers.
I remember that at the time, from The Fool in 2008, Lampert had a lot of merit. "He's going to do that, he's going to do that, he's a genius, he's going to be able to make financial engineering his way of creating a lot of value for shareholders." 39. Real estate .It will focus on some brands, such as the Craftsman brand and the Kenmore brand, Lands & End. "And we see what has happened in the last 10 years. It certainly did not work.
Rig: Emily, one of the things we were talking about before the show today is the way that Lampert really saw Sears, in a way, as a collection of assets, but not as much a guardian of this great American brand .
Flippen: Of course, the decline is 20/20 and I am relatively young. So I've never lived in the era of Sears domination. But I think that Lampert, from my point of view, never really entered this company with the intention of saving her. You can look at how he ran the company, the interest that his hedge fund had for it. What he did was that he consolidated many assets and then sold the most valuable assets, leaving Sears this broken retailer while his hedge fund was receiving tons of origination fees and interest payments for giving debt to "save" this American icon. I am therefore not sure that Eddie Lampert has truly assumed the role of CEO with the intention of being a steward of Sears legacy, instead of thinking that he "Will be wondering how, as CEO, I will make money with this investment.?" I think it was what it was for him, a long term investment.
Rig: So, if I'm looking for a good washer-dryer, Eddie Lampert is probably not the guy to talk to?
Flippen: Probably not.
Rig: Let's pull the thread forward here. I want to go back to Eddie Lampert, Matt. He states that by declaring chapter 11 here – I should go back and say that he resigned from his position as Sears CEO, but he still is the chairman and remains the biggest investor in the society. He says the bankruptcy will allow Sears to strengthen its balance sheet and return to profitability. Wishful thinking?
Argersinger: I think very wishful thinking. I'm not surprised about that. Toys R Us, to use a recent example, declared Chapter 11 bankruptcy at least twice, or even three times, before it was finally liquidated. I think this is inevitable for Sears too. They will close stores. They will try to put in place a debt financing mechanism so that they can spend the holiday season, increase their incomes a bit, and perhaps try to pay off some debts. But it's a business that, from a retail point of view, has no chance of bouncing back. I think the brand has lost a lot of the connection it once had with consumers. By the way, they still have about $ 1.5 billion in pension liabilities to pay. How will they be able to cover that at some point?
In my mind, although many companies must follow this process, I do not see the light at the end of the tunnel.
Rig: Emilie?
Flippen: Yes, I completely agree. I think that continuing to move forward on this subject, where Lampert really went wrong, was not centered on the demographic core, nor on the consumer. Sears has been successful so much that she has been obsessed with the consumer. She was constantly changing her activities, innovating and moving towards the markets. Sometimes it was lost. Their financial services, for example, worked well, but as Matt said, it did not make sense to go out and buy a shirt and a stock. It might be wise to buy a battery and insurance, but not a shirt and a stock. Really trying to understand the demographic core, I do not think Lampert has spent so much time doing it. I think he's mostly focused on buzzwords, saying, "We're going to make it a technology-driven company," and he's actually not worth it. So yes, in my opinion, the fact of not focusing on the core business and the main customer is why Sears is cheated.
Rig: Matt, earlier, you mentioned Derek Thompson. He is a writer for L & # 39; Atlantic. He spoke at one of our member events, has a book titled Hit Makers. A few years ago, he had written an interesting article on the fact that Sears was the Amazon of his time until he made avoidable mistakes. In fact, it's essentially the title of the piece. Here are four lessons he says Amazon can learn from Sears. I want to spot you with these and get your thoughts.
He said, lesson # 1, that the retail business is in a state of perpetual metamorphosis. Lesson # 2, even the big technological benefits for retailers are ephemeral. Lesson # 3, there is no strategic replacement for being obsessed with people and their behavior. Lesson # 4, adding more business is not the same as building a better business.
Argersinger: These are all four fantastic. When I think of them all together, it speaks of flexibility. You need to constantly adapt to your customers, the environment and your competitors. Look at Walmart. If we think of Walmart, Walmart appeared in the 60s, 70s, but in reality, in the 80s and 90s, began to enter the Sears market. It was not because they had necessarily more products. It was really a technology story. Walmart had understood the supply chain, the distribution. They took Sears in advance in many ways and were so much more efficient that they could offer these prices low and low, so that Sears and other retailers could not compete.
It was just an example of what Sears was looking to develop and diversify in all these areas. But wait, their competitors were doing a lot of interesting things to lower their customers' prices, and they were not doing it. So when you think of Amazon, you think about other companies, the ability to be flexible, adapt to your customers, trends, technology. Otherwise, you are ready to lose.
Flippen: Let's be clear here, I think that innovation takes capital. As a business, you have to put your money in your mouth. You can not say, "I'm going to be a data-driven company," and then not pursue the necessary investments to make it a reality. For the moment, I think that Amazon has really done very well. They have made many strategic acquisitions and used this free cash flow to continue their growth, innovate and transform their business in the future of tomorrow. Of course, we can not know if this will continue. But I think this precedent, put your money where you have the floor and put the capital behind the necessary innovation, is the key to success.
Rig: Emily Flippen, Matt Argersinger, thank you for joining me!
Argersinger: Thank you Mac!
Flippen: Thank you!
Rig: If you have a thought about Sears, if you want to share a Sears story, if you have a question or comment to make, our email is [email protected]. Thank you as always for joining us! As always, the people in the series may have an interest in the actions they are talking about and the Motley Fool may have recommendations for or against, so do not buy or sell any stock on the sole basis of what you heard. So much for this edition of Market deception. The show is mixed by Austin Morgan. I am Mac Greer. Thank you for listening. Well, see you tomorrow.
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